1
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, 1999
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.)
515 Post Oak Boulevard
Suite 450
Houston, Texas 77027-9408
(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 May 11, 1999, of the issuer's common
stock was 32,206,807 and of the issuer's restricted voting common stock was
2,655,709.
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
March 31, 1999....................................................... 2
Consolidated Statements of Operations for the six months ended
March 31, 1998 and 1999.............................................. 3
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1999.............................................. 4
Consolidated Statement of Stockholders' Equity for the six months ended
March 31, 1999....................................................... 5
Consolidated Statements of Cash Flows for the six months ended
March 31, 1998 and 1999.............................................. 6
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1999.............................................. 7
Condensed Notes to Consolidated Financial Statements...................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 21
Item 6. Exhibits and Reports on Form 8-K............................. 21
Signatures.................................................................... 22
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, March 31,
1998 1999
------------- -------------
(Audited) (Unaudited)
ASSETS
Cash ..................................................... $ 14,583 $ 35,630
Accounts receivable, net of allowance of $4,160
and $4,562, respectively ............................ 146,327 167,801
Inventories, net ......................................... 6,440 8,995
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts ......... 12,502 21,129
Prepaid and other current assets ......................... 3,198 4,418
------------- -------------
Total current assets ................................ 183,050 237,973
Receivables from related parties ......................... 142 233
Goodwill, net ............................................ 293,066 341,703
Property and equipment, net .............................. 23,436 29,721
Other non-current assets ................................. 2,774 9,013
------------- -------------
Total assets ................................... $ 502,468 $ 618,643
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt and current maturities of long-term debt . $ 3,823 $ 537
Accounts payable and accrued expenses .................... 69,225 83,357
Income taxes payable ..................................... 6,686 3,861
Billings in excess of costs and estimated
earnings recognized on uncompleted contracts ........ 27,807 29,863
Other current liabilities ................................ 489 451
------------- -------------
Total current liabilities ........................... 108,030 118,069
Long-term bank debt ...................................... 89,500 --
Other long-term debt, net of current maturities .......... 854 851
Senior Subordinated Notes, net of $1,188
unamortized discount ................................ -- 148,812
Other non-current liabilities ............................ 1,380 1,498
------------- -------------
Total liabilities .............................. 199,764 269,230
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock ........................................ 281 299
Restricted common stock ............................. 27 27
Additional paid-in capital .......................... 291,650 319,509
Retained earnings ................................... 10,746 29,578
------------- -------------
Total stockholders' equity ..................... 302,704 349,413
------------- -------------
Total liabilities and stockholders' equity ..... $ 502,468 $ 618,643
============= =============
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
Six Months Ended March 31,
------------------------------
1998 1999
------------ ------------
Revenues .................................... $ 104,333 $ 413,404
Cost of services (including depreciation) ... 82,126 326,934
------------ ------------
Gross profit ........................... 22,207 86,470
Selling, general & administrative expenses:
Corporate .............................. 734 3,904
Field .................................. 16,542 41,686
Non-cash, non-recurring compensation charge . 17,036 --
Goodwill amortization ....................... 640 3,943
------------ ------------
Income (loss) from operations .......... (12,745) 36,937
------------ ------------
Other (income)/expense:
Interest expense ....................... 59 4,923
Interest income ........................ (111) (496)
Gain on sale of assets ................. (4) (129)
Other income, net ...................... (119) (154)
------------ ------------
(175) 4,144
------------ ------------
Income (loss) before income taxes ........... (12,570) 32,793
Provision for income taxes .................. 1,953 13,961
------------ ------------
Net income (loss) ........................... $ (14,523) $ 18,832
============ ============
Basic earnings (loss) per share ............. $ (1.28) $ 0.59
============ ============
Diluted earnings (loss) per share ........... $ (1.28) $ 0.58
============ ============
Shares used in the computation
of earnings per share (Note 5)-
Basic- ................................. 11,366,953 31,761,207
============ ============
Diluted- ............................... 11,366,953 32,254,651
============ ============
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
Three Months Ended March 31,
------------------------------
1998 1999
------------ ------------
Revenues ..................................... $ 72,534 $ 215,692
Cost of services (including depreciation) .... 56,864 170,189
------------ ------------
Gross profit ............................ 15,670 45,503
Selling, general & administrative expenses:
Corporate ............................... 451 1,906
Field ................................... 9,107 21,843
Non-cash, non-recurring compensation charge .. 17,036 --
Goodwill amortization ........................ 640 2,095
------------ ------------
Income (loss) from operations ........... (11,564) 19,659
------------ ------------
Other (income)/expense:
Interest expense ........................ 4 3,228
Interest income ......................... (84) (345)
Gain on sale of assets .................. (4) (99)
Other income, net ....................... (90) (126)
------------ ------------
(174) 2,658
------------ ------------
Income (loss) before income taxes ............ (11,390) 17,001
Provision for income taxes ................... 2,452 7,261
------------ ------------
Net income (loss) ............................ $ (13,842) $ 9,740
============ ============
Basic earnings (loss) per share .............. $ (0.76) $ 0.30
============ ============
Diluted earnings (loss) per share ............ $ (0.76) $ 0.30
============ ============
