UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: May 28, 2003
Commission File No. 001-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0542208
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1800 West Loop South
Suite 500
Houston, Texas 77027
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
ITEM 7. EXHIBITS
(C) Exhibits
Exhibit No. Description
----------- -----------
10.1 Amendment No. 5 dated May 27, 2003, to the Credit Agreement
dated May 22, 2001, among Integrated Electrical Services,
Inc., as borrower, certain financial institutions which are
or may become parties thereto, as banks, Bank of Scotland
and LaSalle Bank National Association, as syndications
agents, and JP Morgan Chase Bank, as administrative agent.
99.1 Press Release dated May 27, 2003.
99.2 Integrated Electrical Services, Inc. Company and Investment
Profile Report dated May 2003.
ITEM 9. REGULATION FD DISCLOSURE
On May 28, 2003, the Company released a press release and an updated internally
generated report describing the Company and Investment Profile of Integrated
Electrical Services, Inc. Also, on May 27, 2003, the Company completed amendment
five of its credit facility dated May 21, 2001. The press release is attached to
this Form 8-K as Exhibit 99.1. The Company and Investment Profile is attached to
this Form 8-K as Exhibit 99.2. The credit facility amendment is attached to this
Form 8-K as Exhibit 10.1.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ William W. Reynolds
---------------------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer
Dated: May 28, 2003
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Amendment No. 5 dated May 27, 2003, to the Credit Agreement dated
May 22, 2001, among Integrated Electrical Services, Inc., as
borrower, certain financial institutions which are or may become
parties thereto, as banks, Bank of Scotland and LaSalle Bank
National Association, as syndications agents, and JP Morgan Chase
Bank, as administrative agent.
99.1 Press Release dated May 27, 2003.
99.2 Integrated Electrical Services, Inc. Company and Investment
Profile Report dated May 2003.
EXHIBIT 10.1
FIFTH AMENDMENT
FIFTH AMENDMENT (this "Amendment"), dated as of May 27, 2003, 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"), Bank of
Scotland and LaSalle Bank National Association, as syndications agents, and
JPMorgan Chase Bank, as administrative agent (in such capacity, the
"Administrative Agent").
W I T N E S S E T H:
- - - - - - - - - -
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 "Annual Aggregate Acquisition Limit" set forth in
Section 1.1 of the Credit Agreement (Certain Defined Terms) is hereby amended to
read in its entirety as follows:
"Annual Aggregate Acquisition Limit" means $30,000,000 for
each of the fiscal years ending September 30, 2003, September 30, 2004,
September 30, 2005 and September 30, 2006, respectively.
2. The definition of "EBIT" set forth in Section 1.1 of the Credit
Agreement (Certain Defined Terms) is hereby amended to read in its entirety as
follows:
"EBIT" means, with respect to any Person and for any period of
its determination, the consolidated net income (excluding extraordinary
gains and losses) of such Person for such period, plus the consolidated
interest expense and income taxes of such Person for such period;
provided that, notwithstanding anything herein to the contrary, for the
purpose of calculating EBIT, (i) impairment to goodwill calculated in
accordance with FASB Statement No. 142, Goodwill and Other Intangibles,
shall be disregarded and (ii)
losses from non-cash write downs of the investments described on
Exhibit K hereto shall be disregarded.
3. The definition of "EBITDA" set forth in Section 1.1 of the Credit
Agreement (Certain Defined Terms) is hereby amended to read in its entirety as
follows:
"EBITDA" means, with respect to any Person and for any period
of its determination, the consolidated net income (excluding
extraordinary gains and losses) of such Person for such period, plus
the consolidated interest expense and income taxes of such Person for
such period, plus the consolidated depreciation and amortization of
such Person for such period; provided that, notwithstanding anything
herein to the contrary, for the purpose of calculating EBITDA, (i)
impairment to goodwill calculated in accordance with FASB Statement No.
142, Goodwill and Other Intangibles, shall be disregarded and (ii)
losses from non-cash write downs of the investments described on
Exhibit K hereto shall be disregarded.
