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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____to_____.
Commission File No. 1-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0542208
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
1800 West Loop South
Suite 500
Houston, Texas 77027-3233
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding as of April 29, 2004 of the issuer's common
stock was 36,151,909 and of the issuer's restricted voting common stock was
2,605,709.
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003 and
March 31, 2004....................................................................... 2
Consolidated Statements of Operations for the six months ended
March 31, 2003 and 2004.............................................................. 3
Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2004.............................................................. 4
Consolidated Statement of Stockholders' Equity for the six months ended
March 31, 2004....................................................................... 5
Consolidated Statements of Cash Flows for the six months ended
March 31, 2003 and 2004.............................................................. 6
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2004.............................................................. 7
Condensed Notes to Consolidated Financial Statements...................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................... 32
Item 4. Controls and Procedures.......................................................... 33
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................. 34
Item 6. Exhibits and Reports on Form 8-K................................................. 35
Signatures ................................................................................... 36
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, March 31,
2003 2004
---- ----
(Audited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 40,201 $ 19,043
Accounts receivable:
Trade, net of allowance of $5,425 and $3,764 respectively ....................... 245,618 227,343
Retainage ....................................................................... 68,789 68,974
Related party ................................................................... 67 36
Costs and estimated earnings in excess of billings on
uncompleted contracts ........................................................... 48,256 52,601
Inventories ......................................................................... 20,473 23,817
Prepaid expenses and other current assets ........................................... 23,319 26,526
--------- ---------
Total current assets ............................................................ 446,723 418,340
PROPERTY AND EQUIPMENT, net ......................................................... 52,697 48,734
GOODWILL, net ....................................................................... 197,884 197,884
OTHER NON-CURRENT ASSETS ............................................................ 28,870 31,530
--------- ---------
Total assets ................................................................. $ 726,174 $ 696,488
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................................................ $ 256 $ 7,286
Accounts payable and accrued expenses ............................................... 138,143 121,748
Billings in excess of costs and estimated earnings on
uncompleted contracts ........................................................... 41,913 37,095
--------- ---------
Total current liabilities ....................................................... 180,312 166,129
LONG-TERM BANK DEBT, net of current maturities ...................................... - 42,857
OTHER LONG-TERM DEBT, net of current maturities ..................................... 195 110
SENIOR SUBORDINATED NOTES, net ...................................................... 247,927 173,244
OTHER NON-CURRENT LIABILITIES ....................................................... 30,183 33,081
--------- ---------
Total liabilities ............................................................ 458,617 415,421
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding .................................................. - -
Common stock, $.01 par value, 100,000,000 shares authorized,
38,439,984 shares issued ..................................................... 385 385
Restricted voting common stock, $.01 par value, 2,605,709 shares
issued, authorized and outstanding ........................................... 26 26
Treasury stock, at cost, 2,725,793 and 2,299,076 shares, respectively ........... (16,361) (14,562)
Unearned restricted stock ....................................................... - (1,660)
Additional paid-in capital ...................................................... 427,709 429,307
Retained deficit ................................................................ (144,202) (132,429)
--------- ---------
Total stockholders' equity ................................................... 267,557 281,067
--------- ---------
Total liabilities and stockholders' equity ................................... $ 726,174 $ 696,488
========= =========
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
2
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Six Months Ended March 31,
--------------------------
2003 2004
------------ ------------
(Unaudited)
Revenues ..................................................... $ 691,712 $ 703,692
Cost of services ............................................. 591,251 605,196
------------ ------------
Gross profit ............................................ 100,461 98,496
Selling, general and administrative expenses ................. 76,079 71,359
------------ ------------
Income from operations .................................. 24,382 27,137
------------ ------------
Other (income)/expense:
Interest expense ........................................ 12,799 13,015
(Gain)/loss on sale of assets ........................... (30) 147
Other expense (income), net ............................. (55) 4,865
------------ ------------
12,714 18,027
------------ ------------
Income before income taxes ................................... 11,668 9,110
Provision/(benefit) for income taxes ......................... 4,492 (2,663)
------------ ------------
Net income ................................................... $ 7,176 $ 11,773
============ ============
Basic earnings per share ..................................... $ 0.18 $ 0.31
============ ============
Diluted earnings per share ................................... $ 0.18 $ 0.30
============ ============
Shares used in the computation of earnings per share (Note 5):
Basic ................................................... 39,388,158 38,408,067
============ ============
Diluted ................................................. 39,423,220 39,013,887
============ ============
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
3
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Three Months Ended March 31,
----------------------------------
2003 2004
------------ ------------
(Unaudited)
Revenues ..................................................... $ 343,135 $ 343,849
Cost of services ............................................. 294,030 295,964
------------ ------------
Gross profit ............................................ 49,105 47,885
Selling, general and administrative expenses ................. 37,460 35,081
------------ ------------
Income from operations .................................. 11,645 12,804
------------ ------------
Other (income)/expense:
Interest expense ........................................ 6,343 6,555
(Gain)/loss on sale of assets ........................... (89) 137
Other expense (income), net ............................. (86) 4,966
------------ ------------
6,168 11,658
------------ ------------
Income before income taxes ................................... 5,477 1,146
Provision/(benefit) for income taxes ......................... 2,108 (4,399)
------------ ------------
Net income ................................................... $ 3,369 $ 5,545
============ ============
Basic earnings per share ..................................... $ 0.09 $ 0.14
============ ============
Diluted earnings per share ................................... $ 0.09 $ 0.14
============ ============
Shares used in the computation of earnings per share (Note 5):
Basic ................................................... 39,327,623 38,544,198
============ ============
Diluted ................................................. 39,372,367 39,242,461
============ ============
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Restricted Voting
Common Stock Common Stock Treasury Stock
-------------------------- -------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- --------- ---------- ---------- ----------
BALANCE, September 30,
2003 .......................... 38,439,984 $ 385 2,605,709 $ 26 (2,725,793) $ (16,361)
Issuance of stock
(unaudited) ................... - - - - 4,926 30
Issuance of restricted
stock (unaudited) ............. - - - - - -
Purchase of treasury
stock (unaudited) ............. - - - - (549,200) (4,340)
Issuance of stock under
employee stock
purchase plan
(unaudited) ................... 199,438 1,290
Exercise of stock
options (unaudited) ........... - - - - 771,553 4,819
Non-cash compensation
(unaudited) ................... - - - - - -
Net income (unaudited) ......... - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, March 31,
2004 (unaudited) .............. 38,439,984 $ 385 2,605,709 $ 26 (2,299,076) $ (14,562)
========== ========== ========== ========== ========== ==========
Unearned Additional Retained Total
Restricted Earnings Stockholders' Paid-In
Stock Capital (Deficit) Equity
---------- ---------- ---------- ----------
BALANCE, September 30,
2003 .......................... $ - $427,709 $ (144,202) $ 267,557
Issuance of stock
(unaudited) ................... - 9 - 39
Issuance of restricted
stock (unaudited) ............. (1,992) 1,992 - -
Purchase of treasury
stock (unaudited) ............. - - - (4,340)
Issuance of stock under
employee stock
purchase plan
(unaudited) ................... - (638) - 652
Exercise of stock
options (unaudited) ............ - 235 - 5,054
Non-cash compensation
(unaudited) .................... 332 - - 332
Net income (unaudited) ......... - - 11,773 11,773
---------- ---------- ---------- ----------
BALANCE, March 31,
2004 (unaudited) .............. $ (1,660) $ 429,307 $ (132,429) $ 281,067
========== ========== ========== ==========
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
5
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended March 31,
--------------------------
2003 2004
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 7,176 11,773
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for allowance for doubtful accounts ...................... 661 (8)
Deferred income taxes .............................................. - (6,262)
Depreciation and amortization ...................................... 7,341 6,732
Loss (gain) on sale of property and equipment ...................... (30) 147
Non-cash compensation expense ...................................... - 332
Gain on divestiture ................................................ (26) -
Changes in operating assets and liabilities, net of acquisitions and
dispositions of businesses
Accounts receivable ........................................... 10,101 17,955
Inventories ................................................... 2,075 (3,344)
Costs and estimated earnings in
excess of billings on uncompleted contracts .............. 1,297 (4,345)
Prepaid expenses and other current assets ..................... 672 (1,675)
Other noncurrent assets ....................................... 423 2,591
Accounts payable and accrued expenses ......................... (9,098) (13,537)
Billings in excess of costs and estimated
earnings on uncompleted contracts ........................ (5,982) (4,818)
Other current liabilities ..................................... 362 50
Other noncurrent liabilities .................................. 2,998 1,433
-------- --------
Net cash provided by operating activities ................ 17,970 7,024
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ............................ 1,540 398
Purchases of property and equipment ..................................... (5,462) (3,139)
Purchases of business, net of cash acquired ............................. (2,723) -
Sale of business ........................................................ 1,084 -
Investments in securities ............................................... (500) (400)
-------- --------
Net cash used in investing activities .................... (6,061) (3,141)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings .............................................................. 27 50,040