Shares used in the computation
of earnings per share (Note 5)-
Basic- .................................. 18,241,867 32,422,323
============ ============
Diluted- ................................ 18,241,867 32,882,040
============ ============
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Common Stock Restricted Common Stock Additional Total
------------------------- ------------------------- Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 30, 1998 ......... 28,105,363 $ 281 2,655,709 $ 27 $ 291,650 $ 10,746 $ 302,704
Issuance of stock for
Acquisitions (unaudited) .. 1,766,962 17 -- -- 27,644 -- 27,661
Options exercised (unaudited) .. 55,348 1 -- -- 215 -- 216
Net income (unaudited) ......... -- -- -- -- -- 18,832 18,832
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, March 31, 1999 (unaudited) . 29,927,673 $ 299 2,655,709 $ 27 $ 319,509 $ 29,578 $ 349,413
========== ========== ========== ========== ========== ========== ==========
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
Six Months Ended March 31,
------------------------------
1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (14,523) $ 18,832
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Non-cash, non-recurring compensation charge ................. 17,036 --
Depreciation and amortization ............................... 1,172 6,533
Gain on sale of property and equipment ...................... -- (129)
Changes in operating assets and liabilities
(Increase) decrease in
Accounts receivable .................................... (5,288) (2,879)
Inventories ............................................ 266 (392)
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts ....... 601 (5,044)
Prepaid expenses and other current assets .............. 38 (422)
Increase (decrease) in
Accounts payable and accrued expenses .................. (3,184) 4,391
Billings in excess of costs and estimated earnings
recognized on uncompleted contracts ............... 4,348 (2,703)
Income taxes payable and other current liabilities ..... 1,162 (4,539)
Other, net .................................................. (75) (1,092)
------------ ------------
Net cash provided by operating activities ........................ 1,553 12,556
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired ..................... (35,697) (35,101)
Proceeds from sale of property and equipment ..................... 82 321
Additions to property and equipment .............................. (2,003) (3,786)
Collections of notes receivable .................................. 475 --
------------ ------------
Net cash used in investing activities ............................ (37,143) (38,566)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt ............................................... 626 183,748
Payments of debt ................................................. (20,551) (131,313)
Distributions to accounting acquirer ............................. (17,758) --
Proceeds from initial public offering ............................ 91,513 --
Debt issuance costs .............................................. -- (5,329)
Other ............................................................ -- (49)
------------ ------------
Net cash provided by financing activities ........................ 53,830 47,057
------------ ------------
NET INCREASE IN CASH .................................................. 18,240 21,047
CASH, beginning of period ............................................. 4,154 14,583
------------ ------------
CASH, end of period ................................................... $ 22,394 $ 35,630
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest .................................................... $ 37 $ 2,655
Income taxes ................................................ $ -- $ 17,430
Non-cash property distribution .............................. $ 756 $ --
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
Three Months Ended March 31,
------------------------------
1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ (13,842) $ 9,740
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Non-cash, non-recurring compensation charge ................ 17,036 --
Depreciation and amortization .............................. 926 3,472
Gain on sale of property and equipment ..................... (15) (99)
Changes in operating assets and liabilities
(Increase) decrease in
Accounts receivable ................................... (3,131) (3,431)
Inventories ........................................... (147) 53
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts ...... (281) (4,449)
Prepaid expenses and other current assets ............. (386) (589)
Increase (decrease) in
Accounts payable and accrued expenses ................. 605 7,618
Billings in excess of costs and estimated earnings
recognized on uncompleted contracts .............. 2,178 684
Income taxes payable and other current liabilities .... 1,676 (479)
Other, net ................................................. (196) (852)
------------ ------------
Net cash provided by operating activities ....................... 4,423 11,668
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .................... (35,697) (27,650)
Proceeds from sale of property and equipment .................... -- 192
Additions to property and equipment ............................. (1,653) (1,810)
------------ ------------
Net cash used in investing activities ........................... (37,350) (29,268)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt .............................................. 234 164,248
Payments of debt ................................................ (20,551) (109,909)
Distributions to accounting acquirer ............................ (17,626) --
Proceeds from initial public offering ........................... 91,513 --
Debt issuance costs ............................................. -- (5,329)
Other ........................................................... -- 176
------------ ------------
Net cash provided by financing activities ....................... 53,570 49,186
------------ ------------
NET INCREASE IN CASH ................................................. 20,643 31,586
CASH, beginning of period ............................................ 1,751 4,044
------------ ------------
CASH, end of period .................................................. $ 22,394 $ 35,630
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest ................................................... $ -- $ 1,621
Income taxes ............................................... $ -- $ 13,369
Non-cash property distribution ............................. $ 756 $ --
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
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INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW
Integrated Electrical Services, Inc. ("IES" or the "Company"), a Delaware
corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial, residential, power line and data
communication markets.