4. The definition of "Net Worth" set forth in Section 1.1 of the Credit
Agreement (Certain Defined Terms) is hereby amended to read in its entirety as
follows:
"Net Worth" means, with respect to any Person and as of any
date of its determination, the excess of (a) the assets of such Person
over (b) the liabilities of such Person; provided that, notwithstanding
anything herein to the contrary, for the purpose of calculating Net
Worth, (i) adjustments to goodwill calculated in accordance with FASB
Statement No. 142, Goodwill and Other Intangibles, shall be disregarded
and (ii) losses from non-cash write downs of the investments described
on Exhibit K hereto shall be disregarded.
5. The definition of "Revolving Loan Maturity Date" set forth in
Section 1.1 of the Credit Agreement (Certain Defined Terms) is hereby amended to
read in its entirety as follows:
"Revolving Loan Maturity Date" means May 22, 2006.
6. Section 2.5(a) of the Credit Agreement (Commitment Fees) is hereby
amended to read in its entirety as follows:
(a) Commitment Fees. The Borrower shall pay to the
Administrative Agent for the ratable benefit of the Banks a per annum
unused commitment fee on the average daily amount by which (i) the
aggregate amount of the Revolving Loan Commitments exceeds (ii) the
aggregate outstanding amount of the Revolving Loan plus the Letter of
Credit Exposure 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:
2
Total Debt to EBITDA Commitment Fee
-------------------- --------------
< 2.00 0.375%
-
> 2.00 0.50%
provided, however, that on each day that less than twenty-five percent
(25%) of the Revolving Loan Commitments shall be utilized, such unused
commitment fee percentage shall be increased by 0.125% over the
applicable percentage shown above. The unused commitment fee shall be
due and payable in arrears on the last day of each calendar quarter and
on the Revolving Loan Maturity Date.
Determination of Total Debt to EBITDA for purposes of calculating the
commitment fees payable under this Section 2.5(a) shall be based on the
same calculation applied in Section 5.5(b)(ii) using the applicable
Compliance Certificate and the adjusted financial reports contained in
Schedule B of such Compliance Certificate.
7. 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
--------------------- -----
March 31, 2003 4.00 to 1.00
June 30, 2003 3.75 to 1.00
September 30, 2003 3.75 to 1.00
December 31, 2003 3.50 to 1.00
March 31, 2004 3.50 to 1.00
June 30, 2004 and each
fiscal quarter thereafter 3.25 to 1.00
Compliance with this Section 5.5(b)(ii) shall be determined in the
applicable Compliance Certificate based upon the adjusted financial
reports contained in Schedule B of such Compliance Certificate.
8. 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
3
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
--------------------- -----
March 31, 2003 2.00 to 1.00
June 30, 2003 2.00 to 1.00
September 30, 2003 2.25 to 1.00
December 31, 2003 2.25 to 1.00
March 31, 2004 and each
fiscal quarter thereafter 2.50 to 1.00
Compliance with this Section 5.5(c) shall be determined in the
applicable Compliance Certificate based upon the adjusted financial
reports contained in Schedule B of such Compliance Certificate.
9. Section 5.9(c)(ii) of the Credit Agreement is hereby amended to read
in its entirety as follows:
(ii) At any time after the Subordinated Debt Event, the Borrower or
any Subsidiary of the Borrower may make any Acquisition (by
purchase or merger) provided that (A) the Borrower or such
Subsidiary of the Borrower is the acquiring or surviving
entity, (B) the aggregate of all consideration (other than
common stock of the Borrower) paid by the Restricted Entities
in connection with any Acquisition does not exceed $15,000,000
without the prior consent of the Majority Banks, (C) the
aggregate of all consideration (other than common stock of the
Borrower) paid by the Restricted Entities in connection with
all Acquisitions during any fiscal year does not exceed the
Annual Aggregate Acquisition Limit for the applicable year
without the prior consent of the Majority Banks, (D) no
Default or Event of Default exists and the Acquisition would
not reasonably be expected to cause a Default or Event of
Default after giving pro forma effect thereto (including any
default under Section 5.5 with respect to historical and
future pro forma financial status and results), (E) the
acquired assets are in substantially the same business as the
Borrower, and (F) as of the last day of the fiscal quarter
then most recently ended prior to the date of any such
Acquisition for which financial statements have been delivered
to the Banks pursuant to Section 5.2, the ratio of (a) the
consolidated Total Debt of the Borrower as of the 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, shall not exceed than the
applicable ratios set forth below as of the dates indicated:
4
Fiscal Quarter Ending Ratio
--------------------- -----
March 31, 2003 3.75 to 1.00
June 30, 2003 3.50 to 1.00
September 30, 2003 3.50 to 1.00
December 31, 2003 3.25 to 1.00
March 31, 2004 3.25 to 1.00
June 30, 2004 and each
fiscal quarter thereafter 3.00 to 1.00
Compliance with this Section 5.9(c)(ii) shall be based on the
same calculation applied in Section 5.5(b)(ii) using the
applicable Compliance Certificate and the adjusted financial
reports contained in Schedule B of such Compliance
Certificate.
