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 December 31, 2001
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 77027-3290
(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 February 13, 2002, of the issuer's common
stock was 37,447,479 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, 2001 and
December 31, 2001.................................................................... 2
Consolidated Statements of Operations for the three months ended
December 31, 2000 and 2001........................................................... 3
Consolidated Statement of Stockholders' Equity for the three months ended
December 31, 2001.................................................................... 4
Consolidated Statements of Cash Flows for the three months ended
December 31, 2000 and 2001........................................................... 5
Condensed Notes to Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................. 25
Signatures ............................................................................. 26
1
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, December 31,
2001 2001
------------- -------------
(Audited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 3,475 $ 4,167
Accounts receivable:
Trade, net of allowance of $5,206 and $4,978 respectively ................ 275,922 270,258
Retainage ................................................................ 64,933 63,247
Related parties .......................................................... 222 230
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................................... 62,249 50,504
Inventories .................................................................. 21,855 27,477
Prepaid expenses and other current assets .................................... 23,858 18,635
------------- -------------
Total current assets ..................................................... 452,514 434,518
PROPERTY AND EQUIPMENT, net .................................................. 70,343 69,959
GOODWILL, net ................................................................ 482,654 199,370
OTHER NON-CURRENT ASSETS ..................................................... 27,992 26,536
------------- -------------
Total assets .......................................................... $ 1,033,503 $ 730,383
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt ..................... $ 679 $ 643
Accounts payable and accrued expenses ........................................ 164,272 134,157
Income taxes payable ......................................................... 700 248
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................................... 50,234 57,138
------------- -------------
Total current liabilities ................................................ 215,885 192,186
LONG-TERM BANK DEBT .......................................................... 12,000 19,000
OTHER LONG-TERM DEBT, net of current maturities .............................. 872 1,478
SENIOR SUBORDINATED NOTES, net of $4,949 and $4,780
unamortized discount, respectively ....................................... 273,210 270,365
OTHER NON-CURRENT LIABILITIES ................................................ 2,892 2,260
------------- -------------
Total liabilities ..................................................... 504,859 485,289
------------- -------------
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,
38,331,672 and 38,633,598 shares issued, respectively ................. 383 386
Restricted voting common stock, $.01 par value, 2,605,709 shares ......... --
issued, authorized and outstanding, respectively ...................... 26 26
Treasury stock, at cost, 1,245,879 and 1,245,212 shares, respectively .... (9,181) (9,176)
Additional paid-in capital ............................................... 428,640 430,348
Retained earnings (deficit) .............................................. 108,719 (176,378)
Accumulated other comprehensive income (loss) ............................ 57 (112)
------------- -------------
Total stockholders' equity ............................................ 528,644 245,094
------------- -------------
Total liabilities and stockholders' equity ............................ $ 1,033,503 $ 730,383
============= =============
The accompanying condensed notes to 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)
Three Months Ended December 31,
--------------------------------
2000 2001
-------------- --------------
(Unaudited)
Revenues .................................................................. $ 427,030 $ 375,179
Cost of services (including depreciation) ................................. 352,489 317,950
-------------- --------------
Gross profit ......................................................... 74,541 57,229
Selling, general and administrative expenses .............................. 51,965 49,773
Restructuring charge ...................................................... -- 4,000
Goodwill amortization ..................................................... 3,249 --
-------------- --------------
Income from operations ............................................... 19,327 3,456
-------------- --------------
Other (income)/expense:
Interest expense ..................................................... 6,258 6,785
Gain on sale of assets ............................................... (36) (71)
Other (income) expense, net .......................................... (175) 178
-------------- --------------
6,047 6,892
-------------- --------------
Income (loss) before income taxes ......................................... 13,280 (3,436)
Provision (benefit) for income taxes ...................................... 6,272 (1,623)
Cumulative effect of change in accounting principle, net of
tax ............................................................... -- 283,284
-------------- --------------
Net income (loss) ......................................................... $ 7,008 $ (285,097)
============== ==============
Basic earnings (loss) per share:
Basic earnings (loss) per share before cumulative effect
of change in accounting principle ............................... $ 0.17 $ (0.04)
============== ==============
Cumulative effect of change in accounting principle .................. $ -- $ (7.13)
============== ==============
Basic earnings (loss) per share ...................................... $ 0.17 $ (7.17)
============== ==============
Diluted earnings (loss) per share:
Diluted earnings (loss) per share before cumulative effect
of change in accounting principle ............................... $ 0.17 $ (0.04)
============== ==============
Cumulative effect of change in accounting principle .................. $ -- $ (7.13)
============== ==============
Diluted earnings (loss) per share .................................... $ 0.17 $ (7.17)
============== ==============
Shares used in the computation of earnings (loss) per share (Note 5):
Basic ................................................................ 40,756,732 39,759,175
============== ==============
Diluted .............................................................. 41,088,790 39,759,175
============== ==============
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
3
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Restricted Voting
Compre- Common Stock Common Stock Treasury Stock
hensive ---------------------- ---------------------- -----------------------
Income Shares Amount Shares Amount Shares Amount
--------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 30, 2001 .. 38,331,672 $ 383 2,605,709 $ 26 (1,245,879) $ (9,181)
Issuance of stock
(unaudited) ............. 301,926 3 -- -- -- --
Exercise of stock options
(unaudited) ............. -- -- -- -- 667 5
Unrealized holding loss on
securities, net of
tax (unaudited) ......... $ (169) -- -- -- -- -- --
Net loss (unaudited) ......... (285,097) -- -- -- -- -- --
---------
Comprehensive loss
(unaudited) ............. $(285,266)
========= ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2001 ... 38,633,598 $ 386 2,605,709 $ 26 (1,245,212) $ (9,176)
========== ========== ========== ========== ========== ==========
Accumulated
Additional Retained Other Total
Paid-In Earnings Comprehensive Stockholders'
Capital (Deficit) Income (Loss) Equity
------------ ------------ ------------ ------------
BALANCE, September 30, 2001 ....... $ 428,640 $ 108,719 $ 57 $ 528,644
Issuance of stock
(unaudited) .................. 1,709 -- -- 1,712
Exercise of stock options
(unaudited) .................. (1) -- -- 4
Unrealized holding loss on
securities, net of
tax (unaudited) .............. -- -- (169) (169)
Net loss (unaudited) .............. -- (285,097) -- (285,097)
Comprehensive loss
(unaudited) ..................