On January 30, 1998, concurrent with the closing of its initial public offering
("IPO" or "Offering") of common stock, IES acquired 16 companies and related
entities engaged in all facets of electrical contracting and maintenance
services (collectively, the "Founding Companies" or the "Founding Company
Acquisitions"). Subsequent to its IPO, and through March 31, 1999, the Company
has acquired or entered into definitive agreement to acquire 34 additional
electrical contracting and maintenance businesses (the "Post IPO
Acquisitions"). Of these "Post IPO Acquisitions", 33 were accounted for using
the purchase method of accounting (the "Purchased Companies") and one was
accounted for using the pooling-of-interests method of accounting (the "Pooled
Company").
The financial statements of IES for periods prior to January 30, 1998 (the
effective closing date of the acquisitions of the Founding Companies) are the
financial statements of Houston-Stafford (the "Accounting Acquirer") as restated
for the acquisition of the Pooled Company in June 1998. The operations of the
other Founding Companies and IES, acquired by the Accounting Acquirer, have been
included in the Company's financial statements beginning February 1, 1998, and
the Purchased Companies beginning on their respective dates of acquisition.
References herein to the "Company" include IES and its subsidiaries.
The accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and therefore the financial statements included herein should be reviewed in
conjunction with the financial statements and related notes thereto contained in
the Company's annual report 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 and three months ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 1999.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 of the Notes to Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1998.
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USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and 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. Significant estimates in these
financial statements include those regarding revenue recognition for contracts
accounted for under the percentage -of- completion method.
2. INITIAL PUBLIC OFFERING AND FOUNDING COMPANY ACQUISITIONS
On January 30, 1998, the Company completed its IPO of its stock, which involved
the sale to the public of 7,000,000 shares of the Company's common stock at
$13.00 per share. The Company received net proceeds from the Offering of
approximately $78.8 million. Concurrent with the completion of the Offering, IES
acquired the Founding Companies for consideration consisting of $53.4 million in
cash and 12,313,025 shares of common stock. Additionally, on February 5, 1998,
the Company sold 1,050,000 shares of its common stock pursuant to the
overallotment option granted to the underwriters in connection with the Offering
for net proceeds of approximately $12.7 million. The Company used approximately
$7.6 million of the net proceeds from the Offering to retire outstanding third
party debt and approximately $16.0 million to pay indebtedness incurred by the
Founding Companies for distributions to the owners prior to the Acquisitions.
The Company used the remaining net proceeds for acquisitions (see Note 3).
3. ACQUISITIONS
For the six months ended March 31, 1999, the Company has acquired 13
acquisitions accounted for as purchases. The total consideration paid in these
transactions was approximately $35.1 million of cash and 1.8 million shares of
common stock which exceeded the net tangible assets acquired by $51.1 million,
which amount has been recorded as goodwill in the accompanying consolidated
financial statements. The accompanying balance sheets include allocations of
the respective purchase prices to the assets acquired and liabilities assumed
based on preliminary estimates of fair value and are subject to final
adjustment.
The unaudited pro forma data presented below assume that the Founding Company
Acquisitions, the Offering, and the Post IPO Acquisitions had occurred at the
beginning of each period presented .
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Six Months Ended March 31,
-----------------------------------------
1998 1999
------------------ -----------------
(in thousands, except per share data)
Revenues...................................... $ 415,222 $ 439,935
Net income.................................... $ 17,818 $ 19,432
Basic earnings per share...................... $ 0.55 $ 0.60
Diluted earnings per share.................... $ 0.54 $ 0.59
The unaudited pro forma data presented above also reflects pro forma adjustments
primarily related to: reductions in general and administrative expenses for
contractually agreed reductions in owners' compensation, the reversal of the $17
million non-cash, non-recurring compensation charge which occurred during the
quarter ended March 31, 1998, estimated goodwill amortization for the excess of
consideration paid over the net assets acquired assuming a 40-year amortization
period, interest expense on borrowings incurred to fund acquisitions,
elimination of interest income, and additional tax expense based on the
Company's effective tax rate.
4. LONG-TERM DEBT
Credit Facility -
The Company has a $175.0 million three-year revolving credit facility with
NationsBank, N.A. dba Bank of America, N.A. as agent (the "Credit Facility").
The Credit Facility matures on July 30, 2001, and will be used for working
capital, acquisitions, capital expenditures and other corporate purposes. The
amounts borrowed under the Credit Facility bear interest at an annual rate
equal to either (a) the London interbank offered rate ("LIBOR") plus 1.0% to
2.0%, as determined by the ratio of the Company's total funded debt to EBITDA
(as defined), or (b) the higher of (i) the bank's prime rate and (ii) the
Federal Funds rate plus 0.5%, plus up to an additional 0.5% as determined by
the ratio of the Company's total funded debt to EBITDA. Commitment fees of
0.25% to 0.375%, as determined by the ratio of the Company's total funded debt
to EBITDA, are due on any unused borrowing capacity under the Credit Facility.