10. Section 5.10 of the Credit Agreement (Distributions) is hereby
amended to read in its entirety as follows:
5.10 Distributions. The Borrower shall not (a) declare or pay
any dividends; (b) purchase, redeem, retire or otherwise acquire for
value any of its capital stock now or hereafter outstanding; (c) make
any distribution of assets to its stockholders as such, whether in
cash, assets or in obligations of it; (d) allocate or otherwise set
apart any sum for the payment of any dividend or distribution on, or
for the purchase, redemption or retirement of, any shares of its
capital stock; or (e) make any other distribution by reduction of
capital or otherwise in respect of any shares of its capital stock;
except that the Borrower may make payments of dividends on Qualified
Preferred Stock; provided, however, that the Borrower may repurchase
from the holders thereof capital stock of the Borrower and/or purchase
or repay Subordinated Debt of the Borrower so long as:
(i) no Default is continuing or would result therefrom;
(ii) the aggregate amounts applied to repurchase capital
stock or to purchase or repay Subordinated Debt after
May 27, 2003 shall not exceed the lesser of (1) if
there are no outstanding Revolving Loans at the time
of the applicable repurchase, purchase or repayment,
$70,000,000 and if there are any outstanding
Revolving Loans at the time of the applicable
repurchase, purchase or repayment, $50,000,000 or (2)
sum of $30,000,000 plus fifty percent (50%) of the
cumulative quarterly consolidated net income (less
100% of the cumulative consolidated net loss) of the
Borrower for each fiscal quarter of the Borrower
commencing with the fiscal quarter ending on March
31, 2003 and ending on the last day of the fiscal
quarter then most recently ended prior to the date of
any such repurchase of capital stock or purchase or
repayment of Subordinated Debt for which financial
statements have been delivered to the Banks pursuant
to Section 5.2,
5
(iii) the aggregate amounts applied to repurchase capital
stock after May 27, 2003 shall not exceed
$20,000,000, and
(iv) as of the last day of the fiscal quarter then most
recently ended prior to the date of any such
repurchase of capital stock or purchase or repayment
of Subordinated Debt for which financial statements
have been delivered to the Banks pursuant to Section
5.2, the ratio of (a) the consolidated Total Debt of
the Borrower as of the 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, shall not
exceed than the applicable ratios set forth below as
of the dates indicated:
Fiscal Quarter Ending Ratio
--------------------- -----
March 31, 2003 3.75 to 1.00
June 30, 2003 3.50 to 1.00
September 30, 2003 3.50 to 1.00
December 31, 2003 3.25 to 1.00
March 31, 2004 3.25 to 1.00
June 30, 2004 and each
fiscal quarter thereafter 3.00 to 1.00
Compliance with this Section 5.10(iv) shall be based
on the same calculation applied in Section 5.5(b)(ii)
using the applicable Compliance Certificate and the
adjusted financial reports contained in Schedule B of
such Compliance Certificate.