------------ ------------ ------------ ------------
BALANCE, December 31, 2001 ........ $ 430,348 $ (176,378) $ (112) $ 245,094
============ ============ ============ ============
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended December 31,
-------------------------------
2000 2001
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ 7,008 $ (285,097)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Cumulative effect of change in accounting principle ............. -- 283,284
Depreciation and amortization ................................... 6,901 4,227
Gain on sale of property and equipment .......................... (36) (71)
Non-cash compensation expense ................................... 142 1,422
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net ................................... 17,047 7,342
Inventories ................................................ (13) (5,622)
Costs and estimated earnings in
excess of billings on uncompleted contracts ........... 1,076 11,745
Prepaid expenses and other current assets .................. (6,385) 3,541
Increase (decrease) in:
Accounts payable and accrued expenses ...................... (60,129) (31,537)
Billings in excess of costs and estimated
earnings on uncompleted contracts ..................... 10,281 6,904
Income taxes payable ....................................... 2,643 (452)
Other, net ................................................. 241 75
------------- -------------
Net cash used by operating activities .......... (21,224) (4,239)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ......................... 190 170
Additions to property and equipment .................................. (5,594) (3,942)
Purchase of businesses, net of cash acquired ......................... (233) --
Investments in available for sale securities ......................... (4,849) --
Additions to note receivable from affiliate .......................... -- (583)
------------- -------------
Net cash used by investing activities .......... (10,486) (4,355)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ........................................................... 50,000 44,291
Repayments of debt ................................................... (18,129) (36,721)
Purchase of treasury stock ........................................... (1,298) --
Proceeds from issuance of stock ...................................... -- 1,712
Proceeds from sale of treasury stock ................................. 980 --
Proceeds from exercise of stock options .............................. -- 4
------------- -------------
Net cash provided by financing activities ...... 31,553 9,286
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (157) 692
CASH AND CASH EQUIVALENTS, beginning of period ............................ 770 3,475
------------- -------------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 613 $ 4,167
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest ........................................................ $ 2,828 $ 475
Income taxes .................................................... $ 3,862 $ 3,383
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
5
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 December 1997 to create a leading national provider
of electrical services, focusing primarily on the commercial and industrial,
residential, communications 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, 2001 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 three
months ended December 31, 2001, are not necessarily indicative of the results
that may be expected for the fiscal year ended September 30, 2002.
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, 2001.
SUBSIDIARY GUARANTIES
All of the Company's operating income and cash flows are generated by its wholly
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 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.
6
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 and self-insured claims liability.
NEW ACCOUNTING PRONOUNCEMENT
In August 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale and requires that those long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company is in the process of
assessing the impact that the adoption of this standard will have on its
financial position and results of operations. Historically, the Company has not
disposed of any assets or incurred any asset impairments under SFAS No. 121.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill amortization for the
quarter ended December 31, 2001 would have otherwise been $3.2 million. Material
amounts of recorded goodwill attributable to each of our reporting units were
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Fair value was determined using discounted cash flows,
market multiples and market capitalization. These impairment tests are required
to be performed at adoption of SFAS No. 142 and at least annually thereafter.
Significant estimates used in the methodologies include estimates of future cash
flows, future short-term and long-term growth rates, weighted average cost of
capital and estimates of market multiples for each of the reportable units. On
an ongoing basis (absent any impairment indicators), we expect to perform our
impairment tests during our first fiscal quarter.
Based on our initial impairment tests, we recognized a charge of $283.3 million
($7.13 per share) in the first quarter of 2002 to reduce the carrying value of
goodwill of our reporting units to its implied fair value. This impairment is a
result of adopting a fair value approach, under SFAS No. 142, to testing
impairment of goodwill as compared to the previous method utilized in which
evaluations of goodwill impairment were made by the Company using the estimated
future undiscounted cash flows compared to the assets carrying amount. Under
SFAS No. 142, the
7
impairment adjustment recognized at adoption of the new rules was reflected as a
cumulative effect of change in accounting principle in our first quarter 2002
income statement. Impairment adjustments recognized after adoption, if any,
generally are required to be recognized as operating expenses.
The carrying amount of goodwill attributable to each reportable operating unit
with goodwill balances and changes therein follows:
September 30, Impairment December 31,
2001 Adjustment 2001
------------- ---------- ------------
Commercial and Industrial ......... $ 418,887 $ 277,042 $ 141,845
Residential ....................... 63,767 6,242 57,525
------------- ---------- ------------
$ 482,654 $ 283,284 $ 199,370
============= ========== ============
The unaudited results of operations presented below for the three months ended
December 31, 2001 and adjusted results of operations for the three month ended
December 31, 2000 reflect the operations of the Company had we adopted the
non-amortization provisions of SFAS No. 142 effective October 1, 2000:
Three Months Ended
December 31,
--------------------------
2000 2001
----------- -----------
Net income (loss) ................................ $ 7,008 $ (285,097)
Add: Cumulative effect of change in accounting ... -- 283,284
principle, net of tax
Add: Goodwill amortization, net of tax ........... 3,162 --
----------- -----------
Adjusted net income (loss) ....................... $ 10,170 $ (1,813)
=========== ===========
Basic earnings (loss) per share:
Reported net income (loss) .................. $ 0.17 $ (7.17)
Cumulative effect of change in accounting
principle, net of tax .................. -- (7.13)
Goodwill amortization, net of tax ........... 0.08 --
----------- -----------
Adjusted net income (loss) .................. $ 0.25 $ (0.04)
=========== ===========
Diluted earnings (loss) per share:
Reported net income (loss) .................. $ 0.17 $ (7.17)
Cumulative effect of change in accounting
principle, net of tax .................. -- (7.13)
Goodwill amortization, net of tax ........... 0.08 --
----------- -----------
Adjusted net income (loss) .................. $ 0.25 $ (0.04)
=========== ===========
8
2. RESTRUCTURING CHARGE
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. As a result of
the program implementation, the Company recorded a pre-tax restructuring charge
of $4.0 million in the quarter ended December 31, 2001. The charge was based on
the cost of the workforce reduction program and includes severance and other
special termination benefits. The Company expects to record additional
restructuring costs of approximately $0.9 to $1.4 million during the quarter
ended March 31, 2002.