The Company's subsidiaries have guaranteed the repayment of all amounts due
under the facility, and the facility is secured by the capital stock of the
guarantors and the accounts receivable of the Company and the guarantors. The
Credit Facility requires the consent of the lenders for acquisitions exceeding
a certain level of cash consideration, prohibits the payment of cash dividends
on the Company's common stock, restricts the ability of the Company to incur
other indebtedness and requires the Company to comply with certain financial
covenants. Availability of the Credit Facility is subject to customary drawing
conditions.
The Credit Facility is used to fund acquisitions, capital expenditures and
working capital requirements. Under the terms of the Credit Facility the Company
is required to comply with various affirmative and negative covenants including:
(i) the maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, and (iii) restrictions on liens, guarantees and dividends.
Senior Subordinated Notes -
On January 25, 1999, the Company completed its offering of $150.0 million Senior
Subordinated Notes (the "Notes"). The Notes bear interest at 9 3/8% and mature
on February 1, 2009. The Company will pay interest on the Notes on February 1
and August 1 of each year, commencing
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August 1, 1999. The Notes are unsecured senior subordinated obligations and are
subordinated to all existing and future senior indebtedness. The Notes are
guaranteed on a senior subordinated basis by all of the Company's subsidiaries.
Under the terms of the 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.
The net proceeds to the Company from the offering of the Notes was
approximately $144 million after deducting the debt issuance discount,
underwriting commissions and offering expenses. The Company used a portion of
the proceeds from the Notes to repay the $100.0 million indebtedness then
outstanding on its Credit Facility. The balance of the proceeds of the Notes,
as well as amounts available under the Credit Facility, may be used for general
corporate purposes, including but not limited to future acquisitions, capital
expenditures and additional working capital.
5. PER SHARE INFORMATION
Basic earnings per share calculations are based on the weighted average number
of shares of common stock and restricted voting common stock outstanding.
Diluted earnings per share calculations are based on the weighted average number
of common shares outstanding and common equivalent shares from the assumed
exercise of outstanding stock options.
As of March 31, 1999, the Company had outstanding options to purchase up to a
total of approximately 3,549,199 shares of Common Stock, of which 655,537 shares
were vested and exercisable, issued pursuant to the Company's stock option
plans. The shares used to calculate the historical earnings per share for the
periods presented are summarized as follows:
Three Months Ended March 31,
---------------------------
1998 1999
---------- ----------
Weighted average shares outstanding .... 18,241,867 32,422,323
Weighted average equivalent shares
from outstanding stock options .... -- 459,717
---------- ----------
18,241,867 32,882,040
========== ==========
Six Months Ended March 31,
--------------------------
1998 1999
---------- ----------
Weighted average shares outstanding .... 11,366,953 31,761,207
Weighted average equivalent shares
from outstanding stock options .... -- 493,444
---------- ----------
11,366,953 32,254,651
========== ==========
Common stock equivalents for the three and six month periods ended March 31,
1998 are excluded in the calculation of weighted average shares outstanding as
the Company recorded a net loss for these periods. The number of potentially
antidilutive shares excluded from the calculation of fully diluted earning per
share for the three and six months ended March 31, 1998 was 238,315 and 119,158,
respectively.
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6. COMMITMENTS AND CONTINGENCIES
Subsidiaries of the Company are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
7. SUBSEQUENT EVENTS
Subsequent to March 31, 1999 and through May 11, 1999, the Company acquired nine
companies for an aggregate consideration of approximately 2.2 million shares of
common stock and $28.8 million in cash, net of cash acquired. The cash portion
of such consideration was provided by excess proceeds from the offering of the
Notes, cash on hand and borrowings under the Company's Credit Facility.
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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, and
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
ability to successfully consummate acquisitions, fluctuations in operating
results because of acquisitions and seasonality, national and regional industry
and economic conditions, competition and risks entailed in the operation and
growth of existing and newly acquired businesses. 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, 1998.
Because of the significant effect of the acquisitions of the Founding Companies
(excluding Houston-Stafford) and the acquisitions of the Purchased Companies on
our results of operations, our historical results of operations and
period-to-period comparisons are not indicative of future results and may not be
meaningful. We plan to continue acquiring businesses in the future. The
integration of acquired electrical contracting and maintenance businesses and
the addition of management personnel to support existing and future acquisitions
may positively or negatively affect our results of operations during the period
immediately following acquisition.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
SIX MONTHS ENDED MARCH 31, 1999
The following table presents selected historical financial information for the
six months ended March 31, 1998 and 1999. The historical results of operations
presented below include the results of operations of Houston-Stafford and the
Pooled Company for the six months ended March 31, 1998 and the results of the
other Founding Companies beginning February 1, 1998. Our results of operations
for the six months ended March 31, 1999, includes the results of operations for
all Purchased Companies owned by IES at October 1, 1998, and the Purchased
Companies acquired during the six months ended March 31, 1999, beginning on
their respective dates of acquisition.