11. Schedule I-A to the Credit Agreement is hereby amended to be
identical to Schedule I-A attached hereto. Banks agree that, notwithstanding
anything to the contrary set forth in the Credit Agreement, any Bank may agree
to an increase of its Revolving Loan Commitment and any new Bank may agree to an
new Revolving Loan Commitment, in each case with the prior written consent of
the Borrower and the Administrative Agent (but without necessity for consent by
any Bank or other Bank, as the case may be), so long as the aggregate of all
Revolving Loan Commitments, after giving effect to any such increase, does not
exceed $150,000,000.
12. A new Exhibit K is hereby added to the Credit Agreement, such new
exhibit to be identical to Exhibit K attached hereto.
IV. Conditions to Effectiveness. This Amendment shall become effective
on the date on which (i) this Amendment shall have been executed by the
Borrower, the Administrative Agent and the Banks and the Borrower shall have
executed and delivered to the Administrative such additional Notes or other Loan
Documents as the Administrative Agent may reasonably require, (ii) the Borrower
shall have paid to the Administrative Agent, for disbursement to each Bank, such
commitment fees as the Borrower and the Administrative Agent shall have agreed
6
upon and (iii) the Administrative Agent shall have received an opinion from
Borrower's counsel in form and substance reasonably acceptable to the
Administrative Agent.
V. 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. Syndication Agents. From and after the effective date of this
Amendment, Bank of Scotland and LaSalle Bank National Association shall be the
Syndication Agents under the Credit Agreement.
5. 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.
7
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.
Schedule I-A -Commitments
Exhibit K - Certain Investments
INTEGRATED ELECTRICAL SERVICES, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
8
JPMORGAN CHASE BANK,
as Administrative Agent and as a Bank
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
9
BANK OF SCOTLAND,
as Syndications Agent and as a Bank
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
10
LASALLE BANK NATIONAL ASSOCIATION,
as Syndications Agent and as a Bank
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
11
U. S. BANK NATIONAL ASSOCIATION
(formerly known as FIRSTAR BANK, N.A.)
By:
---------------------------------------
Gregory L. Dryden, Vice President
12
WELLS FARGO BANK TEXAS, N.A.
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
13
FIRST AMERICAN BANK, SSB
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
14
FIRST BANK & TRUST
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
15
SOUTHWEST BANK OF TEXAS, N.A.
By:
---------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
16
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/PUTZEL 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.
DKD ELECTRIC COMPANY, 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.
17
HATFIELD REYNOLDS ELECTRIC COMPANY
HOLLAND ELECTRICAL SYSTEMS, INC.
HOUSTON-STAFFORD ELECTRIC, INC.
HOUSTON-STAFFORD MANAGEMENT LLC
HOWARD BROTHERS ELECTRIC CO., INC.
ICS HOLDINGS LLC
IES COMMUNICATIONS, INC.
IES CONTRACTORS MANAGEMENT LLC
IES ENC, INC.
IES ENC MANAGEMENT, INC.
IES OPERATIONS GROUP, INC.
IES PROPERTIES MANAGEMENT, INC.
IES PROPERTIES, INC.
IES RESIDENTIAL GROUP, INC.
IES SPECIALTY LIGHTING, INC.
IES VENTURES 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.
MID-STATES ELECTRIC COMPANY, INC.
MILLS ELECTRICAL CONTRACTORS, INC.
MILLS MANAGEMENT LLC
MITCHELL ELECTRIC COMPANY, INC.
M-S SYSTEMS, INC.
MURRAY ELECTRICAL CONTRACTORS, INC.
NEAL ELECTRIC MANAGEMENT LLC
NEW TECHNOLOGY ELECTRICAL
CONTRACTORS, INC.
NBH HOLDING CO., 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
RAINES ELECTRIC CO., INC.
RAINES MANAGEMENT LLC
RKT ELECTRIC, INC.
ROCKWELL ELECTRIC, INC.
18
RODGERS ELECTRIC COMPANY, INC.
RON'S ELECTRIC, INC.
SPECTROL, INC.
SEI ELECTRICAL CONTRACTOR, 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.
WRIGHT ELECTRICAL CONTRACTING, INC.
RIVIERA ELECTRIC LLC
IES CONTRACTORS, INC.