Repayments of debt ...................................................... (16,030) (75,241)
Purchase of treasury stock .............................................. (3,376) (4,340)
Proceeds from exercise of stock options ................................. - 5,054
Proceeds from issuance of stock ......................................... - 39
Proceeds from issuance of stock under employee stock purchase plan ...... 821 652
Payments for debt issuance costs ........................................ - (1,245)
-------- --------
Net cash used in financing activities .................... (18,558) (25,041)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... (6,649) (21,158)
CASH AND CASH EQUIVALENTS, beginning of period ............................... 32,779 40,201
-------- --------
CASH AND CASH EQUIVALENTS, end of period ..................................... $ 26,130 19,043
======== ======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest ........................................................... $ 12,061 13,480
Income taxes ....................................................... $ - 700
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
6
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------
2003 2004
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 3,369 5,545
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for allowance for doubtful accounts ............................. 282 381
Deferred income taxes ..................................................... - (4,832)
Depreciation and amortization ............................................. 3,691 3,279
Loss (gain) on sale of property and equipment ............................. (89) 137
Non-cash compensation expense ............................................. - 249
Changes in operating assets and liabilities, net of acquisitions and
dispositions of businesses
Accounts receivable .................................................. 1,700 8,993
Inventories .......................................................... 1,202 (1,170)
Costs and estimated earnings in
excess of billings on uncompleted contracts ..................... 1,192 (3,375)
Prepaid expenses and other current assets ............................ 699 (1,798)
Other noncurrent assets .............................................. (6) 1,918
Accounts payable and accrued expenses ................................ 959 (5,207)
Billings in excess of costs and estimated
earnings on uncompleted contracts ............................... 119 (4,972)
Other current liabilities ............................................ 195 50
Other noncurrent liabilities ......................................... 1,386 1,399
-------- --------
Net cash provided by operating activities ....................... 14,699 597
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ................................... 484 175
Purchases of property and equipment ............................................ (2,933) (1,394)
Purchases of business .......................................................... (2,723) -
Investments in securities ...................................................... (500) -
-------- --------
Net cash used in investing activities ........................... (5,672) (1,219)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ..................................................................... 22 50,000
Repayments of debt ............................................................. (195) (75,102)
Purchase of treasury stock ..................................................... (2,607) (990)
Proceeds from exercise of stock options ........................................ - 2,178
Proceeds from issuance of stock ................................................ - 19
Proceeds from issuance of stock under employee stock purchase plan ............. 821 652
Payments for debt issuance costs ............................................... - (1,245)
-------- --------
Net cash used in financing activities ........................... (1,959) (24,488)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................................... 7,068 (25,110)
CASH AND CASH EQUIVALENTS, beginning of period ...................................... 19,062 44,153
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................ $ 26,130 19,043
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest .................................................................. $ 11,784 13,270
Income taxes .............................................................. $ - 326
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
7
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW
Integrated Electrical Services, Inc. (the "Company" or "IES"), a Delaware
corporation, was founded in June 1997 to create a leading national provider of
electrical services, focusing primarily on the commercial and industrial,
residential, low voltage and service and maintenance markets.
The accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required for complete
financial statements, and therefore should be reviewed in conjunction with the
financial statements and related notes thereto contained in the Company's annual
report for the year ended September 30, 2003, filed on Form 10-K with the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Actual operating results for the six
months ended March 31, 2004, are not necessarily indicative of the results that
may be expected for the fiscal year ended September 30, 2004.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a description of these policies, refer to Note 2 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2003.
SUBSIDIARY GUARANTIES
All of the Company's operating income and cash flows are generated by its 100%
owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding 9 3/8% senior subordinated notes due 2009 (the "Senior Subordinated
Notes"). The Company is structured as a holding company and substantially all of
its assets and operations are held by its subsidiaries. There are currently no
significant restrictions on the Company's ability to obtain funds from its
subsidiaries by dividend or loan. The parent holding company's independent
assets, revenues, income before taxes and operating cash flows are less than 3%
of the consolidated total. The separate financial statements of the subsidiary
guarantors are not included herein because (i) the subsidiary guarantors are all
of the direct and indirect subsidiaries of the Company; (ii) the subsidiary
guarantors have fully and unconditionally, jointly and severally guaranteed the
Senior Subordinated Notes; and (iii) the aggregate assets, liabilities, earnings
and equity of the subsidiary guarantors is substantially equivalent to the
assets, liabilities, earnings and equity of the Company on a consolidated basis.
As a result, the presentation of separate financial statements and other
disclosures concerning the subsidiary guarantors is not deemed material.
8
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are primarily used in the Company's revenue recognition of construction in
progress, fair value assumptions in analyzing goodwill impairment, allowance for
doubtful accounts receivable, realizability of deferred tax assets and
self-insured claims liability.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The results of the Company's operations, particularly from residential
construction, are seasonal, dependant upon weather trends, with typically higher
revenues generated during the spring and summer and lower revenues during the
fall and winter. The commercial and industrial aspect of its business is less
subject to seasonal trends, as this work generally is performed inside
structures protected from the weather. The Company's service business is
generally not affected by seasonality. In addition, the construction industry
has historically been highly cyclical. The Company's volume of business may be
adversely affected by declines in construction projects resulting from adverse
regional or national economic conditions. Quarterly results may also be
materially affected by gross margins for both bid and negotiated projects, the
timing of new construction projects and any acquisitions. Accordingly, operating
results for any fiscal period are not necessarily indicative of results that may
be achieved for any subsequent fiscal period.
NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities," ("Interpretation 46").
The objective of Interpretation 46 is to improve the financial reporting by
companies involved with variable interest entities. Until now, one company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interest. Interpretation 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period ending after March 15, 2004. Certain
disclosure requirements apply to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
Company has investments in two firms, EnerTech Capital Partners II, L.P.
(EnerTech) and Energy Photovoltaics, Inc. (EPV) that might fall under this
interpretation. The Company determined that EPV was excepted out of the
provisions of Interpretation 46 and that it was not the primary beneficiary of
EnerTech and as such, the adoption of this interpretation did not have a
material impact on the Company's results of operations or its financial
position.
9
STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. Under APB 25, if the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The Company's stock
options have all been granted with exercise prices at fair value, therefore no
compensation expense has been recognized under APB 25 (See Note 7). The
following table illustrates the effect on net income and earnings per share
assuming the compensation costs for IES' stock option and purchase plans had
been determined using the fair value method at the grant dates amortized on a
pro rata basis over the vesting period as required under SFAS No. 123,
"Accounting for Stock-Based Compensation" for the three and six months ended
March 31, 2003 and 2004 (in thousands, except for per share data):
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- --------------------------
2003 2004 2003 2004
--------- --------- --------- ---------
Net income, as reported ............................... $ 3,369 $ 5,545 $ 7,176 $ 11,773
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects ......................... - 151 - 201
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ......................... 378 443 755 814
--------- --------- --------- ---------
Pro forma net income for SFAS
No.123 ............................................ $ 2,991 $ 5,253 $ 6,421 $ 11,160
========= ========= ========= =========
Earnings per share:
Basic - as reported ................................ $ 0.09 $ 0.14 $ 0.18 $ 0.31
Basic - pro forma for SFAS No. 123 ................. $ 0.08 $ 0.14 $ 0.16 $ 0.29
Earnings per share:
Diluted - as reported .............................. $ 0.09 $ 0.14 $ 0.18 $ 0.30
Diluted - pro forma for SFAS No. 123 ............... $ 0.08 $ 0.13 $ 0.16 $ 0.29
10
2. BUSINESS COMBINATIONS
Acquisition
On February 27, 2003, the Company purchased the assets of Riviera Electric LLC,
an electrical contractor located in the state of Colorado, out of a bankruptcy
auction of a prior competitor. The total consideration paid in this transaction
was approximately $2.7 million, comprised entirely of cash, net of cash
acquired. The fair value of the tangible net assets acquired exceeded the total
consideration paid. As a result, the long-term fixed assets of the acquisition
were reduced to zero. The purchase price was allocated as follows (amounts in
thousands):
Accounts receivable, net ........................................ $ 11,643
Retention ....................................................... 3,884
Costs and estimated earnings in excess of billings
on uncompleted projects and other .......................... 922
Less: Accounts payable and accrued expenses ..................... (10,214)
Less: Billings in excess of costs and estimated
earnings on uncompleted projects and other ................. (3,512)
--------
Cash paid, net of cash acquired ................................. $ 2,723
========
The unaudited pro forma data presented below reflect the results of operations
of IES and the acquisition of Riviera Electric LLC assuming the transaction was
completed on October 1, 2002 (in thousands):
Six Months
Ended
March 31,
-----------
2003
-----------
Revenues .............................................. $ 726,377
Net income ............................................ $ 8,060
Basic earnings per share .............................. $ 0.20
Diluted earnings per share ............................ $ 0.20
The unaudited pro forma data summarized above also reflects pro forma
adjustments primarily related to reductions in general and administrative
expenses for contractually agreed reductions in compensation programs and
additional income tax expense based on the Company's effective income tax rate.