4. DEBT
Debt consists of the following (in thousands):
September 30, December 31,
2001 2001
------------- ------------
Secured credit facility with a group of lending institutions, due ....... $ 12,000 $ 19,000
May 22, 2004, at a weighted average interest rate of 7.56% and
6.66%, respectively
Senior subordinated notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 9.50% ....... 150,000 150,000
Senior subordinated notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 10.00% ...... 125,000 125,000
Other ................................................................... 1,551 2,121
------------ ------------
288,551 296,121
Less - short-term debt and current maturities of long-term debt ......... (679) (643)
Less - unamortized discount on Senior Subordinated Notes ................ (4,949) (4,780)
------------ ------------
Total long-term debt .............................................. $ 282,923 $ 290,698
============ ============
Credit Facility
The Company is party to a $150.0 million revolving credit facility with a
syndicate of lending institutions to be used for working capital, capital
expenditure, acquisitions and other corporate purposes that matures May 22,
2004, as amended through February 4, 2002 (the "Credit Facility"). Amounts
borrowed under the Credit Facility bear interest at an annual rate equal to
either (a) the London interbank offered rate (LIBOR) plus 1.75 percent to 3.50
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 Federal funds rate plus 0.50 percent plus an additional 0.25
percent to 2.00 percent, as determined by the ratio of the Company's total
funded debt to EBITDA. Commitment fees of 0.50 percent are assessed on any
unused borrowing capacity under the Credit Facility. The Company's existing and
future subsidiaries guarantee the repayment of all amounts due under the
facility, and the facility is secured by the capital stock of those subsidiaries
and the accounts receivable of the Company and those subsidiaries. Borrowings
under the Credit Facility are limited to 66 2/3% of outstanding receivables (as
defined in the agreement). 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 common stock, restricts the
ability of the Company to repurchase shares
9
of common stock, to incur other indebtedness and requires the Company to comply
with various affirmative and negative covenants including certain financial
covenants. Among other restrictions, the financial covenants include minimum net
worth requirements, a maximum total consolidated funded debt to EBITDA ratio, a
maximum senior consolidated debt to EBITDA ratio, and a minimum interest
coverage ratio. The Company was in compliance with the financial covenants of
its Credit Facility, as amended through February 4, 2002, at December 31, 2001.
As of December 31, 2001, the Company had borrowings outstanding under its Credit
Facility of $19.0 million, letters of credit outstanding under its Credit
Facility of $4.7 million, $2.1 million of other borrowings and available
borrowing capacity under its Credit Facility of $126.3 million.
Senior Subordinated Notes
The Company has $275.0 million in senior subordinated notes. 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.
Interest Rate Swap
The Company entered into an interest rate swap agreement in August 2001,
designated as a fair value hedge, in order to minimize the risks and cost
associated with its financing activities. The interest rate swap agreement has a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. Under the swap agreement,
the Company pays the counterparty variable rate interest (3-month LIBOR plus
3.49%) and the counterparty pays the Company fixed rate interest of 9.375% on a
semiannual basis over the life of the instrument. Pursuant to SFAS No. 133, as
amended, such interest rate swap contract is reflected at fair value on the
Company's consolidated balance sheet and the related portion of fixed-rate debt
being hedged is reflected at an amount equal to the sum of its carrying value
plus an adjustment representing the change in fair value of the debt obligation
attributable to the interest rate being hedged. The net effect of this
accounting on the Company's operating results is that interest expense on the
portion of fixed-rate debt being hedged is generally recorded based on variable
interest rates. The interest rate swap is considered to be perfectly effective
because it qualifies for the "short-cut" method under SFAS No. 133 and therefore
there is no net change in fair value to be recognized in income. At September
30, 2001 and December 31, 2001, the interest rate swap had a notional value of
$100.0 million and a fair value of $3.2 million and $0.1 million, respectively.
The fair value of this contract is included in the balance sheet in other
noncurrent assets. The following table presents the balance sheet effect on the
Company's senior subordinated notes (in thousands):
10
September 30, December 31,
2001 2001
------------- ------------
Senior subordinated notes, due February 1, 2009 ............ $ 275,000 $ 275,000
Less: unamortized discount on senior subordinated notes .... (4,949) (4,780)
Add: Fair value of interest rate hedge ..................... 3,159 145
------------- ------------
$ 273,210 $ 270,365
============= ============
5. PER SHARE INFORMATION
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share for the three months ended December 31, 2000 and 2001
(in thousands, except share information):
Three Months Ended December 31,
------------ ------------
2000 2001
------------ ------------
Numerator:
Net income (loss) ................................. $ 7,008 $ (285,097)
============ ============
Denominator:
Weighted average shares outstanding - basic ....... 40,756,732 39,759,175
Effect of dilutive stock options .................. 332,058 --
------------ ------------
Weighted average shares outstanding - diluted ..... 41,088,790 39,759,175
============ ============
Earnings (loss) per share:
Basic ............................................. $ 0.17 $ (7.17)
Diluted ........................................... $ 0.17 $ (7.17)
For the three months ended December 31, 2000 and 2001, stock options of 5.1
million and 6.9 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. For the three months
ended December 31, 2001, the weighted average diluted shares outstanding
excluded 25,830 shares related to employee stock options where the exercise
prices were less than the average market price of the Company's common stock.
These shares were excluded because the Company reported a loss during the
period, and including them would have had an antidilutive effect on loss per
share.
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.
11
During the three months ended December 31, 2001, the Company aligned its
operations among two reportable segments: commercial/industrial and residential.
The commercial/industrial segment provides electrical and communications
contracting, design, installation, renovation, engineering and upgrades and
maintenance and replacement services in facilities such as office buildings,
high-rise apartments and condominiums, theaters, restaurants, hotels, hospitals
and critical-care facilities, school districts, manufacturing and processing
facilities, military installations, airports, refineries, petrochemical and
power plants, outside plant, network enterprise and switch network customers.
The residential segment consists of electrical and communications contracting,
installation, replacement and renovation services in single family and low-rise
multifamily housing units. Other includes expenses associated with the Company's
home office and regional infrastructure.
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
unallocated home office expenses. Management allocates costs between segments
for selling, general and administrative expenses, goodwill amortization,
depreciation expense, capital expenditures and total assets. Those methods used
for allocation may change in the future.
Segment information for the three months ended December 31, 2000 and 2001 is as
follows (in thousands):
THREE MONTHS ENDED DECEMBER 31, 2000
-------------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
----------- ----------- ---------- ----------
Revenues ...................................... $ 364,718 $ 62,312 $ -- $ 427,030
Cost of services (including depreciation) .... 304,488 48,001 -- 352,489
----------- ----------- ---------- ----------
Gross profit .................................. 60,230 14,311 -- 74,541
Selling, general and administrative ........... 35,835 8,038 8,092 51,965
Goodwill amortization ......................... 2,851 398 -- 3,249
----------- ----------- ---------- ----------
Operating income .............................. $ 21,544 $ 5,875 $ (8,092) $ 19,327
=========== =========== ========== ==========
Other data:
Depreciation expense .......................... $ 3,211 $ 251 $ 190 $ 3,652
Capital expenditures .......................... 4,759 388 447 5,594
Total assets .................................. 849,681 120,185 41,526 1,011,392
12
THREE MONTHS ENDED DECEMBER 31, 2001
------------------------------------------------
COMMERCIAL/
INDUSTRIAL RESIDENTIAL OTHER TOTAL
----------- ----------- -------- --------
Revenues .................................... $ 308,045 $ 67,134 $ -- $375,179
Cost of services (including depreciation) ... 265,032 52,918 -- 317,950
----------- ----------- -------- --------
Gross profit ................................ 43,013 14,216 -- 57,229
Selling, general and administrative ......... 33,240 8,634 7,899 49,773
Restructuring charge ........................ -- -- 4,000 4,000
----------- ----------- -------- --------
Operating income ............................ $ 9,773 $ 5,582 $(11,899) $ 3,456
=========== =========== ======== ========
Other data:
Depreciation expense ........................ $ 3,421 $ 332 $ 474 $ 4,227
Capital expenditures ........................ 2,638 112 1,192 3,942
Total assets ................................ 559,573 99,831 70,979 730,383
The Company's information for the three months ended December 31, 2000 has been
restated for consistency with the current year presentation. 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.