By:
-------------------------------------------
William Reynolds, Chief Financial Officer
BRITT RICE HOLDINGS LLC
BW/BEC, L.L.C.
CARROLL HOLDINGS LLC
HOUSTON-STAFFORD HOLDINGS LLC
IES HOLDINGS LLC
J.W. GRAY HOLDINGS LLC
MILLS ELECTRICAL HOLDINGS LLC
POLLOCK SUMMIT HOLDINGS INC.
RAINES HOLDINGS LLC
TESLA POWER (NEVADA), INC.
By:
-------------------------------------------
Victor Duva, Manager
IES CONTRACTORS HOLDINGS LLC
BEXAR ELECTRIC II LLC
BRITT RICE HOLDINGS II LLC
BW/BEC II LLC CARROLL
HOLDINGS II LLC
HOUSTON-STAFFORD HOLDINGS II LLC
IES HOLDINGS II LLC
IES PROPERTIES HOLDINGS II LLC
19
J.W. GRAY HOLDINGS II LLC
MILLS ELECTRIC HOLDINGS II LLC
POLLOCK SUMMIT HOLDINGS II LLC
RAINES HOLDINGS II LLC
TELSA POWER (NEVADA) II LLC
By:
-------------------------------------------
John Seli, Manager
IES REINSURANCE, LTD.
By:
-------------------------------------------
David Miller, Vice 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 FEDERAL CONTRACT GROUP LP
IES MANAGEMENT LP
IES PROPERTIES LP
J.W. GRAY ELECTRICAL CONTRACTORS LP
MILLS ELECTRIC LP
NEAL ELECTRIC LP
POLLOCK SUMMIT ELECTRIC LP
RAINES ELECTRIC LP
20
TESLA POWER AND AUTOMATION, L.P.
TESLA POWER PROPERTIES, L.P.
By: ITS GENERAL PARTNER
By:
----------------------------------
William Reynolds,
Chief Financial Officer
21
SCHEDULE I-A
------------
REVOLVING LOAN COMMITMENTS
--------------------------
JPMorgan Chase Bank $20,000,000
Bank of Scotland $20,000,000
LaSalle Bank National Association $20,000,000
U. S. Bank National Association $15,000,000
Wells Fargo Bank Texas, N. A. $15,000,000
First American Bank, SSB $15,000,000
First Bank & Trust $10,000,000
Southwest Bank of Texas, N.A. $10,000,000
TOTAL $125,000,000
22
EXHIBIT K
1. Current Investments in Energy Photovoltaics, Inc.
2. Current Investments (and future Investments pursuant to current
commitments) in Entertech Capital Partners II L.P.
23
Exhibit 99.1
IES
[GRAPHIC OMITTED]
NEWS RELEASE
Contacts: William W. Reynolds, CFO
Integrated Electrical Services, Inc.
713-860-1500
Ken Dennard / kdennard@drg-e.com
------------------
Karen Roan / kroan@drg-e.com
---------------
DRG&E / 713-529-6600
IES Extends Credit Facility through May 2006 and
Updates "Company & Investment Profile"
HOUSTON -- MAY 28, 2003 -- Integrated Electrical Services, Inc. (NYSE: IES)
today announced that it has amended its credit facility led by JP Morgan Chase
Bank to extend its term from May 2004 to May 2006. The amended facility is for
$125 million and has the ability to increase to $150 million at the company's
discretion.
IES' President and Chief Executive Officer, H. Roddy Allen stated,
"This amended facility is in keeping with the company's plan to have a more
conservative capital structure. IES has not drawn on its existing facility since
April 2002. As of March 31, 2003, we have $26.1 million in cash on our balance
sheet and have provided guidance that we expect to generate between $30 million
and $40 million of free cash flow this fiscal year, defined as cash flow from
operations less capital expenditures." The amendment to the credit facility will
be filed on May 28, 2003 with the Securities and Exchange Commission ("SEC") on
Form 8-K.