The unaudited pro forma financial data does not purport to represent what the
Company's combined results of operations would actually have been if such
transactions had in fact occurred on October 1, 2002, and are not necessarily
representative of the Company's results of operations for any future period.
11
Divestiture
On October 8, 2002, the Company sold all of the stock of one of its operating
companies. The proceeds from the sale were $1.1 million in cash and 70,330
shares of the Company's common stock. The Company recorded a pre-tax gain of
less than $0.1 million associated with this sale that is recorded in other
income.
In connection with the disposition discussed above, the net pre-tax gain was
determined as follows for the quarter ended December 31, 2002 (in thousands):
Book value of assets divested................................ $ 1,830
Liabilities divested......................................... (502)
-------------
Net assets divested...................................... 1,328
------------
Cash received................................................ 1,084
Common stock received........................................ 270
------------
Total consideration received............................. 1,354
------------
Pre-tax gain............................................. $ 26
============
3. RESTRUCTURING CHARGES
In October 2001, the Company began implementation of a workforce reduction
program. The purpose of this program was to cut costs by reducing the number of
administrative staff both in the field and at the home office. The total number
of terminated employees was approximately 450. As a result of the program
implementation, the Company recorded pre-tax restructuring charges of $5.6
million associated with 45 employees during the year ended September 30, 2002
and presented these charges as a separate component of the Company's results of
operations for the period then ended. The charges were based on the costs of the
workforce reduction program and include severance and other special termination
benefits. The Company believes the reduction of these personnel resulted in
annual savings of approximately $4.1 million in salaries and benefits. During
the six months ended March 31, 2004, the Company settled the remaining payments
required under the restructuring agreements and reduced the restructuring
accrual by $0.4 million, which is included as a reduction in selling, general,
and administrative expenses. As of March 31, 2004, there are no amounts accrued
and unpaid as a result of the restructuring.
4. DEBT
Credit Facility
On February 27, 2004, the Company amended and restated its $150.0 million
revolving credit facility to a $125.0 million revolving credit facility and a
$50.0 million term loan led by Bank One, NA. The term loan is repayable in 15
quarterly installments of $1.8 million beginning May 28, 2004, with a final
installment equal to the then-unpaid principal balance of the term loan on
February 27, 2008. The revolving credit facility matures February 27, 2008
(collectively, the "Credit Facility"). The proceeds from the term loan and our
available cash were used to call
12
$75.0 million of our long term bonds. Amounts borrowed under the Credit Facility
bear interest at an annual rate equal to either (a) the Eurodollar rate plus
1.75 percent to 2.75 percent, as determined by the ratio of the Company's total
funded debt to EBITDA (as defined in the Credit Facility) or (b) the higher of
(i) the bank's prime rate or (ii) the sum of the Federal funds rate plus 0.50
percent plus an additional 0.00 percent to 0.50 percent, as determined by the
ratio of the Company's total funded debt to EBITDA. Commitment fees of 0.375
percent to 0.50 percent are assessed on any unused borrowing capacity under the
Credit Facility. The Company's direct and indirect subsidiaries guarantee the
repayment of all amounts due under the facility, and the facility is secured by
a first perfected security interest in all of the assets of the Company and
those subsidiaries, including all of the outstanding shares of the capital stock
of those subsidiaries. Among other restrictions, the financial covenants include
a minimum net worth requirement, a maximum total consolidated funded debt to
EBITDA ratio, a maximum senior consolidated debt to EBITDA ratio, a minimum
fixed charge coverage ratio and a minimum asset coverage ratio. The Company was
in compliance with the financial covenants of its Credit Facility at March 31,
2004. As of March 31, 2004, the Company had $50.0 million outstanding under its
Credit Facility, letters of credit outstanding under its Credit Facility of
$33.7 million, $0.3 million of other borrowings and available borrowing capacity
under its Credit Facility of $91.3 million.
Senior Subordinated Notes
On January 25, 1999 and May 29, 2001, the Company completed offerings of $150.0
million and $125.0 million Senior Subordinated Notes, respectively. The Senior
Subordinated Notes bear interest at 9 3/8% and mature on February 1, 2009. The
Company pays interest on the Senior Subordinated Notes on February 1 and August
1 of each year. The Senior Subordinated Notes are unsecured obligations and are
subordinated to all existing and future senior indebtedness. The Senior
Subordinated Notes are guaranteed on a senior subordinated basis by all of the
Company's subsidiaries. Under the terms of the Senior Subordinated Notes, the
Company is required to comply with various affirmative and negative covenants
including: (i) restrictions on additional indebtedness, and (ii) restrictions on
liens, guarantees and dividends. During the year ended September 30, 2002, the
Company retired approximately $27.1 million of these Senior Subordinated Notes.
During the three months ended March 31, 2004, the Company called approximately
$75.0 million of its Senior Subordinated Notes, paying a call premium of 4.688%,
or $3.5 million. This premium was recorded as a loss in other income and expense
in accordance with SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections."
13
Debt consists of the following (in thousands):
September 30, March 31,
2003 2004
-------- ---------
Secured credit facility with a group of lending institutions, due February 27,
2008, at a weighted average interest rate of 4.12% .............................. $ - $ 50,000
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 9.50% .................... 137,885 62,885
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 10.00% ................... 110,000 110,000
Other ................................................................................ 451 253
--------- ---------
Total debt ..................................................................... 248,336 223,138
Less - short-term debt and current maturities of long-term debt ...................... (256) (7,286)
Less - unamortized discount on Senior Subordinated Notes ............................. (3,198) (2,576)
Add - fair value of terminated interest rate hedge ................................... 3,240 2,935
--------- ---------
Total long-term debt ........................................................... $ 248,122 $ 216,211
========= =========
5. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share for the six months ended March 31, 2003 and 2004 (in
thousands, except share information):
Six Months Ended March 31,
--------------------------
2003 2004
---- ----
Numerator:
Net income ........................................ $ 7,176 $ 11,773
=========== ===========
Denominator:
Weighted average shares outstanding - basic ....... 39,388,158 38,408,067
Effect of dilutive stock options .................. 35,062 605,820
----------- -----------
Weighted average shares outstanding - diluted ..... 39,423,220 39,013,887
=========== ===========
Earnings per share:
Basic ............................................. $ 0.18 $ 0.31
Diluted ........................................... $ 0.18 $ 0.30
For the six months ended March 31, 2003 and 2004, stock options of 5.3 million
and 2.2 million, respectively, were excluded from the computation of diluted
earnings per share because the options exercise prices were greater than the
average market price of the Company's common stock.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share for the three months ended March 31, 2003 and 2004
(in thousands, except share information):
14
Three Months Ended March 31,
----------------------------
2003 2004
---- ----
Numerator:
Net income ........................................ $ 3,369 $ 5,545
=========== ===========
Denominator:
Weighted average shares outstanding - basic ....... 39,327,623 38,544,198
Effect of dilutive stock options .................. 44,744 698,263
----------- -----------
Weighted average shares outstanding - diluted ..... 39,372,367 39,242,461
=========== ===========
Earnings per share:
Basic ............................................. $ 0.09 $ 0.14
Diluted ........................................... $ 0.09 $ 0.14
For the three months ended March 31, 2003 and 2004, stock options of 5.3 million
and 2.2 million, respectively, were excluded from the computation of diluted
earnings per share because the options exercise prices were greater than the
average market price of the Company's common stock.
6. OPERATING SEGMENTS
The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Certain information is disclosed, per SFAS No. 131,
based on the way management organizes financial information for making operating
decisions and assessing performance.
The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies. These segments, which contain different economic characteristics,
are managed through geographically-based regions.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on income from operations of the respective business units prior to home
office expenses. Management allocates costs between segments for selling,
general and administrative expenses, goodwill impairment, depreciation expense,
capital expenditures and total assets.