The Company granted a restricted stock award of 400,000 underlying shares under
its 1999 Plan. The award became fully vested during the three months ended
December 31, 2001. The market value of the underlying stock on the date of grant
for this award was $2.3 million. During the three months ended December 31, 2000
and 2001, the Company amortized $0.1 million and $1.4 million, respectively, in
connection with this award.
8. 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 and it is possible that the
results of legal proceedings may materially adversely affect us, in the opinion
of the Company, 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. The Company expenses routine legal costs related
to such proceedings as incurred.
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
13
telecommunications industries. Through December 31, 2001, the Company had
invested $1.5 million under its commitment to EnerTech.
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 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, 2001.
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 and assessment of
goodwill impairment. These accounting policies, as well as others, are described
in the Notes to the Consolidated Financial Statements of our Annual Report on
Form 10-K for the year ended September 30, 2001 and at relevant sections in this
discussion and analysis.
Our revenues are derived by providing specialty contracting services to the
commercial and industrial and residential markets. Those markets comprise our
reportable segments.
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. The cost of labor and materials, however, may vary from the costs we
originally estimated. Variations from estimated contract costs along with other
risks inherent in
14
performing fixed 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
form estimated project costs can have a significant impact on our operating
results for any fiscal quarter or year. We believe our exposure to loss 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 less than one year, while we frequently provide
service and maintenance work under open ended, unit price master service
agreements which are renewable annually. We recognize revenue when services are
performed except when work is being performed under a construction contract.
Such contracts generally provide 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.
15
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 2001
The following table presents selected unaudited historical financial information
for the three months ended December 31, 2000 and 2001.
Three Months Ended December 31,
---------------------------------
2000 % 2001 %
------- ---- ------- ----
(dollars in millions)
Revenues ......................................... $ 427.0 100% $ 375.2 100%
Cost of services (including depreciation) ........ 352.5 83% 318.0 85%
------- ---- ------- ----
Gross profit ............................. 74.5 17% 57.2 15%
Selling, general & administrative expenses ....... 51.9 12% 49.7 13%
Restructuring charge ............................. -- 0% 4.0 1%
Goodwill amortization ............................ 3.3 1% -- 0%
------- ---- ------- ----
Income from operations ................... 19.3 4% 3.5 1%
Interest and other expense, net .................. 6.0 1% 6.9 2%
------- ---- ------- ----
Income (loss) before income taxes and .... 13.3 3% (3.4) -1%
cumulative effect of change in
accounting principle
Provision (benefit) for income taxes ............. 6.3 1% (1.6) 0%
Cumulative effect of change in accounting
principle, net of tax ................... -- 0% 283.3 75%
------- ---- ------- ----
Net income (loss) ........................ $ 7.0 2% $(285.1) -76%
======= ==== ======= ====
REVENUES
PERCENT OF TOTAL REVENUES
---------------------------------
THREE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 2001
---------- ----------
Commercial and Industrial 85% 82%
Residential 15% 18%
---------- ----------
Total Company 100% 100%
========== ==========
Total revenues decreased $51.8 million, or 12%, from $427.0 million for the
three months ended December 31, 2000, to $375.2 million for the three months
ended December 31, 2001. This decrease in revenues is primarily the result of
non-recurring work performed for one customer during the three months ended
December 31, 2000 and increased competition for available work during the three
months ended December 31, 2001.
Commercial and industrial revenues decreased $56.7 million, or 16%, from $364.7
million for the three months ended December 31, 2000, to $308.0 million for the
three months ended December 31, 2001. This decrease is primarily the result of
non-recurring work performed for one customer during the three months ended
December 31, 2000 and decreased awards of
16
construction contracts at margins acceptable to us during the three months ended
December 31, 2001.
Residential revenues increased $4.8 million, or 8%, from $62.3 million for the
three months ended December 31, 2000, to $67.1 million for the three months
ended December 31, 2001, primarily as a result of increased awards of
construction contracts in markets we serve.
GROSS PROFIT
SEGMENT GROSS PROFIT MARGINS
AS A PERCENT OF SEGMENT REVENUES
--------------------------------
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2000 2001
---------- ----------
Commercial and Industrial 17% 14%
Residential 23% 21%
---------- ----------
Total Company 17% 15%
========== ==========
Gross profit decreased $17.3 million, or 23%, from $74.5 million for the three
months ended December 31, 2000, to $57.2 million for the three months ended
December 31, 2001. Gross profit margin as a percentage of revenues decreased
approximately 2% from 17% for the three months ended December 31, 2000 to 15%
for the three months ended December 31, 2001. This decrease in gross profit
margin as a percentage of revenues was primarily the result of increased
competition for available work and project fade recorded on fixed-price
contracts at one of our subsidiaries during the three months ended December 31,
2001.
Commercial and industrial gross profit decreased $17.2 million, or 29%, from
$60.2 million for the three months ended December 31, 2000, to $43.0 million for
the three months ended December 31, 2001. Commercial and industrial gross profit
margin as a percentage of revenues decreased 3% from 17% for the three months
ended December 31, 2000, to 14% for the three months ended December 31, 2001.
This decrease in gross profit margin as a percentage of revenues was primarily
due to increased competition for available work and project fade recorded on
fixed-price contracts at one of our subsidiaries during the three months ended
December 31, 2001.
Residential gross profit decreased $0.1 million, or 1%, from $14.3 million for
the three months ended December 31, 2000, to $14.2 million for the three months
ended December 31, 2001. Residential gross profit margin as a percentage of
revenues decreased 2% from 23% for the three months ended December 31, 2000, to
21% for the three months ended December 31, 2001. This decrease in gross profit
margin as a percent of revenues is primarily the result of performing more lower
margin multi-family work and single-family tract housing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $2.2 million, or 4%, from
$51.9 million for the three months ended December 31, 2000, to $49.7 million for
the three months ended December 31, 2001. This decrease results from the
elimination of certain administrative field
17
and home office personnel during the three months ended December 31, 2001.