Additionally, IES announced today that it has updated its "Company &
Investment Profile" which can be found on the company's website at
www.ies-co.com under the investor relations section, or on Form 8-K to be filed
with the SEC on May 28, 2003. The "Company & Investment Profile" includes
updated discussions of IES' performance, strategies, industry outlook, peer
analysis and guidance along with expanded discussion about the company's
organizational systems, processes and controls, and competitive landscape.
This profile is being published and updated by IES in continuation of
the company's effort to provide greater disclosure and increase transparency to
the investment community. Given structural and regulatory changes impacting the
securities industry and challenging capital market conditions, it is the
company's intent to take greater responsibility and a more proactive role in
communicating with investors.
Investors and interested parties are encouraged to visit the investor
relations section on the company's website, http://www.ies-co.com, to download
the Adobe Acrobat formatted file of the updated "Company & Investment Profile."
Integrated Electrical Services, Inc. is a leading national provider of
electrical solutions to the commercial and industrial, residential and service
markets. The company offers electrical system design and installation, contract
maintenance and service to large and small customers, including general
contractors, developers and corporations of all sizes.
This press release includes certain statements, including statements relating to
the Company's expectations of future operating results that may be deemed
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition to historical information, this
document contains forward-looking statements made by the management of IES. Such
statements are typically identified by terms expressing future expectation or
goals. These forward-looking statements, although made in good faith, include
assumptions, expectations, predictions, intentions or beliefs about future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in these forward-looking
statements. Factors that might cause such differences include, but are not
limited to, inherent uncertainties relating to estimating future results,
fluctuations in operating results because of down-turns in levels or types of
construction, incorrect estimates used in entering fixed-price contracts,
difficulty in managing operations in existing, geographically-diverse
operations, the high level of competition in the construction industry, the
impact of variations in interest rates, general level of the economy, changes in
the level of competition in the electrical industry, changes in the costs of
labor, changes in the cost or availability of bonds required for certain types
of projects, inability to find sufficient numbers of trained employees,
inability to successfully achieve or maintain planned business objectives,
inaccurate estimates used in percentage of completion calculations, the unknown
effect of U.S. involvement in armed conflict, and seasonal variation in the
ability to perform work. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinion only as the
date hereof. We take no obligation to revise or publicly release the results of
any revision of these forward-looking statements. If any revisions are made to
this document, the revisions will necessarily be delayed from the occurrence of
the event or receipt of the information upon which the revision will be based.
Readers should carefully review the cautionary statement described in this and
other documents we file from time to time with the Securities and Exchange
Commission, including annual reports on Form 10-K.
# # #
EXHIBIT 99.2
May 2003 www.ies-co.com
INTEGRATED ELECTRICAL SERVICES
(NYSE: IES)
COMPANY & INVESTMENT PROFILE
- --------------------------------------------------------------------------------
KEY INVESTMENT POINTS
o IES is the largest provider of electrical contracting services in the U.S.,
with approximately 150 locations across the country. Its size, diverse
customer base and breadth of services give the Company significant
advantages in the marketplace and cushion it from swings in the economy.
o The Company's size also allows it to provide nationwide service to larger
customers such as Wal-Mart, Marriott, Intel, 3M, and Pulte Homes.
o In 2004, sectors where IES has significant strength and tends to have
higher profitability margins such as manufacturing facilities, hotels,
office buildings and retail centers are expected to have significant
construction growth.
o Management's Back to Basics and One Company. One Plan. initiatives have
boosted backlog, lowered costs and increased cash flow.
o IES continues to show steady improvement, with the operating income margin
improving from 2% in Q1 2002 to 6% in Q4 2002. Operating income margin in
Q2 2003 was 20 basis points higher than Q2 2002.
o IES generated record cash flow from operations of $53.4 million in fiscal
2002 and through March 31, 2003 has generated $18.8 million. A portion of
the cash is being used to pay down debt and execute a 2 million share
common stock repurchase program, which is over 50% complete with 1.1
million shares repurchased at 3/31/03.
o IES' executive incentive plan, while discretionary, is aligned with
shareholder expectations and is structured such that executives may receive
up to a target bonus when IES achieves certain levels of profitability.
o IES maintains strong corporate governance policies, including split CEO and
Chairman positions and a seven-person board with four outside directors.