15
Segment information for the six months ended March 31, 2003 and 2004 is as
follows (in thousands):
SIX MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
---------- ----------- ----- -----
Revenues .................................... $556,379 $135,333 $ - $691,712
Cost of services ............................ 485,129 106,122 - 591,251
-------- -------- -------- --------
Gross profit ................................ 71,250 29,211 - 100,461
Selling, general and administrative ......... 50,122 16,859 9,098 76,079
-------- -------- -------- --------
Operating income ............................ $ 21,128 $ 12,352 $ (9,098) $ 24,382
======== ======== ======== ========
Other data:
Depreciation expense ........................ $ 5,896 $ 503 $ 942 $ 7,341
Capital expenditures ........................ 3,253 360 1,849 5,462
Total assets ................................ 505,006 107,720 98,766 711,492
SIX MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
---------- ----------- ----- -----
Revenues .................................... $558,273 $145,419 $ - $703,692
Cost of services ............................ 489,705 115,491 - 605,196
-------- -------- -------- --------
Gross profit ................................ 68,568 29,928 - 98,496
Selling, general and administrative ......... 44,090 16,818 10,451 71,359
-------- -------- -------- --------
Operating income ............................ $ 24,478 $ 13,110 $(10,451) $ 27,137
======== ======== ======== ========
Other data:
Depreciation expense ........................ $ 5,016 $ 605 $ 1,111 $ 6,732
Capital expenditures ........................ 1,391 724 1,024 3,139
Total assets ................................ 503,900 102,777 89,811 696,488
Segment information for the three months ended March 31, 2003 and 2004 is as
follows (in thousands):
THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
---------- ----------- ----- -----
Revenues .................................... $284,745 $ 58,390 $ - $343,135
Cost of services ............................ 247,852 46,178 - 294,030
-------- -------- -------- --------
Gross profit ................................ 36,893 12,212 - 49,105
Selling, general and administrative ......... 24,864 8,160 4,436 37,460
-------- -------- -------- --------
Operating income ............................ $ 12,029 $ 4,052 $ (4,436) $ 11,645
======== ======== ======== ========
Other data:
Depreciation expense ........................ $ 2,976 $ 243 $ 472 $ 3,691
Capital expenditures ........................ 1,973 108 852 2,933
Total assets ................................ 505,006 107,720 98,766 711,492
16
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
---------- ----------- ----- -----
Revenues .................................... $270,078 $ 73,771 $ - $343,849
Cost of services ............................ 237,134 58,830 - 295,964
-------- -------- -------- --------
Gross profit ................................ 32,944 14,941 - 47,885
Selling, general and administrative ......... 21,371 8,486 5,224 35,081
-------- -------- -------- --------
Operating income ............................ $ 11,573 $ 6,455 $ (5,224) $ 12,804
======== ======== ======== ========
Other data:
Depreciation expense ........................ $ 2,388 $ 327 $ 564 $ 3,279
Capital expenditures ........................ 574 422 398 1,394
Total assets ................................ 503,900 102,777 89,811 696,488
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
7. 1999 INCENTIVE COMPENSATION PLAN
In November 1999, the Board of Directors adopted the 1999 Incentive Compensation
Plan (the "1999 Plan"). The 1999 Plan authorizes the Compensation Committee of
the Board of Directors or the Board of Directors to grant employees of the
Company awards in the form of options, stock appreciation rights, restricted
stock or other stock based awards. The Company has up to 5.5 million shares of
common stock authorized for issuance under the 1999 Plan.
In December 2003, the Company granted a restricted stock award of 242,295 shares
under its 1999 Plan to certain employees. This award will vest in equal
installments on December 1, 2004 and 2005, provided the recipient is still
employed by the Company. The market value of the stock on the date of grant for
this award was $2.0 million, which will be recognized as compensation expense
over the related two year vesting period. During the six months ended March 31,
2004, the Company amortized $0.3 million to expense in connection with this
award.
8. COMMITMENTS AND CONTINGENCIES
From time to time, the Company and its subsidiaries are made party to legal
actions and claims, various governmental proceedings and private civil suits
that arise in the ordinary course of business in the construction industry. Some
of the legal proceedings include claims for punitive as well as compensatory
damages. While the final outcome of these matters cannot be predicted with
certainty, considering among other things the meritorious legal defense
available, liabilities that have been recorded and applicable insurance, it is
the opinion of the Company's management that none of these items will have a
material adverse effect on the results of operations, financial position or
liquidity of the Company. However, an unexpected adverse resolution of one or
more of these items could have a material adverse effect on the results of
operations in a particular quarter or fiscal year. The Company expenses routine
legal costs related to such proceedings as incurred.
17
Some of the Company's customers require the Company to post letters of credit as
a means of guaranteeing performance under its contracts and ensuring payment by
the Company to subcontractors and vendors. If the customer has reasonable cause
to effect payment under a letter of credit, the Company would be required to
reimburse its creditor for the letter of credit. Depending on the circumstances
surrounding a reimbursement to its creditor, the Company may have a charge to
earnings in that period. To date, the Company has not had a situation where a
customer has had reasonable cause to effect payment under a letter of credit. At
March 31, 2004, $2.1 million of the Company's outstanding letters of credit were
to collateralize its customers.
Some of the underwriters of the Company's casualty insurance program require it
to post letters of credit as collateral. This is common in the insurance
industry. To date the Company has not had a situation where an underwriter has
had reasonable cause to effect payment under a letter of credit. At March 31,
2004, $31.6 million of the Company's outstanding letters of credit were to
collateralize its insurance programs.
Many of the Company's customers require us to post performance and payment bonds
issued by a surety. Those bonds guarantee the customer that the Company will
perform under the terms of a contract and that it will pay its subcontractors
and vendors. In the event that the Company fails to perform under a contract or
pay subcontractors and vendors, the customer may demand the surety to pay or
perform under the Company's bond. The Company's relationship with its sureties
is such that it will indemnify the sureties for any expenses they incur in
connection with any of the bonds they issue on the Company's behalf. To date,
the Company has not incurred significant expenses to indemnify its sureties for
expenses they incurred on the Company's behalf. As of March 31, 2004, the
Company's cost to complete projects covered by surety bonds was approximately
$201.3 million.
The Company has committed to invest up to $5.0 million in EnerTech Capital
Partners II L.P. ("EnerTech"). EnerTech is a private equity firm specializing in
investment opportunities emerging from the deregulation and resulting
convergence of the energy, utility and telecommunications industries. Through
March 31, 2004, the Company had invested $3.1 million under its commitment to
EnerTech.
At March 31, 2004, the Company had reserves of $24.2 million recorded in other
noncurrent liabilities for tax positions adopted that a taxing authority may
view differently. The Company believes these reserves are adequate in the event
the positions are not ultimately upheld. The timing of the payments of these
reserves is not currently known and would be based on the outcome of a possible
review by a taxing authority.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following should be read in conjunction with the response to Part I, Item 1
of this Report. Any capitalized terms used but not defined in this Item have the
same meaning given to them in Part I, Item 1.
This report on Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are based on our expectations and involve risks and
uncertainties that could cause our actual results to differ materially from
those set forth in the statements. Such risks and uncertainties include, but are
not limited to, the inherent uncertainties related to estimating future results,
fluctuations in operating results because of downturns in levels of
construction, incorrect estimates used in entering into fixed price contracts,
difficulty in managing the operation and growth of existing and newly acquired
businesses, the high level of competition in the construction industry and the
effects of seasonality. The foregoing and other factors are discussed in our
filings with the SEC, including our Annual Report on Form 10-K for the year
ended September 30, 2003.
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified the
accounting principles which we believe are most critical to our reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition, the assessment
of goodwill impairment, our allowance for doubtful accounts receivable, the
recording of our self-insurance liabilities and our estimation of the valuation
allowance for deferred tax assets. These accounting policies, as well as others,
are described in the Note 2 of "Notes to Consolidated Financial Statements" of
our Annual report on Form 10-K for the year ended September 30, 2003 and at
relevant sections in this discussion and analysis.
We enter into contracts principally on the basis of competitive bids. We
frequently negotiate the final terms and prices of those contracts with the
customer. Although the terms of our contracts vary considerably, most are made
on either a fixed price or unit price basis in which we agree to do the work for
a fixed amount for the entire project (fixed price) or for units of work
performed (unit price). We also perform services on a cost-plus or time and
materials basis. We are generally able to achieve higher margins on fixed price
and unit price than on cost-plus contracts. We currently generate, and expect to
continue to generate, more than half of our revenues under fixed price
contracts. Our most significant cost drivers are the cost of labor, the cost of
materials and the cost of casualty and health insurance. These costs may vary
from the costs we originally estimated. Variations from estimated contract costs
along with other risks inherent in performing fixed price and unit price
contracts may result in actual revenue and gross profits for a project differing
from those we originally estimated and could result in losses on projects.
Depending on the size of a particular project, variations from estimated project
costs could have a significant
19
impact on our operating results for any fiscal quarter or year. We believe our
exposure to losses on fixed price contracts is limited in aggregate by the high
volume and relatively short duration of the fixed price contracts we undertake.