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Six Months Ended March 31,
------------------------------------------------------
1998 % 1999 %
--------- --------- --------- ---------
(dollars in millions)
Revenues ...................... $ 104.3 100.0% $ 413.4 100.0%
Cost of services .............. 82.1 78.7% 326.9 79.1%
--------- --------- --------- ---------
Gross profit .................. 22.2 21.3% 86.5 20.9%
Selling, general &
administrative expenses .. 17.3 16.6% 45.6 11.0%
Non-cash, non-recurring
compensation charge ...... 17.0 16.3% -- --
Goodwill amortization ......... 0.6 0.6% 4.0 1.0%
--------- --------- --------- ---------
Income (loss) from operations . $ (12.7) (12.2)% $ 36.9 8.9%
========= ========= ========= =========
REVENUES. Revenues increased $309.1 million, or 296%, from $104.3 million for
the six months ended March 31, 1998, to $413.4 million for the six months ended
March 31, 1999. The increase in revenues is principally due to the acquisitions
of the Founding Companies (excluding Houston-Stafford) and the acquisitions of
the Purchased Companies.
GROSS PROFIT. Gross profit increased $64.3 million, or 290%, from $22.2 million
for the six months ended March 31, 1998, to $86.5 million for the six months
ended March 31, 1999. The increase in gross profit was principally due to the
acquisitions of the Founding Companies (excluding Houston-Stafford) and the
acquisitions of the Purchased Companies. As a percentage of revenues, gross
profit decreased from 21.3% in 1998 to 20.9% in 1999. This decrease is primarily
attributable to planned changes in the Company's business mix from acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $28.3 million, or 164%, from $17.3 million for
the six months ended March 31, 1998, to $45.6 million for the six months ended
March 31, 1999. This increase in selling, general and administrative expenses
was primarily attributable to the acquisitions of the Founding Companies
(excluding Houston-Stafford), the acquisitions of the Purchased Companies,
increased corporate costs associated with being a public company, partially
offset by a non-recurring $5.6 million bonus paid to the owners of
Houston-Stafford during the six months ended March 31, 1998 but prior to our
IPO. Excluding such bonuses and higher corporate costs, selling, general and
administrative expenses as a percentage of revenues decreased from 10.5% in 1998
to 10.1% in 1999.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $49.6 million,
from $(12.7) million for the six months ended March 31, 1998, to $36.9
million for the six months ended March 31, 1999. This increase in income from
operations is primarily attributed to the Founding Company Acquisitions
(excluding Houston-Stafford), the acquisitions of the Purchased Companies,
the non-recurring owner bonuses and the non-cash, non-recurring compensation
charge of $17.0 million in connection with the Founding Company acquisitions in
1998, and partially offset by higher corporate costs discussed above. As a
percentage of revenues, income from operations (excluding the owner bonuses, the
non-cash,
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non-recurring compensation charge and higher corporate costs noted above)
decreased from approximately 10.2% in 1998 to 9.9% in 1999.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1999
The following table presents selected historical financial information for the
three months ended March 31, 1998 and 1999. The historical results of operations
presented below include the results of operations of Houston-Stafford and the
Pooled Company for the three months ended March 31, 1998 and the results of the
other Founding Companies beginning February 1, 1998. Our results of operations
for the three months ended March 31, 1999, includes the results of operations
for all Purchased Companies owned by IES at January 1, 1999, and the Purchased
Companies acquired during the three months ended March 31, 1999, beginning on
their respective dates of acquisition.
Three Months Ended March 31,
------------------------------------------------
1998 % 1999 %
--------- --------- --------- ---------
(dollars in millions)
Revenues ...................... $ 72.5 100.0% $ 215.7 100.0%
Cost of services .............. 56.8 78.3% 170.2 78.9%
------- ------ ------- ------
Gross profit .................. 15.7 21.7% 45.5 21.1%
Selling, general &
administrative expenses .. 9.6 13.2% 23.7 11.0%
Non-cash, non-recurring
compensation charge ...... 17.0 23.5% -- --
Goodwill amortization ......... 0.7 1.0% 2.1 1.0%
------- ------ ------- ------
Income (loss) from operations . $ (11.6) (16.0)% $ 19.7 9.1%
======= ====== ======= ======
REVENUES. Revenues increased $143.2 million, or 198%, from $72.5 million for the
three months ended March 31, 1998, to $215.7 million for the three months ended
March 31, 1999. The increase in revenues is principally due to the acquisitions
of the Founding Companies (excluding Houston Stafford) and the acquisitions of
the Purchased Companies.