Selling, general and administrative expenses as a percentage of revenues
increased from 12% for the three months ended December 31, 2000 to 13% for the
three months ended December 31, 2001. This increase is a function of decreased
revenues earned during the three months ended December 31, 2001, as compared to
revenues earned during the three months ended December 31, 2000.
RESTRUCTURING CHARGE
In October 2001, we began implementation of a workforce reduction program. The
purpose of this program was to reduce the number of administrative staff both in
the field and in the home office. As a result of the program implementation, we
recorded a pre-tax restructuring charge of $4.0 million during the quarter ended
December 31, 2001. The charge was based on the cost of the workforce reduction
program, including severance and other special termination benefits.
INCOME FROM OPERATIONS
Income from operations decreased $15.8 million, from $19.3 million for the three
months ended December 31, 2000, to $3.5 million for the three months ended
December 31, 2001. This decrease in income from operations was primarily
attributed to decreased revenues year over year, decreased margins earned on
those revenues and a $4.0 million restructuring charge incurred during the three
months ended December 31, 2001.
NET INTEREST AND OTHER EXPENSE
Interest and other expense, net increased from $6.0 million for the three months
ended December 31, 2000, to $6.9 million for the three months ended December 31,
2001, primarily as a result of increased interest expense on borrowings and a
$0.3 million loss recorded on our equity investment in Energy Photovoltaics,
Inc.
PROVISION FOR INCOME TAXES
We recorded a tax benefit 47.2% for the three months ended December 31, 2001.
This benefit is the result of a loss before income taxes recorded during the
three months ended December 31, 2001. During the three months ended December 31,
2000, we recorded a tax provision of 47.2%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had cash and cash equivalents of $4.2 million,
working capital of $242.3 million, outstanding borrowings under our credit
facility of $19.0 million, $4.7 million of letters of credit outstanding, and
available capacity under our credit facility of $126.3 million. The amount
outstanding under our senior subordinated notes was $275.0 million. All debt
obligations are on our balance sheet. We have no off balance sheet debt
obligations.
During the three months ended December 31, 2001, we used $4.2 million of net
cash for operating activities. This net cash used in operating activities is
comprised of a net loss of
18
$285.1 million, increased by $288.9 million of non-cash charges related
primarily to the cumulative effect of change in accounting principle,
depreciation expense, and non-cash compensation expenses and decreased by
changes in working capital. Working capital changes consisted of a $31.5 million
decrease in accounts payable and accrued expenses as a result of payments of
year-end accruals, offset by a $7.3 million decrease in accounts receivable as a
result of the timing of collections. Working capital changes also included an
$11.7 million decrease in costs and estimated earnings in excess of billings on
uncompleted projects, a $6.9 million increase in billings in excess of costs and
estimated earnings on uncompleted contracts, and an increase in inventories of
$5.6 million primarily related to inventory purchased for a contract, with the
balance of the change due to other working capital changes. Net cash used in
investing activities was $4.4 million, consisting primarily of $3.9 million used
for capital expenditures and $0.4 million for investments in available for sale
securities and other. Net cash provided by financing activities was $9.3
million, resulting primarily from borrowings, net of repayments under our credit
facility.
Debt Financing. We are party to a $150.0 million revolving credit facility with
a syndicate of lending institutions to be used for working capital, capital
expenditure, acquisitions and other corporate purposes that matures May 22,
2004, as amended through February 4, 2002. Amounts borrowed under our credit
facility bear interest at an annual rate equal to either (a) the London
interbank offered rate (LIBOR) plus 1.75 percent to 3.50 percent, as determined
by the ratio of our total funded debt to EBITDA (as defined in our credit
facility) or (b) the higher of (i) the bank's prime rate or (ii) the Federal
funds rate plus 0.50 percent plus an additional 0.25 percent to 2.00 percent, as
determined by the ratio of our total funded debt to EBITDA. Commitment fees of
0.50 percent are assessed on any unused borrowing capacity under our credit
facility. Our existing and future subsidiaries guarantee the repayment of all
amounts due under our facility, and our facility is secured by the capital stock
of those subsidiaries, our accounts receivable and the accounts receivable of
those subsidiaries. Borrowings under our credit facility are limited to 66 2/3%
of outstanding receivables (as defined in the agreement). Our 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 repurchase shares of common stock, to incur
other indebtedness and requires us to comply with various affirmative and
negative covenants including certain financial covenants. Among other
restrictions, the financial covenants include minimum net worth requirements, a
maximum total consolidated funded debt to EBITDA ratio, a maximum senior
consolidated debt to EBITDA ratio, and a minimum interest coverage ratio. We
were in compliance with the financial covenants of our credit facility, as
amended through February 4, 2002, at December 31, 2001. At February 11, 2002, we
had outstanding borrowings of $10.0 million on our credit facility.
We have $275.0 million in million senior subordinated notes. 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.
19
All of our operating income and cash flows are generated by our wholly owned
subsidiaries, which are the subsidiary guarantors of our outstanding senior
subordinated notes. 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; (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;
and (iv) the presentation of separate financial statements and other disclosures
concerning the subsidiary guarantors is not deemed material.
In August 2001, we entered into an interest rate swap contract that has a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. At September 30, 2001 and
December 31, 2001, the fair value of this derivative was $3.2 million and $0.1
million, respectively and is included in other noncurrent assets. Under the
hedge method of accounting for these types of derivatives, the change in the
fair value of the interest rate swap contract is recorded with an offsetting
adjustment to the carrying value of the hedged instrument and is thus included
in the senior subordinated notes classification as of December 31, 2001.
Borrowings outstanding on our credit facility and our senior subordinated notes
and our interest rate swap contract expose us to significant risks. Our credit
facility and interest rate swap contract expose us to risks associated with
floating interest rates. Our senior subordinated notes are fixed interest rate
obligations. The competitiveness of those fixed rates may impair our ability to
retire those obligations at reasonable rates before maturity.
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.
20
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.
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 form deregulation and resulting convergence of the
energy, utility and telecommunications industries. Through December 31, 2001, we
had invested $1.5 million under our commitment to EnerTech.