Additionally, we derive a significant amount of our revenues from new
construction and from the southern part of the United States. Downturns in new
construction activity or in construction in the southern United States could
affect our results.
We complete most projects within one year. We frequently provide service and
maintenance work under open-ended, unit price master service agreements which
are renewable annually. We recognize revenue on service and time and material
work when services are performed. Work performed under a construction contract
generally provides that the customers accept completion of progress to date and
compensate us for services rendered measured in terms of units installed, hours
expended or some other measure of progress. Revenues from construction contracts
are recognized on the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants Statement of Position 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." Percentage-of-completion for construction contracts is measured
principally by the percentage of costs incurred and accrued to date for each
contract to the estimated total costs for each contract at completion. We
generally consider contracts to be substantially complete upon departure from
the work site and acceptance by the customer. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Changes in job performance, job conditions, estimated contract costs and
profitability and final contract settlements may result in revisions to costs
and income, and the effects of these revisions are recognized in the period in
which the revisions are determined. Provisions for total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
We evaluate goodwill for potential impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Included in this evaluation are certain assumptions and estimates to
determine the fair values of reporting units such as estimates of future cash
flows, discount rates, as well as assumptions and estimates related to the
valuation of other identified intangible assets. Changes in these assumptions
and estimates or significant changes to the market value of our common stock
could materially impact our results of operations or financial position.
We provide an allowance for doubtful accounts for unknown collection issues in
addition to reserves for specific accounts receivable where collection is
considered doubtful. Inherent in the assessment of the allowance for doubtful
accounts are certain judgments and estimates including, among others, our
customers' access to capital, our customers' willingness to pay, general
economic conditions and the ongoing relationships with our customers.
We are insured for workers' compensation, automobile liability, general
liability and employee-related health care claims, subject to large deductibles.
Our general liability program provides coverage for bodily injury and property
damage neither expected nor intended. Losses up to the deductible amounts are
accrued based upon our estimates of the liability for claims incurred and an
estimate of claims incurred but not reported. The accruals are derived from
actuarial studies, known facts, historical trends and industry averages
utilizing the assistance of an actuary to
20
determine the best estimate of the ultimate expected loss. We believe such
accruals to be adequate. However, insurance liabilities are difficult to assess
and estimate due to unknown factors, including the severity of an injury, the
determination of our liability in proportion to other parties, the number of
incidents not reported and the effectiveness of our safety program. Therefore,
if actual experience differs from than the assumptions used in the actuarial
valuation, adjustments to the reserve may be required and would be recorded in
the period that the experience becomes known.
We regularly evaluate valuation allowances established for deferred tax assets
for which future realization is uncertain. We perform this evaluation at least
annually at the end of each fiscal year at such time as events have occurred or
are anticipated to occur that may change our most recent assessment. The
estimation of required valuation allowances includes estimates of future taxable
income. In assessing the realizability of deferred tax assets at March 31, 2004,
we considered whether it was more likely than not that some portion or all of
the deferred tax assets would not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. We
consider the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. If actual
future taxable income differs from our estimates, our results could be affected.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2003 COMPARED TO THE
SIX MONTHS ENDED MARCH 31, 2004
The following table presents selected unaudited historical financial information
for the six months ended March 31, 2003 and 2004.
Six Months Ended March 31,
--------------------------
2003 % 2004 %
------ --- ------ ---
(dollars in millions)
Revenues .............................................. $691.7 100% $703.7 100%
Cost of services (including depreciation) ............. 591.2 85% 605.2 86%
--------------------------------------------------------
Gross profit .................................. 100.5 15% 98.5 14%
Selling, general & administrative expenses ............ 76.1 11% 71.4 10%
--------------------------------------------------------
Income from operations ........................ 24.4 4% 27.1 4%
Interest and other expense, net ....................... 12.7 2% 18.0 3%
--------------------------------------------------------
Income before income taxes ............................ 11.7 2% 9.1 1%
Provision for income taxes ............................ 4.5 1% (2.7) 0%
--------------------------------------------------------
Net income .................................... $ 7.2 1% $ 11.8 2%
========================================================
21
REVENUES
PERCENT OF TOTAL REVENUES
-------------------------
SIX MONTHS ENDED MARCH 31,
--------------------------
2003 2004
---- ----
Commercial and Industrial 80% 79%
Residential 20% 21%
--- ---
Total Company 100% 100%
=== ===
Total revenues increased $12.0 million, or 1.7%, from $691.7 million for the six
months ended March 31, 2003, to $703.7 million for the six months ended March
31, 2004. This increase in revenues is primarily the result of $18.5 million of
revenues included in the six months ended March 31, 2004 due to an acquisition
in February 2003. Therefore, only one month of revenue was included in the six
months ended March 31, 2003. This increase was partially offset by weakness in a
few select commercial markets and the reductions of communications revenues.
Commercial and industrial revenues increased $1.9 million, or 0.3%, from $556.4
million for the six months ended March 31, 2003, to $558.3 million for the six
months ended March 31, 2004. This increase in revenues is primarily the result
of approximately $18.5 million of commercial and industrial revenue due to the
acquisition that was included in the results of operations for the six months
ended March 31, 2004 but was owned by us for one month during the six months
ended March 31, 2003. This increase was offset by a decrease in commercial
revenues of $14.8 million, or 4.7%, primarily in the central region and a
reduction in communications related revenues of $7.5 million, or 16.5%, across
the company due to decreased spending in these markets.
Residential revenues increased $10.1 million, or 7.5%, from $135.3 million for
the six months ended March 31, 2003, to $145.4 million for the six months ended
March 31, 2004, primarily as a result of increased demand for new housing
resulting from the continued low interest rate environment.
GROSS PROFIT
SEGMENT GROSS PROFIT MARGINS
AS A PERCENT OF SEGMENT REVENUES
--------------------------------
SIX MONTHS ENDED MARCH 31,
--------------------------------
2003 2004
---- ----
Commercial and Industrial 13% 12%
Residential 22% 21%
--- ---
Total Company 15% 14%
=== ===
Gross profit decreased $2.0 million, or 2.0%, from $100.5 million for the six
months ended March 31, 2003, to $98.5 million for the six months ended March 31,
2004. Gross profit margin as a percentage of revenues decreased from 14.5% for
the six months ended March 31, 2003, to 14.0% for the six months ended March 31,
2004. The decline in gross margin during the six months ended March 31, 2004 was
primarily due to the significant increase in copper prices
22
which impacted IES' material costs. The fixed price nature of many of our
contracts precluded us from passing these costs onto our customers. This
accounted for 37 basis points impact to our gross margin.
Commercial and industrial gross profit decreased $2.7 million, or 3.8%, from
$71.3 million for the six months ended March 31, 2003, to $68.6 million for the
six months ended March 31, 2004. Commercial and industrial gross profit margin
as a percentage of revenues decreased from 12.8% for the six months ended March
31, 2003, to 12.3% for the six months ended March 31, 2004. The decrease in
commercial and industrial gross profit was primarily due to the higher copper
prices discussed above.
Residential gross profit increased $0.7 million, or 2.4%, from $29.2 million for
the six months ended March 31, 2003, to $29.9 million for the six months ended
March 31, 2004. This increase results primarily from the increased revenues in
the residential segment. Residential gross profit margin as a percentage of
revenues decreased from 21.6% for the six months ended March 31, 2003, to 20.6%
for the six months ended March 31, 2004. This decrease in gross profit margin as
a percentage of revenues was primarily the result of increased costs incurred
due to the increased price of copper wire during the six months ended March 31,
2004 and increased competition for available work.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $4.7 million, or 6.2%,
from $76.1 million for the six months ended March 31, 2003, to $71.4 million for
the six months ended March 31, 2004. Selling, general and administrative
expenses as a percentage of revenues decreased 0.9% from 11.0% for the six
months ended March 31, 2003 to 10.1% for the six months ended March 31, 2004.
This decrease primarily results from an organizational restructuring that
occurred during the last two years where we streamlined our administrative cost
structure. The decrease also reflects a $0.4 million release of accrued
restructuring charges for one individual that settled during the six months
ended March 31, 2004 and a $0.8 million decrease in bad debt expense during the
six months ended March 31, 2004. Lastly, health care costs were approximately
$0.7 million lower in the six months ended March 31, 2004 because of plan design
changes that took effect January 1, 2004 and reduced lives participating in the
medical plan.
INCOME FROM OPERATIONS
Income from operations increased $2.7 million, or 11.1%, from $24.4 million for
the six months ended March 31, 2003, to $27.1 million for the six months ended
March 31, 2004. This increase in income from operations was primarily attributed
to a $12.0 million increase in revenues earned year over year, a $4.7 million
decrease in selling, general and administrative expenses, offset by a 2.0%
decrease in gross profit earned on those revenues primarily as a result of
increased copper prices.