GROSS PROFIT. Gross profit increased $29.8 million, or 190%, from $15.7 million
for the three months ended March 31, 1998, to $45.5 million for the three months
ended March 31, 1999. The increase in gross profit was principally due to the
acquisitions of the Founding Companies (excluding Houston-Stafford) and the
acquisitions of the Purchased Companies. As a percentage of revenues, gross
profit decreased from 21.7% in 1998 to 21.1% in 1999. This decrease is primarily
attributable to planned changes in the Company's business mix from acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $14.1 million, or 147%, from $9.6 million for
the three months ended March 31, 1998, to $23.7 million for the three months
ended March 31, 1999. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions of the Founding
Companies (excluding Houston-Stafford), the acquisitions of the Purchased
Companies, increased corporate costs associated with being a public company,
partially offset by a non-recurring $1.2 million bonus paid to the owners of
Houston-Stafford during the three
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months ended March 31, 1998 but prior to our IPO. Excluding such bonuses and
higher corporate costs, selling, general and administrative expenses as a
percentage of revenues decreased from 10.9% in 1998 to 10.1% in 1999.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $31.3 million,
from $(11.6) million for the three months ended March 31, 1998, to $19.7 million
for the three months ended March 31, 1999. This increase in income from
operations is primarily attributed to the Founding Company Acquisitions
(excluding Houston-Stafford), the acquisitions of the Purchased Companies, the
non-recurring owner bonuses and the non-cash, non-recurring compensation charge
of $17.0 million in connection with the Founding Company acquisitions in 1998,
and partially offset by higher corporate costs discussed above. As a percentage
of revenues, income from operations (excluding the owner bonuses, the non-cash,
non-recurring compensation charge and higher corporate costs noted above)
increased from approximately 9.8% in 1998 to 10.0% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, we had cash of $35.6 million, working capital of $119.9
million, no outstanding borrowings under our Credit Facility, $2.4 million of
letters of credit outstanding, and available capacity under our Credit Facility
of $172.6 million.
During the three months ended March 31, 1999, we generated $11.7 million of net
cash from operating activities. Net cash used in investing activities was $29.3
million including $27.7 million used for the purchase of businesses. Net cash
flows generated by financing activities was $49.2 million resulting primarily
from the Company's offering of $150.0 million Senior Subordinated Notes net of
payments on the Credit Facility of $100.0 million.
We have a $175.0 million three-year revolving credit facility with NationsBank,
N.A. dba Bank of America, N.A. as agent (the "Credit Facility"). The Credit
Facility will be used for working capital, acquisitions, capital expenditures
and other corporate purposes. The amounts borrowed under the Credit Facility
bear interest at an annual rate equal to either (a) the London interbank
offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio of our
total funded debt to EBITDA (as defined), or (b) the higher of (i) the bank's
prime rate and (ii) the Federal Funds rate plus 0.5%, plus up to an additional
0.5% as determined by the ratio of our total funded debt to EBITDA. Commitment
fees of 0.25% to 0.375%, as determined by the ratio of our total funded debt
to EBITDA, are due on any unused borrowing capacity under the Credit Facility.
Our subsidiaries have guaranteed the repayment of all amounts due under the
facility, and the facility is secured by the capital stock of the guarantors
and the accounts receivable of the Company and the guarantors. The Credit
Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of cash dividends on
our common stock, restricts our ability to incur other indebtedness and
requires us to comply with certain financial covenants. Availability of the
Credit Facility is subject to customary drawing conditions. As of May 11, 1999,
we have available borrowing capacity under our Credit Facility of approximately
$157.6 million.
On January 25, 1999, we completed our offering of $150.0 million Senior
Subordinated Notes (the "Notes"). The Notes bear interest at 9 3/8% and will
mature on February 1, 2009. We will pay interest on the Notes on February 1 and
August 1 of each year, commencing August 1, 1999. The Notes are unsecured
Senior Subordinated obligations and are subordinated to all existing
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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: (i) restrictions on additional indebtedness, and (ii) restrictions on
liens, guarantees and dividends.
We received net proceeds from the offering of the Notes of approximately $144
million after deducting the debt issuance discount, underwriting commissions
and offering expenses. We used a portion of the proceeds from the Notes to
repay the $100.0 million indebtedness then outstanding on our Credit Facility.
The balance of the proceeds of the Notes, as well as amounts available under
the Credit Facility, may be used for general corporate purposes, including but
not limited to, future acquisitions, capital expenditures and additional
working capital.
We anticipate that our existing cash, cash flow from operations and proceeds
from our Credit Facility and the Notes will provide sufficient cash to enable us
to meet our working capital needs, debt service requirements and planned capital
expenditures for property and equipment through 1999.