Our future contractual obligations include:
LESS THAN
ONE YEAR 2003 2004 2005 2006 THEREAFTER TOTAL
--------- -------- -------- -------- -------- ---------- --------
Debt and capital lease obligations ... $ 482 $ 1,272 $ 19,251 $ 95 $ 21 $ 275,000 $296,121
Operating lease obligations .......... $ 7,201 $ 8,496 $ 6,680 $ 4,718 $ 2,467 $ 3,210 $ 32,772
Our other commercial commitments expire as follows:
LESS THAN
ONE YEAR 2003 2004 2005 2006 THEREAFTER TOTAL
---------- ------ ----- ----- ----- ---------- ------
Standby letters of credit ........ $ 890 $3,850 $ -- $ -- $ -- $ -- $4,740
Other commercial commitments ..... $ -- $ -- $ -- $ -- $ -- $ 3,500 $3,500
Outlook. 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 have taken steps to reduce costs. We have
made significant cuts in administrative overhead at the home office and in the
field. We believe these cuts will result in savings of over $20 million as
compared to the prior year. In connection with these cuts, we incurred a
restructuring charge of $4.0 million during the quarter ended December 31, 2001.
We expect to incur an additional restructuring charge of $0.9 million to $1.4
million during our quarter ended March 31, 2002.
We expect to generate cash flow from operations. Our cash flows from operations
tends to track the seasonality of our business and historically has 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 planned capital expenditures for property
and equipment through the next twelve months. Additionally, we expect to
generate enough cash flow from operations to repay borrowings currently
outstanding on our credit
21
facility. 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.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations, particularly 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 gross margins in 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 PRONOUNCEMENTS
Effective October 1, 2001, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill amortization for the
quarter ended December 31, 2001 would have otherwise been $3.2 million. Material
amounts of recorded goodwill attributable to each of our reporting units were
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Fair value was determined using discounted cash flows,
market multiples and market capitalization. These impairment tests are required
to be performed at adoption of SFAS No. 142 and at least annually thereafter.
Significant estimates used in the methodologies include estimates of future cash
flows, future short term and long term growth rates, weighted average cost of
capital and estimates of market multiples for each of the reportable units. On
an ongoing basis (absent any impairment indicators), we expect to perform our
impairment tests during our first fiscal quarter following our annual budgeting
process.
Based on our initial impairment tests, we recognized a charge of $283.3 million
($7.13 per share) in the first quarter of 2002 to reduce the carrying value of
goodwill of our reporting units to their implied fair value. This impairment is
a result of adopting a fair value approach, under SFAS No. 142, to testing
impairment of goodwill as compared to the previous method utilized in which we
made evaluations of goodwill impairment by using the estimated future
undiscounted cash flows to the assets carrying amount. Under SFAS No. 142, the
impairment adjustment recognized at adoption of the new rules was reflected as a
cumulative effect of change in accounting principle in our first quarter 2002
income statement. Impairment adjustments recognized after adoption, if any,
generally are required to be recognized as operating expenses. Historically, we
have not disposed of any assets or incurred any asset impairments under SFAS
No. 121.
22
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We
are in the process of assessing the impact that the adoption of this standard
will have on our financial position and results of operations. Historically, we
have not disposed of any assets or incurred any asset impairments under SFAS No.
121.
23
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 include
outstanding borrowings under our floating rate credit facility and interest rate
risks resulting from the use of an interest rate swap contract that we entered
into in August 2001. Management does not use derivative financial instruments
for trading purposes or to speculate on changes in interest rates or commodity
prices.
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 December 31, 2001:
2002 2003 2004 2005 2006 THEREAFTER TOTAL
------- ------- ------- ------- ------- ------------ --------
Liabilities - Debt:
Variable Rate (Credit Facility) .......... $ -- $ -- $19,000 $ -- $ -- $ -- $ 19,000
Average Interest Rate .................... 6.66% 6.66% 6.66% -- -- -- 6.66%
Fixed Rate (senior subordinated notes).... $ -- $ -- $ -- $ -- $ -- $ 275,000 $275,000
Interest Rate ............................ 9.375% 9.375% 9.375% 9.375% 9.375% 9.375% 9.375%
Fair Value of Debt:
Variable Rate ............................ $ 19,000
Fixed Rate ............................... $241,313
Interest Rate Swap:
Pay variable/receive fixed ............... $ -- $ -- $ -- $ -- $ -- $ 100,000 $100,000
Average rate paid (3-Month LIBOR
plus 3.495) ............................ 5.72% 5.72% 5.72% 5.72% 5.72% 5.72% 5.72%
Fixed rate received ...................... 9.375% 9.375% 9.375% 9.375% 9.375% 9.375% 9.357%
Fair Value of Interest Rate Swap: $ 145
24
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
10.1 Amendment No. 3 dated February 4, 2002, to the Credit Facility
dated May 22, 2001, among the Company, as borrower, the
Financial Institutions named therein, as banks, Credit
Lyonnais and the Bank of Nova Scotia as syndication agents,
Toronto Dominion (Texas), Inc. as documentation agent and the
Chase Manhattan Bank, as administrative agent.
B. REPORTS ON FORM 8-K:
A report on Form 8-K was filed with the SEC on December 21, 2001, in
connection with a press release issued on December 20, 2001.
25
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: February 14, 2002 By: /s/ William W. Reynolds
------------------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer
26
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Amendment No. 3 dated February 4, 2002, to the Credit Facility dated
May 22, 2001, among the Company, as borrower, the Financial
Institutions named therein, as banks, Credit Lyonnais and the Bank of
Nova Scotia as syndication agents, Toronto Dominion (Texas), Inc. as
documentation agent and the Chase Manhattan Bank, as administrative
agent.
EXHIBIT 10.1
THIRD AMENDMENT
THIRD AMENDMENT (this "Amendment"), dated as of December 31, 2001, to
the Credit Agreement, dated as of May 22, 2001 (as further amended, supplemented
or modified from time to time, the "Credit Agreement"), among Integrated
Electrical Services, Inc., a Delaware corporation (the "Borrower"), certain
financial institutions which are or may become parties thereto (the "Banks"),
Credit Lyonnais and The Bank of Nova Scotia, as syndications agents, Toronto
Dominion (Texas), Inc., as documentation agent, and JPMorgan Chase Bank, as
administrative agent (in such capacity, the "Administrative Agent").
WITNESSETH:
-----------
WHEREAS, pursuant to the Credit Agreement, the Banks have agreed to
make, and have made, certain loans and other extensions of credit to the
Borrower;
WHEREAS, the Borrower has requested that the Administrative Agent and
the Banks amend a certain provision of the Credit Agreement; and
WHEREAS, the Administrative Agent and the Banks are willing to agree to
the requested amendment on the terms and conditions contained herein;
NOW, THEREFORE, the parties hereto hereby agree as follows:
I. Defined Terms. Terms defined in the Credit Agreement and used herein
shall have the meanings given to them in the Credit Agreement, as amended
hereby.