23
NET INTEREST AND OTHER EXPENSE
Interest and other expense, net, increased $5.3 million, from $12.7 million for
the six months ended March 31, 2003, to $18.0 million for the six months ended
March 31, 2004. This increase in net interest and other expense was primarily
the result of a $5.2 million loss associated with retiring $75 million of senior
subordinated notes during the six months ended March 31, 2004 and additional
interest expense related to the $50 million term loan issued on February 27,
2004.
PROVISION FOR INCOME TAXES
Our effective tax rate decreased from 38.5% for the six months ended March 31,
2003 to negative 29.2% for the six months ended March 31, 2004. This decrease is
attributable to the release of $6.3 million of deferred tax valuation allowances
during the six months ended March 31, 2004. We released these valuation
allowances because we believe that we will now realize the deferred tax assets
for which they were established. Without the impact of these valuation allowance
releases, our effective tax rate was 39.5% for the six months ended March 31,
2004. This increase in our effective tax rate from 38.5% for the six months
ended March 31, 2003 to 39.5% for the six months ended March 31, 2004 is
attributable to a change in the mix of states where taxable income is generated,
an increase in state net operating loss valuation allowances and additional
reserves for potential tax liability related to tax return filing positions
taken by the Company.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2004
The following table presents selected unaudited historical financial information
for the three months ended March 31, 2003 and 2004.
Three Months Ended March 31,
--------------------------------------------------------
2003 % 2004 %
------ ---- ------ ----
(dollars in millions)
Revenues ......................................... $343.1 100% $343.9 100%
Cost of services (including depreciation) ........ 294.0 86% 296.0 86%
--------------------------------------------------------
Gross profit ............................. 49.1 14% 47.9 14%
Selling, general & administrative expenses ....... 37.5 11% 35.1 10%
--------------------------------------------------------
Income from operations ................... 11.6 3% 12.8 4%
Interest and other expense, net .................. 6.1 2% 11.7 3%
--------------------------------------------------------
Income before income taxes ....................... 5.5 2% 1.1 0%
Provision for income taxes ....................... 2.1 1% (4.4) (1%)
--------------------------------------------------------
Net income ............................... $ 3.4 1% $ 5.5 2%
========================================================
24
REVENUES
PERCENT OF TOTAL REVENUES
-------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
---- ----
Commercial and Industrial 83% 79%
Residential 17% 21%
--- ---
Total Company 100% 100%
==== ====
Total revenues increased $0.8 million, or 0.2%, from $343.1 million for the
three months ended March 31, 2003, to $343.9 million for the three months ended
March 31, 2004. This increase in revenues is primarily the result of $6.1
million of revenues due to an acquisition that was included in the results of
operations for the three months ended March 31, 2004 but was owned by us for one
month during the three months ended March 31, 2003. This increase was offset by
weaknesses in a few select commercial markets and reductions in communications
revenues.
Commercial and industrial revenues decreased $14.6 million, or 5.1%, from $284.7
million for the three months ended March 31, 2003, to $270.1 million for the
three months ended March 31, 2004. The acquisition revenues discussed above were
more than offset by a decrease in commercial revenues of $24.5 million, or
14.4%, primarily in the central region and reductions of communications revenues
of $2.1 million, or 9.6% across the company due to decreased spending in these
markets.
Residential revenues increased $15.4 million, or 26.4%, from $58.4 million for
the three months ended March 31, 2003, to $73.8 million for the three months
ended March 31, 2004, primarily as a result of increased demand for housing due
to the low interest rate environment.
GROSS PROFIT
SEGMENT GROSS PROFIT MARGINS
AS A PERCENT OF SEGMENT REVENUES
--------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2004
---- ----
Commercial and Industrial 13% 12%
Residential 21% 20%
--- ---
Total Company 14% 14%
=== ===
Gross profit decreased $1.2 million, or 2.4%, from $49.1 million for the three
months ended March 31, 2003, to $47.9 million for the three months ended March
31, 2004. Gross profit margin as a percentage of revenues decreased from 14.3%
to 13.9% for the three months ended March 31, 2003 compared to three months
ended March 31, 2004. The decline in gross margin during the three months ended
March 31, 2004 was primarily due to the significant increase in copper prices
which impacted IES' material costs. The fixed price nature of many of our
contracts precluded us from passing these costs onto our customers. This
accounted for 69 basis points impact to our gross margin.
25
Commercial and industrial gross profit decreased $4.0 million, or 10.8%, from
$36.9 million for the three months ended March 31, 2003, to $32.9 million for
the three months ended March 31, 2004. Commercial and industrial gross profit
margin as a percentage of revenues decreased from 13.0% for the three months
ended March 31, 2003, to 12.2% for the three months ended March 31, 2004. This
decrease in gross profit margin as a percentage of revenues was primarily the
result of the dramatic increase in copper prices discussed above.
Residential gross profit increased $2.7 million, or 22.1%, from $12.2 million
for the three months ended March 31, 2003, to $14.9 million for the three months
ended March 31, 2004. Residential gross profit margin as a percentage of
revenues decreased from 20.9% for the three months ended March 31, 2003, to
20.3% for the three months ended March 31, 2004. This decrease in gross profit
margin as a percentage of revenues was primarily the result of the increase in
copper prices during the three months ended March 31, 2004 and increased
competition for work.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $2.4 million, or 6.4%,
from $37.5 million for the three months ended March 31, 2003, to $35.1 million
for the three months ended March 31, 2004. Selling, general and administrative
expenses as a percentage of revenues decreased 0.7% from 10.9% for the three
months ended March 31, 2003 to 10.2% for the three months ended March 31, 2004.
This decrease primarily results from an organizational restructuring that
occurred during the last two years where we streamlined our administrative cost
structure. The decrease also includes a $0.2 million decrease in bad debt
expense during the three months ended March 31, 2004. Health care costs were
approximately $0.7 million lower in the three months ended March 31, 2004
because of plan design changes that took effect January 1, 2004 and reduced
lives participating in the medical plan.
INCOME FROM OPERATIONS
Income from operations increased $1.2 million, or 10.3%, from $11.6 million for
the three months ended March 31, 2003, to $12.8 million for the three months
ended March 31, 2004. This increase in income from operations was attributed to
a $2.4 million decrease in selling, general and administrative expenses year
over year offset by an increase in cost of goods sold resulting from the
increase in copper prices during the three months ended March 31, 2004.
NET INTEREST AND OTHER EXPENSE
Interest and other expense, net increased from $6.1 million for the three months
ended March 31, 2003, to $11.7 million for the three months ended March 31,
2004. This increase in net interest and other expense was primarily the result
of a $5.2 million loss associated with retiring $75 million of senior
subordinated notes on March 31, 2004 and additional interest expense related to
the $50 million term loan issued on February 27, 2004.
26
PROVISION FOR INCOME TAXES
Our effective tax rate decreased from 38.5% for the three months ended March 31,
2003 to negative 383.9% for the three months ended March 31, 2004. This decrease
is attributable to the release of $4.8 million of deferred tax valuation
allowances during the three months ended March 31, 2004. We released these
valuation allowances because we believe that we will now realize the deferred
tax assets for which they were established. Without the impact of these
valuation allowance releases, our effective tax rate was 37.8% for the three
months ended March 31, 2004. This decrease in our effective tax rate from 38.5%
for the three months ended March 31, 2003 to 37.8% for the three months ended
March 31, 2004 is attributable to a change in the projected tax differences for
the year ended September 30, 2004, a change in the mix of states where taxable
income is generated, an increase in state net operating loss valuation
allowances and additional reserves for potential tax liability related to tax
return filing positions taken by the Company.
WORKING CAPITAL
SEPTEMBER MARCH
30, 2003 31, 2004
--------- --------
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 40,201 $ 19,043
Accounts receivable:
Trade, net of allowance of $5,425 and $3,764 respectively ......... 245,618 227,343
Retainage ......................................................... 68,789 68,974
Related party ..................................................... 67 36
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................................ 48,256 52,601
Inventories .......................................................... 20,473 23,817
Prepaid expenses and other current assets ............................ 23,319 26,526
-------- --------
Total current assets .......................................... $446,723 $418,340
-------- --------
CURRENT LIABILITIES:
Current maturities of long-term debt ................................. $ 256 7,286
Accounts payable and accrued expenses ................................ 138,143 121,748
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................................ 41,913 37,095
-------- --------
Total current liabilities ..................................... $180,312 $166,129
-------- --------
Working capital ...................................................... $266,411 $252,211
======== ========
Total current assets decreased $28.4 million, or 6.4%, from $446.7 million as of
September 30, 2003 to $418.3 million as of March 31, 2004. This decrease is
primarily the result of a $18.3 million decrease in trade accounts receivable,
net, due to a company-wide focus on collections and the timing of billings on
projects in progress. Working capital was decreased by a $21.2 million decrease
in cash and cash equivalents that was impacted by $50.0 million in term loan
borrowings offset by cash used to retire $75.0 million of senior subordinated
debt included in
27
cash used in financing activities. Additionally, $3.1 million of cash was used
in investing activities. See "Liquidity and Capital Resources" below for further
information. These decreases in current assets were offset by an increase in
costs and estimated earnings in excess of billings on completed contracts of
$4.3 million due to a timing of billings and a $1.7 million increase in prepaid
and other current assets.