Through May 11, 1999, we utilized a combination of cash and common stock to
acquire 43 companies and the Founding Companies with total annualized 1998
revenues of approximately $960 million. The cash component of the consideration
paid for these companies was funded with existing cash, borrowings under our
bank credit facility and proceeds from the Notes.
We intend to continue to pursue acquisition opportunities. The timing, size or
success of any acquisition effort and the associated potential capital
commitments cannot be predicted. We expect to fund future acquisitions primarily
with working capital, cash flow from operations and borrowings, including any
unborrowed portion of the Credit Facility, as well as possible issuances of
additional equity. To the extent we fund a significant portion of the
consideration for future acquisitions with cash, we may have to increase the
amount of the Credit Facility or obtain other sources of financing, including
the issuance of additional debt or equity. Capital expenditures for equipment
and expansion of facilities are expected to be funded from cash flow from
operations and supplemented as necessary by borrowings under the Credit
Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations from residential construction are seasonal, depending
on 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 our business is less subject to seasonal trends, as this
work generally is performed inside structures protected from the weather. Our
service 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 and 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.
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RECENT ACCOUNTING PRONOUNCEMENTS
On October 1, 1998, we adopted SFAS No. 130 "Reporting Comprehensive Income,"
which requires the display of comprehensive income and its components in the
financial statements. Comprehensive income represents all changes in equity of
an entity during the reporting period, including net income and charges directly
to equity which are excluded from net income. There was no difference between
our "traditional" and "comprehensive" net income.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires the
reporting of selected information about operating systems in interim financial
reports issued to shareholders. SFAS No. 131 is effective for us for our year
ended September 30, 1999, at which the time the Company will adopt the
provision. We are currently evaluating the impact on financial disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for us for our year
ended September 30, 2000. SFAS No. 133 requires a company to recognize all
derivative instruments (including certain derivative instruments embedded in
other contracts) as assets or liabilities in its balance sheet and measure them
at fair value. The statement requires that changes in the derivatives' fair
value be recognized as current earnings unless specific hedge accounting
criteria are met. We are evaluating SFAS No. 133 and the impact on existing
accounting policies and financial reporting disclosures. However, we have not to
date engaged in activities or entered into arrangements normally associated with
derivative instruments.
YEAR 2000
Year 2000 Issue. Many software applications, hardware and equipment and embedded
chip systems identify dates using only the last two digits of the year. These
products may be unable to distinguish between dates in the year 2000 and dates
in the year 1900. That inability (referred to as the "Year 2000" issue), if not
addressed, could cause applications, equipment or systems to fail or provide
incorrect information after December 31, 1999, or when using dates after
December 31, 1999. This in turn could have an adverse effect on us due to the
direct dependence on our own applications, equipment and systems and indirect
dependence on those of other entities with which we must interact.
Risk of Non-Compliance and Contingency Plans. The major applications which pose
the greatest Year 2000 risks for us if implementation of its Year 2000
compliance program is not successful are our financial systems applications,
including related third-party software. Potential problems if our Year 2000
compliance program is not successful could include disruptions of our revenue
invoicing and collection from our customers and purchasing and payments to our
vendors and the inability to perform our other financial and accounting
functions. We operate on a decentralized basis with each individual reporting
unit having independent information technology (IT) and non-IT systems. Our
eight most significant reporting units represent in excess of 50% of our total
revenue. Our Year 2000 compliance program is focused on the systems which could
materially affect our business. We have completed a preliminary assessment of
our significant operating units and believe that the systems at these companies
are or will be Year 2000 compliant. We currently have assessed our remaining
Year 2000 risk as low because:
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o we are not dependent on any key customers or suppliers (none
represent as much as 5% of the companies sales or purchases,
respectfully),
o we have many separate PC based systems and are not dependent
on any one system,
o many of our processes are performed using spreadsheets and/or
other manual processes which are not technologically
dependent,
o we perform construction and service maintenance on site for
our customers, the work performed is manual in nature and not
dependent on automated information technology systems to be
completed, and
o we currently believe that most of our systems that have Year
2000 compliance issues are based on prepackaged third-party
software that can be upgraded at nominal costs through vendor
supported upgrades.
As a result, we believe that our reasonably likely worst case Year 2000 scenario
is a temporary inability for us to process the accounting transactions
representing our business activity using automated information systems at
certain of our operating units.
The goal of our Year 2000 project is to ensure that all of the critical systems
and processes which are under our direct control remain functional. However,
because certain systems and processes may be interrelated with systems outside
of our control, there can be no assurance that all implementations will be
successful. Accordingly, as part of our Year 2000 project, contingency and
business plans are in the process of being developed to respond to potential
failures that may occur. Such contingency and business plans are scheduled to be
completed by the fourth quarter of fiscal 1999. To the extent appropriate, such
plans will include emergency back up and recovery procedures, remediation of
existing systems with system upgrades or installation of new systems and
replacing electronic applications with manual processes. Due to the uncertain
nature of contingency planning, there can be no assurances that such plans
actually will be sufficient to reduce the risk of material impacts on our
operations due to Year 2000 issues. We have ongoing information systems
development and implementation projects, none of which have experienced delays
due to our Year 2000 compliance program.