II. Amendments to the Credit Agreement.
1. The definition of "Applicable Margin" set forth in Section 1.1 of
the Credit Agreement is hereby amended to read in its entirety as follows:
"Applicable Margin" means, with respect to interest rates and
letter of credit fees and as of any date of its determination, an
amount equal to the percentage amount set forth in the table below
opposite the applicable ratio of (a) the consolidated Total Debt of the
Borrower as of the end of the fiscal quarter then most recently ended
to (b) the consolidated EBITDA of the Borrower for the four fiscal
quarters then most recently ended:
Applicable Margin
LIBOR Tranches and Applicable Margin
Total Debt to EBITDA Letter of Credit Fee Prime Rate Tranche
-------------------- -------------------- ------------------
<1.50 1.75% 0.25%
-
>1.50 but <2.00 2.00% 0.50%
-
>2.00 but <2.50 2.25% 0.75%
-
>2.50 but <3.00 2.50% 1.00%
-
>3.00 but <3.50 2.75% 1.25%
-
>3.50 but <4.00 3.00% 1.50%
-
>4.00 but <4.50 3.25% 1.75%
-
>4.50 3.50% 2.00%
The foregoing ratio and resulting Applicable Margin shall be based upon
Schedule C of the most recent Compliance Certificate delivered to the
Administrative Agent pursuant to Section 5.2(a) or Section 5.2(b).
Any adjustments to the Applicable Margin shall become effective on the
45th day following the last day of each fiscal quarter or on the 90th
day following the last day of each fiscal year as applicable; provided,
however, that if any such Compliance Certificate is not delivered when
required hereunder, the Applicable Margin shall be deemed to be the
maximum percentage amount in each table from such 45th or 90th day
until such Compliance Certificate is received by the Administrative
Agent.
Upon any change in the Applicable Margin, the Administrative Agent
shall promptly notify the Borrower and the Banks of the new Applicable
Margin.
2. Section 5.5(b)(ii) of the Credit Agreement (Maximum Total Debt to
EBITDA Ratio) is hereby amended to read in its entirety as follows:
(ii) Maximum Total Debt to EBITDA Ratio. As of the last day of
each fiscal quarter of the Borrower, the Borrower shall not permit the
ratio of (a) the consolidated Total Debt of the Borrower as of end of
such fiscal quarter minus, so long as there are no outstanding
Revolving Loans as of such date, cash on the consolidated balance sheet
of the Borrower as of such date to (b) the consolidated EBITDA of the
Borrower for the preceding four fiscal quarters then ended, to be
greater than the applicable ratios set forth below as of the dates
indicated:
Fiscal Quarter Ending Ratio
--------------------- -----
December 31, 2001 3.50 to 1.00
March 31, 2002 4.25 to 1.00
June 30, 2002 4.75 to 1.00
September 30, 2002 4.25 to 1.00
December 31, 2002 4.00 to 1.00
March 31, 2003 3.75 to 1.00
June 30, 2003 3.50 to 1.00
September 30, 2003 and each
fiscal quarter thereafter 3.25 to 1.00
3. Section 5.5(c) of the Credit Agreement (Minimum Interest Coverage
Ratio) is hereby amended to read in its entirety as follows
(c) Minimum Interest Coverage Ratio. As of the last day of
each fiscal quarter, the Borrower shall not permit the ratio of (i) the
consolidated EBIT of the Borrower for the preceding four fiscal
quarters then ended to (ii) the consolidated Interest Expense of the
Borrower (to the extent paid in cash) for the preceding four fiscal
quarters then ended minus any income of the Borrower or any of its
consolidated Subsidiaries during such period which is attributable to
any Interest Hedge Agreement plus any expenses of the Borrower or any
of its consolidated Subsidiaries during such period which is
attributable to any Interest Hedge Agreement, to be less than the
applicable ratios set forth below as of the dates indicated:
Fiscal Quarter Ending Ratio
--------------------- -----
December 31, 2001 2.25 to 1.00
March 31, 2002 1.75 to 1.00
June 30, 2002 1.50 to 1.00
September 30, 2002 1.75 to 1.00
December 31, 2002 2.00 to 1.00
March 31, 2003 2.25 to 1.00
fiscal quarter thereafter 2.50 to 1.00
Compliance with this paragraph (c) shall be determined in the
applicable Compliance Certificate based upon the adjusted financial
reports contained in Schedule A of such Compliance Certificate.
III. Conditions to Effectiveness. This Amendment shall become effective
on the date on which this Amendment shall have been executed by the Borrower,
the Administrative Agent and the Majority Banks and the Borrower shall have paid
to the Administrative Agent, for disbursement to each Bank which joins in the
execution of this Amendment, a fee in an amount equal to 0.20% of the Commitment
of each such Bank.
IV. General.
1. Representations and Warranties. The Borrower represents and warrants
that the representations and warranties made by the Borrower in the Credit
Documents are true and correct in all material respects on and as of the date
hereof, after giving effect to the effectiveness of this Amendment, as if made
on and as of the date hereof, and no Default or Event of Default has occurred
and is continuing.
2. Payment of Expenses. The Borrower agrees to pay or reimburse the
Administrative Agent for all of its out-of-pocket costs and reasonable expenses
incurred in connection with this Amendment, any other documents prepared in
connection herewith and the transactions contemplated hereby, including, without
limitation, the reasonable fees and disbursements of counsel to the
Administrative Agent.
3. No Other Amendments. This Amendment shall not be construed as a
waiver or consent to any further or future action on the part of the Borrower
that would require a waiver or consent of the Administrative Agent and/or the
Banks. Except as expressly amended hereby, the provisions of the Credit
Agreement are and shall remain in full force and effect.
4. Governing Law; Counterparts.
(a) This Amendment and the rights and obligations of the parties hereto
shall be governed by, and construed and interpreted in accordance with, the laws
of the State of New York.
(b) This Amendment may be executed by one or more of the parties to
this Amendment on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
INTEGRATED ELECTRICAL SERVICES, INC.
By:
--------------------------------------
Name:
------------------------------------
Title
------------------------------------
JPMORGAN CHASE BANK,
as Administrative Agent and as a Bank
By:
--------------------------------------
Name:
------------------------------------
Title
------------------------------------
CREDIT LYONNAIS, NEW YORK BRANCH,
as Syndication Agent and as a Bank
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
THE BANK OF NOVA SCOTIA,
as Syndication Agent and as a Bank
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
TORONTO DOMINION (TEXAS), INC.,
as Documentation Agent and as a Bank
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
BANK OF SCOTLAND
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
FIRST BANK & TRUST
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
FIRSTAR BANK, N.A.
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
RZB FINANCE LLC
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
SOUTHWEST BANK OF TEXAS, N.A.
By:
-------------------------------------
Name:
-----------------------------------
Title
-----------------------------------
The undersigned hereby join in this Amendment to evidence their consent
to execution by Borrower of this Amendment, to confirm that each Credit Document
now or previously executed by the undersigned applies and shall continue to
apply to the Credit Agreement, as amended hereby, and to acknowledge that
without such consent and confirmation, the Banks would not execute this
Amendment.