Total current liabilities decreased $14.2 million, or 7.9%, from $180.3 million
as of September 30, 2003 to $166.1 million as of March 31, 2004. This decrease
is primarily the result of a $16.4 million decrease in accounts payable and
accrued expenses due to the timing of payments made and a $4.8 million decrease
in billings in excess of costs and estimated earnings on uncompleted contracts,
offset by a $7.0 million increase in current maturities of long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had cash and cash equivalents of $19.0 million, working
capital of $252.2 million, outstanding borrowings of $50.0 million under our
credit facility, $33.7 million of letters of credit outstanding, other debt of
$0.3 million and available capacity under our credit facility of $91.3 million.
The amount outstanding under our senior subordinated notes was $172.9 million.
All debt obligations are on our balance sheet.
During the six months ended March 31, 2004, we generated $7.0 million of net
cash from operating activities. This net cash provided by operating activities
was comprised of net income of $11.8 million, increased by $6.7 million of
non-cash charges related primarily to depreciation expense, offset by the
reversal of $6.3 million in tax valuation allowances, and further increased by
changes in working capital. Working capital changes consisted of an $18.0
million decrease in trade accounts receivable, net, due to the timing of
collections. Working capital changes also included a $3.3 million increase in
inventory and a $13.5 million decrease in accounts payable and accrued expenses
as a result of the timing of payments made, with the balance of the change due
to other working capital changes. Net cash used in investing activities was $3.1
million, consisting primarily of $3.1 million used for capital expenditures and
$0.4 million invested in securities, offset by $0.4 million in proceeds from the
sale of fixed assets. Net cash used in financing activities was $25.0 million,
resulting primarily from repayments of debt of $75.2 million and $4.3 million
used in the acquisition of treasury stock, offset by borrowings of $50.0 million
and $5.1 million received from the exercise of stock options.
On February 27, 2004, we amended and restated our $150.0 million revolving
credit facility to a $125.0 million revolving credit facility and a $50.0
million term loan led by Bank One, NA. The term loan is repayable in 15
quarterly installments of $1.8 million beginning May 28, 2004, with a final
installment equal to the then-unpaid principal balance of the term loan on
February 27, 2008. The revolving credit facility matures February 27, 2008. The
term loan and the revolving credit facility are collectively referred to as
credit facility. The proceeds from the term loan and our available cash were
used to call $75.0 million of our long term bonds. Amounts borrowed under the
credit facility bear interest at an annual rate equal to either (a) the
Eurodollar rate plus 1.75 percent to 2.75 percent, as determined by the ratio of
the our total funded debt to EBITDA (as defined in the Credit Facility) or (b)
the higher of (i) the bank's prime rate or (ii) the sum of the Federal funds
rate plus 0.50 percent plus an additional 0.00 percent to 0.50 percent, as
28
determined by the ratio of the our total funded debt to EBITDA. Commitment fees
of 0.375 percent to 0.50 percent are assessed on any unused borrowing capacity
under the credit facility. Our direct and indirect subsidiaries guarantee the
repayment of all amounts due under the facility, and the facility is secured by
a first perfected security interest in all of the assets of the company and
those subsidiaries, including all of the outstanding shares of the capital stock
of those subsidiaries. Among other restrictions, the financial covenants include
a minimum net worth requirement, a maximum total consolidated funded debt to
EBITDA ratio, a maximum senior consolidated debt to EBITDA ratio, a minimum
fixed charge coverage ratio and a minimum asset coverage ratio. We were in
compliance with the financial covenants of our credit facility at March 31,
2004. As of March 31, 2004, we had $50.0 million outstanding under our credit
facility, letters of credit outstanding under our credit facility of $33.7
million, $0.3 million of other borrowings and available borrowing capacity under
our credit facility of $91.3 million.
On January 25, 1999 and May 29, 2001, we completed our offerings of $150.0
million and $125.0 million senior subordinated notes, respectively. The notes
bear interest at 9 3/8% and will mature on February 1, 2009. We pay interest on
the notes on February 1 and August 1 of each year. The notes are unsecured
senior subordinated obligations and are subordinated to all of our existing and
future senior indebtedness. The notes are guaranteed on a senior subordinated
basis by all of our subsidiaries. Under the terms of the notes, we are required
to comply with various affirmative and negative covenants including (1)
restrictions on additional indebtedness, and (2) restrictions on liens,
guarantees and dividends. During the year ended September 30, 2002, we retired
approximately $27.1 million of these senior subordinated notes. During the three
months ended March 31, 2004, we called approximately $75.0 million of our senior
subordinated notes, paying a call premium of 4.688%, or $3.5 million. This
premium was recorded as a loss in other income and expense in accordance with
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections."
We utilized approximately $2.7 million cash, net of cash acquired, to purchase
Riviera Electric LLC in Denver, Colorado on February 27, 2003.
All of our operating income and cash flows are generated by our 100% owned
subsidiaries, which are the subsidiary guarantors of our outstanding senior
subordinated notes. We are structured as a holding company and substantially all
of our assets and operations are held by our subsidiaries. There are currently
no significant restrictions on our ability to obtain funds from our subsidiaries
by dividend or loan. Our parent holding company's independent assets, revenues,
income before taxes and operating cash flows are less than 3% of the
consolidated total. The separate financial statements of the subsidiary
guarantors are not included herein because (i) the subsidiary guarantors are all
of the direct and indirect subsidiaries of the company; (ii) the subsidiary
guarantors have fully and unconditionally, jointly and severally guaranteed the
senior subordinated notes; and (iii) the aggregate assets, liabilities, earnings
and equity of the subsidiary guarantors is substantially equivalent to the
assets, liabilities, earnings and equity of the company on a consolidated basis.
As a result, the presentation of separate financial statements and other
disclosures concerning the subsidiary guarantors is not deemed material.
29
Other Commitments. As is common in our industry, we have entered into certain
off balance sheet arrangements that expose us to increased risk. Our significant
off balance sheet transactions include liabilities associated with noncancelable
operating leases, letter of credit obligations and surety guarantees.
We enter into noncancelable operating leases for many of our vehicle and
equipment needs. These leases allow us to retain our cash when we do not own the
vehicles or equipment and we pay a monthly lease rental fee. At the end of the
lease, we have no further obligation to the lessor. We may determine to cancel
or terminate a lease before the end of its term. Typically, we are liable to the
lessor for various lease cancellation or termination costs and the difference
between the then fair market value of the leased asset and the implied book
value of the leased asset as calculated in accordance with the lease agreement.
Some of our customers require us to post letters of credit as a means of
guaranteeing performance under our contracts and ensuring payment by us to
subcontractors and vendors. If our customer has reasonable cause to effect
payment under a letter of credit, we would be required to reimburse our creditor
for the letter of credit. Depending on the circumstances surrounding a
reimbursement to our creditor, we may have a charge to earnings in that period.
To date, we have not had a situation where a customer has had reasonable cause
to effect payment under a letter of credit. At March 31, 2004, $2.1 million of
our outstanding letters of credit were to collateralize our customers.
Some of the underwriters of our casualty insurance programs require us to post
letters of credit as collateral. This is common in the insurance industry. To
date we have not had a situation where an underwriter has had reasonable cause
to effect payment under a letter of credit. At March 31, 2004, $31.6 million of
our outstanding letters of credit were to collateralize our insurance programs.
Many of our customers require us to post performance and payment bonds issued by
a surety. Those bonds guarantee the customer that we will perform under the
terms of a contract and that we will pay subcontractors and vendors. In the
event that we fail to perform under a contract or pay subcontractors and
vendors, the customer may demand the surety to pay or perform under our bond.
Our relationship with our surety is such that we will indemnify the surety for
any expenses it incurs in connection with any of the bonds it issues on our
behalf. To date, we have not incurred significant expenses to indemnify our
surety for expenses it incurred on our behalf. As of March 31, 2004, our cost to
complete projects covered by surety bonds was approximately $201.3 million.
We have committed to invest up to $5.0 million in EnerTech Capital Partners II,
L.P. ("EnerTech"). EnerTech is a private equity firm specializing in investment
opportunities emerging from the deregulation and resulting convergence of the
energy, utility and telecommunications industries. Through March 31, 2004, we
had invested $3.1 million under our commitment to EnerTech.