Compliance Program. In order to address the Year 2000 issue, we have
established a project team to assure that key automated systems and related
processes will remain functional through year 2000. The team is addressing the
project in the following stages: (i) awareness, (ii) assessment, (iii)
remediation, (iv) implementation and (v) testing of the necessary
modifications. The key automated systems consist of (a) project estimating,
management and financial systems applications, (b) hardware and equipment, (c)
embedded chip systems and (d) third-party developed software. The evaluation of
our Year 2000 issue includes the evaluation of the Year 2000 exposure of third
parties material to our operations. We have retained a Year 2000 consulting
firm to assist with the review of our systems for Year 2000 issues.
Company State of Readiness. The awareness phase of our Year 2000 project began
with a corporate-wide awareness program which will continue to be updated
throughout the life of the project. We believe that there is not a material
risk related to our non-IT systems because we are primarily a manual service
provider and do not rely on these types of systems. The assessment phase of the
project involves for both IT and non-IT systems, among other things, efforts to
obtain representations and assurances from third parties, including third party
vendors, that their hardware and equipment, embedded chip systems and software
being used by or impacting us or any of our business units are or will be
modified to be Year 2000 compliant. To date, the
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responses from such third parties have not been conclusive. However, because we
are not dependent on any key customers or suppliers, we do not believe that a
disruption in service with any third party would have a material, adverse effect
on our business, results of operations or financial condition. The remediation
phase involves identifying the changes which are required to be implemented by
system for them to be Year 2000 compliant. The testing and implementation phases
involve verifying that changes address the Year 2000 problems identified through
testing the system as part of implementing such changes. We expect that the
remediation, testing and implementation phases will be substantially completed
during the third and fourth quarters of Fiscal 1999.
Costs to Address Year 2000 Compliance Issues. While the total cost of our Year
2000 project is still being evaluated, we currently estimate that the costs to
be incurred in 1999 associated with the assessing and testing applications,
hardware and equipment, embedded chip systems, and third party developed
software will be less than $300,000, which will be funded with existing
operating cash flows and which we will deduct from income as incurred. We
believe that software vendor Year 2000 releases should address the majority of
our Year 2000 issues. To date, we have expended approximately $40,000 related
to our Year 2000 compliance. These costs were primarily related to the
assessment phase of the project. We expect that the majority of our costs
related to its Year 2000 project will be incurred in the third and fourth
quarters of our 1999 fiscal year. Because our internal systems are PC-based, we
do not expect the costs of the Year 2000 project to have a material adverse
effect on our financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk for changes in interest rates. Refer to our Form
10-K for the year ended September 30, 1998 for detailed discussion of this risk.
In January 1999, we completed an offering of $150.0 million of Senior
Subordinated Notes (the "Notes"). The Notes bear interest at 9 3/8% and mature
on February 1, 2009. We believe the carrying value and fair value of the debt
are the same as of March 31, 1999.
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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 February 10, 1999. 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 29, 1998, for terms expiring at the 2002 annual
stockholders' meeting or until their successors have been
elected and qualified - Class I Directors: C. Byron Snyder,
Alan R. Sielbeck, Bob Weik and Jim P.Wise.
Mr. Snyder was elected by a vote of 2,655,709 shares, being
all of the shares of restricted voting common stock.
Mr. Sielbeck was elected by a vote of 25,565,249 shares, being
more than a majority of the common stock of the Company, and
218,813 shares withheld. Messrs. Weik and Wise were elected by
a vote of 25,541,349 shares, being more than a majority of
common stock of the Company, and 242,713 withheld.
(C) The stockholders ratified the appointment of Arthur Andersen
LLP to audit the financial statements of the Company and its
subsidiaries, by a vote of 26,477,834 shares, being more than
a majority of the common stock and restricted voting common
stock of the Company, with 17,757 shares of common stock voted
against, and 616,326 shares of common stock abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
27. Financial Data Schedule
B. REPORTS ON FORM 8-K
A report on Form 8-K was filed with the SEC on February 4,
1999, in connection with the acquisition by the Company of
four businesses. A report on For 8-K/A was also filed with the
SEC on March 17, 1999, in connection with these acquisitions.
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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: May 17, 1999 By: /s/ STANLEY H. FLORANCE
Stanley H. Florance
Senior Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
5
1,000
6-MOS
SEP-30-1999
OCT-01-1998
MAR-31-1999
35,630
0
172,363
4,562
8,995
237,973
39,637
9,916
618,643
118,069
148,812
0
0
326
349,087
618,643
413,404
413,404
326,934
376,467
(779)
0
4,923
32,793
13,961
18,832
0
0
0
18,832
0.59
0.58