1ST GROUP TELECOMMUNICATIONS, INC.
ACE ELECTRIC, INC.
ALADDIN WARD ELECTRIC & AIR, INC.
AMBER ELECTRIC, INC.
ANDERSON & WOOD CONSTRUCTION CO., INC.
ARC ELECTRIC, INCORPORATED
BACHOFNER ELECTRIC, INC.
BEAR ACQUISITION CORPORATION
BRINK ELECTRIC CONSTRUCTION CO.
BRITT RICE ELECTRIC, INC.
BRITT RICE MANAGEMENT LLC
BRYANT ELECTRIC COMPANY, INC.
BW CONSOLIDATED, INC.
BW/BEC, INC.
CANOVA ELECTRICAL CONTRACTING, INC.
CARROLL MANAGEMENT LLC
CARROLL SYSTEMS, INC.
CHARLES P. BAGBY COMPANY, INC.
COLLIER ELECTRIC COMPANY, INC.
COMMERCIAL ELECTRICAL CONTRACTORS, INC.
CROSS STATE ELECTRIC, INC.
CYPRESS ELECTRICAL CONTRACTORS, INC.
DANIEL ELECTRICAL CONTRACTORS, INC.
DANIEL ELECTRICAL OF TREASURE COAST INC.
DANIEL INTEGRATED TECHNOLOGIES, INC.
DAVIS ELECTRICAL CONSTRUCTORS, INC.
DELCO ELECTRIC, INC.
ELECTRO-TECH, INC.
EMC ACQUISITION CORPORATION
ERNEST P. BREAUX ELECTRICAL, INC.
FEDERAL COMMUNICATIONS GROUP, INC.
FLORIDA INDUSTRIAL ELECTRIC, INC.
GENERAL PARTNER, INC.
GOSS ELECTRIC COMPANY, INC.
H.R. ALLEN, INC.
HATFIELD REYNOLDS ELECTRIC COMPANY
HOLLAND ELECTRICAL SYSTEMS, INC.
HOUSTON-STAFFORD ELECTRIC, INC.
HOUSTON-STAFFORD MANAGEMENT LLC
HOWARD BROTHERS ELECTRIC CO., INC.
I.C.G. ELECTRIC, INC.
IES COMMUNICATIONS, INC.
IES CONTRACTORS MANAGEMENT LLC
IES ELECTRICAL GROUP, INC.
IES PROPERTIES MANAGEMENT, INC.
IES PROPERTIES, INC.
IES RESIDENTIAL GROUP, INC.
IES SPECIALTY LIGHTING, INC.
IES VENTURES INC.
INNOVATIVE ELECTRIC COMPANY, INC.
INTEGRATED ELECTRICAL FINANCE, INC.
INTELLIGENT BUILDING SOLUTIONS, INC.
J.W. GRAY ELECTRIC CO., INC.
J.W. GRAY MANAGEMENT LLC
KAYTON ELECTRIC, INC.
KEY ELECTRICAL SUPPLY, INC.
LINEMEN, INC.
MARK HENDERSON, INCORPORATED
MENNINGA ELECTRIC, INC.
MIDLANDS ELECTRICAL CONTRACTORS, INC.
MID-STATES ELECTRIC COMPANY, INC.
MILLS ELECTRICAL CONTRACTORS, INC.
MILLS MANAGEMENT LLC
MITCHELL ELECTRIC COMPANY, INC.
M-S SYSTEMS, INC.
MURRAY ELECTRICAL CONTRACTORS, INC.
MUTH ELECTRIC, INC.
NEAL ELECTRIC MANAGEMENT LLC
NEW TECHNOLOGY ELECTRICAL CONTRACTORS, INC.
NEWCOMB ELECTRIC COMPANY, INC.
PAN AMERICAN ELECTRIC COMPANY, INC.
PAN AMERICAN ELECTRIC, INC.
PAULIN ELECTRIC COMPANY, INC.
POLLOCK ELECTRIC INC.
PRIMENET, INC.
PRIMO ELECTRIC COMPANY
PUTZEL ELECTRICAL CONTRACTORS, INC.
RAINES ELECTRIC CO., INC.
RAINES MANAGEMENT LLC
RKT ELECTRIC, INC.
ROCKWELL ELECTRIC, INC.
RODGERS ELECTRIC COMPANY, INC.
RON'S ELECTRIC, INC.
SPECTROL, INC.
SPOOR ELECTRIC, INC.
SUMMIT ELECTRIC OF TEXAS, INC.
T&H ELECTRICAL CORPORATION
TECH ELECTRIC CO., INC.
TESLA POWER G.P., INC.
THOMAS POPP & COMPANY
VALENTINE ELECTRICAL, INC.
WOLFE ELECTRIC CO., INC.
WRIGHT ELECTRICAL CONTRACTING, INC.
By:
------------------------------------------
William Reynolds, Chief Financial Officer
BRITT RICE HOLDINGS LLC
BW/BEC, L.L.C.
CARROLL HOLDINGS LLC
DKD ELECTRIC COMPANY, INC.
HOUSTON-STAFFORD HOLDINGS LLC
ICS HOLDINGS LLC
IES CONTRACTORS HOLDINGS LLC
IES HOLDINGS LLC
J.W. GRAY HOLDINGS LLC
MILLS ELECTRICAL HOLDINGS LLC
NBH HOLDING CO., INC.
POLLOCK SUMMIT HOLDINGS INC.
RAINES HOLDINGS LLC
TESLA POWER (NEVADA), INC.
By:
------------------------------------------
Adrianne M. Horne, President
IES PROPERTIES HOLDINGS, INC.
By:
------------------------------------------
Victoria Garrett, President
B. RICE ELECTRIC LP
BEXAR ELECTRIC COMPANY, LTD.
CARROLL SYSTEMS LP
HAYMAKER ELECTRIC, LTD.
HOUSTON-STAFFORD ELECTRICAL CONTRACTORS LP
ICS INTEGRATED COMMUNICATION SERVICES LP
IES CONTRACTORS LP
IES MANAGEMENT LP
IES PROPERTIES LP
J.W. GRAY ELECTRICAL CONTRACTORS LP
MILLS ELECTRIC LP
NEAL ELECTRIC LP
POLLOCK SUMMIT ELECTRIC LP
POLLOCK SUMMIT ELECTRIC LP
RAINES ELECTRIC LP
TESLA POWER AND AUTOMATION, L.P.
TESLA POWER PROPERTIES, L.P.
By: ITS GENERAL PARTNER
By:
--------------------------------------
William Reynolds,
Chief Financial Officer