30
Our future contractual obligations include (in thousands):
LESS THAN
ONE YEAR 2005 2006 2007 2008 THEREAFTER TOTAL
----------- --------- --------- --------- -------- ---------- -------
Debt and capital lease obligations(1).. $ 3,655 $ 7,270 $ 7,163 $ 7,151 $ 25,014 $ 172,885 $ 223,138
Operating lease obligations............ $ 5,202 $ 11,961 $ 8,004 $ 5,510 $ 3,722 $ 2,529 $ 36,928
(1) The tabular amounts exclude the interest obligations that will be
created if the debt and capital lease obligations are outstanding for
the periods presented.
Our other commercial commitments expire as follows (in thousands):
LESS THAN
ONE YEAR 2005 2006 2007 2008 THEREAFTER TOTAL
----------- --------- --------- --------- -------- ---------- --------
Standby letters of credit.............. $ 33,709 $ -- $ -- $ -- $ -- $ -- $ 33,709
Other commercial commitments........... $ -- $ -- $ -- $ -- $ -- $ 1,900(2) $ 1,900
(2) Balance of investment commitment in EnerTech.
Outlook. The following statements are based on current expectations. These
statements are forward-looking and actual results may differ materially.
Economic conditions across the country are challenging. We continue to focus on
collecting receivables and reducing days sales outstanding. To improve our
position for continued success, we continue to take steps to reduce costs. We
have made significant cuts in administrative overhead at the home office and in
the field. Although we have seen signs of improvement in six months ended March
31, 2004, the economic outlook for the remainder of fiscal 2004 is still
somewhat uncertain. We expect earnings per share in the third quarter of fiscal
2004 to range between $0.10 and $0.17 per share. For the year ended September
30, 2004, we expect earnings to range between $0.55 and $0.75 per share.
We expect to generate cash flow from operations. Our cash flows from operations
tend to track with the seasonality of our business and historically have
improved in the latter part of our fiscal year. We anticipate that our cash flow
from operations will provide sufficient cash to enable us to meet our working
capital needs, debt service requirements and capital expenditures for property
and equipment through the next twelve months. We expect capital expenditures of
approximately $12 million for the fiscal year ended September 30, 2004. Our
ability to generate cash flow from operations is dependent on many factors,
including demand for our products and services, the availability of work at
margins acceptable to us and the ultimate collectibility of our receivables. See
"Disclosure Regarding Forward-Looking Statements" contained in our annual report
for the year ended September 30, 2003, filed on Form 10-K with the Securities
and Exchange Commission.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations from residential construction are seasonal, depending
on weather trends, with typically higher revenues generated during spring and
summer and lower revenues during fall and winter. The commercial and industrial
aspect of our business is less subject to seasonal trends, as this work
generally is performed inside structures protected from the weather.
31
Our service and maintenance business is generally not affected by seasonality.
In addition, the construction industry has historically been highly cyclical.
Our volume of business may be adversely affected by declines in construction
projects resulting from adverse regional or national economic conditions.
Quarterly results may also be materially affected by the timing of new
construction projects, acquisitions and the timing and magnitude of acquisition
assimilation costs. Accordingly, operating results for any fiscal period are not
necessarily indicative of results that may be achieved for any subsequent fiscal
period.
NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities," ("Interpretation 46").
The objective of Interpretation 46 is to improve the financial reporting by
companies involved with variable interest entities. Until now, one company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interest. Interpretation 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period ending after March 15, 2004. Certain
disclosure requirements apply to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. We
have investments in two firms, EnerTech Capital Partners II, L.P. (EnerTech) and
Energy Photovoltaics, Inc. (EPV) that might fall under this interpretation. We
determined that EPV was excepted out of the provisions of Interpretation 46 and
that it was not the primary beneficiary of EnerTech and as such, the adoption of
this interpretation did not have a material impact on our results of operations
or our financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management is actively involved in monitoring exposure to market risk and
continues to develop and utilize appropriate risk management techniques. We are
not exposed to any significant market risks from commodity price risk or foreign
currency exchange risk. Our exposure to significant market risks includes
outstanding borrowings under our floating rate credit facility. Management does
not use derivative financial instruments for trading purposes or to speculate on
changes in interest rates or commodity prices.
32
As a result, our exposure to changes in interest rates results from our
short-term and long-term debt with both fixed and floating interest rates. The
following table presents principal or notional amounts (stated in thousands) and
related interest rates by year of maturity for our debt obligations and their
indicated fair market value at March 31, 2004:
2004 2005 2006 2007 2008 THEREAFTER TOTAL
----------- ----------- ----------- ---------- ---------- ------------ --------
Liabilities - Debt:
Variable Rate (term loan)......... $ 3,571 $ 7,143 $ 7,143 $ 7,143 $ 25,000 $ -- $ 50,000
Variable Interest Rate.......... 4.12% 4.12% 4.12% 4.12% 4.12% -- 4.12%
Fixed Rate (senior subordinated
notes).......................... $ -- $ -- $ -- $ -- $ -- $ 172,885 $ 172,885
Fixed Interest Rate............. 9.375% 9.375% 9.375% 9.375% 9.375% 9.375% 9.375%
Fair Value of Debt:
Variable Rate $ 50,000
Fixed Rate $ 181,097
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2004, an evaluation was performed under the supervision and with
the participation of the Company's management, including the CEO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO, concluded that the Company's disclosure controls and procedures were
effective as of March 31, 2004 in providing reasonable assurances that material
information required to be disclosed is included on a timely basis in the
reports it files with the Securities and Exchange Commission.
Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.
33
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) The Company held its annual meeting of stockholders in
Houston, Texas on January 22, 2004. The following sets forth
matters submitted to a vote of the stockholders:
(B) The following individuals were elected to the Board of
Directors as stated in the Company's Proxy Statement dated
December 12, 2003, for terms expiring at the 2007 annual
stockholders' meeting or until their successors have been
elected and qualified - Class III Directors: Donald P. Hodel,
Donald C. Trauscht and James D. Woods.
Mr. Hodel was elected by a vote of 31,025,428 shares, being
more than a majority of the common stock of the Company, and
610,925 shares withheld. Mr. Trauscht was elected by a vote of
30,972,545 shares, being more than a majority of common stock
of the Company, and 663,808 shares withheld. Mr. Woods was
elected by a vote of 30,971,679 shares, being more than a
majority of the common stock of the Company, and 664,674
shares withheld.
(C) The stockholders approved the Company's Employee Stock
Purchase Plan, as amended and restated, including the issuance
of an additional 1,000,000 shares of the Company's common
stock to be issued pursuant thereto, by a vote of 23,515,898
shares, being a majority of the common stock and restricted
voting common stock of the Company, with 2,263,469 shares of
common stock voted against and 8,911 shares of common stock
abstaining.
The stockholders ratified the appointment of Ernst & Young LLP
to audit the financial statements of the Company and its
subsidiaries, by a vote of 32,852,378 shares, being more than
a majority of the common stock and restricted voting common
stock of the Company, with 83,153 of common stock voted
against, and 3,677 shares of common stock abstaining.
34
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.1 Credit Facility dated February 27, 2004, among the
Company, as borrower, the Financial Institutions
named therein, as banks, U.S. Bank National
Association as syndication agent, Bank of Scotland as
managing agent, LaSalle Bank National Association as
Documentation agent and Bank One, NA as
administrative agent.
31.1 Certification of Herbert R. Allen, Chief Executive
Officer and Chief Financial Offer, pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002.
32.1 Certification of Herbert R. Allen, Chief Executive
Officer and Chief Financial Offer, pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K
On March 2, 2004, the Company filed a Current Report on Form 8-K in
connection with the press release of its Company and Investment
Profile dated March 2004.
35
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
INTEGRATED ELECTRICAL SERVICES, INC.
Date: April 29, 2004 By: /s/ Herbert R. Allen
---------------------------
Herbert R. Allen
Chief Executive Officer and
Interim Chief Financial Officer
36
EXHIBIT INDEX
10.1 Credit Facility dated February 27, 2004, among the Company, as
borrower, the Financial Institutions named therein, as banks, U.S. Bank
National Association as syndication agent, Bank of Scotland as managing
agent, LaSalle Bank National Association as Documentation agent and
Bank One, NA as administrative agent.
31.1 Certification of Herbert R. Allen, Chief Executive Officer and Chief
Financial Offer, pursuant to Section 302 of The Sarbanes-Oxley Act of
2002.
32.1 Certification of Herbert R. Allen, Chief Executive Officer and Chief
Financial Offer, pursuant to Section 906 of The Sarbanes-Oxley Act of
2002.