(Amounts in Millions, except per share data)
Price (5/19/03) $ 6.20
52 Wk. High/Low $6.49 - $3.10
Total Shares (as of 4/29/03) 38.8
Equity Market Cap $ 241
Average Daily Volume 72,000
Cash (as of 3/31/03) $ 26
Total Debt (as of 3/31/03) $ 249
Total Enterprise Value (TEV)* $ 464
Institutional Ownership ( as of 03/31/03) 50%
Inside Ownership 26%
-------------
2003 EPS Guidance $0.53 - $0.60
2003 P/E Multiple 11.7x - 10.3x
Price / Sales Multiple 0.2x
Price / Book Value Per Share 0.9x
Book Value Per Share $ 6.66
Total Enterprise Value = Equity Market Cap. + Debt - Cash
IES has outperformed the S&P 500
[GRAPHIC OMITTED]
1
SUMMARY INCOME STATEMENT
---------------------------------------------------------------
FYE - September 30,
--------------------------------------
2001 2002 2003E**
Revenue $1,693 $1,475 $1,475
Cost of Services 1,385 1,253 -
------ ------ --------------
Gross Profit 308 222 -
SG&A 214 174 -
Restruct. Charge - 6 -
Goodwill Amort. 13 - -
------ ------ --------------
Operating Income 81 42 -
Interest Expense (26) (27) -
Other, net - 1 -
------ ------ --------------
Pretax Income 55 16 -
Taxes 26 6 -
Cumulative effect of
Accounting Change - 283 -
------ ------ --------------
Net Income $ 29 $(273) -
====== ====== ==============
Net Income before
Accounting Change $ 29 $ 10 -
Diluted EPS $0.70 $(6.86) $0.53 - $0.60
Change in Accounting
Principle - (7.11) -
Operating EPS* $0.71 $0.25 $0.53 - $0.60
Diluted Shares 40.9 39.8 -
* Before cumulative effect of change in accounting principle, net of tax.
** 2003 Company Guidance.
KEY MARGINS
------------------------------------------------------
FYE - September 30,
----------------------
2001 2002
---- ----
Gross Margin 18.2% 15.0%
SG&A as % Revenues 12.6% 11.8%
Operating Margin 4.8% 2.8%
Pretax Margin 3.2% 1.1%
Net Margin 1.7% 0.7%
Return on Equity 5.5% 5.1%
Return on Assets 2.8% 2.3%
WACC (Weighted Average Cost of Capital) 10% - 12%
2001 2002 2003*
-----------------------------------
52 Wk High $10.00 $6.50 $6.49
52 Wk Low $4.90 $3.07 $4.50
TEV/Op. Income High 7.9x 7.0x
TEV/Op Income Low 3.3x 5.7x
P/E High 10.5x 13.0x 12.3x-10.8x
P/E Low 5.2x 6.1x 8.5x-7.5x
* Share prices in 2003 are YTD and EPS is the corporate guidance range.
SUMMARY BALANCE SHEET AND RATIOS
---------------------------------------------------------------------
FYE - September 30,
-------------------------------
2001 2002 Q2 2003
Assets ------- ------- -------
Current Assets $ 453 $ 438 $ 431
Total Assets $1,034 $ 722 $ 712
Liabilities and Equity
Current Liabilities $ 216 $ 194 $ 194
Total Debt $ 286 $ 249 $ 249
Stockholders' Equity $ 529 $ 254 $ 259
Working Capital % of Revenue 5.5% 13.9% 17.4%
Capital Expenditures as % Revenue 1.5% 0.8% 0.8%
BACKLOG GROWTH*
(BAR CHART)
(Dollars in Millions)
1999 $644
2000 $726
2001 $789
2002 $801
Q2 2003 $798
* Excludes divestitures and is work which
the Company has signed contracts for,
but has not yet completed.
IES 12 MONTH STOCK PERFORMANCE
(PERFORMANCE GRAPH)
2
Table of Contents
- --------------------------------------------------------------------------------
Key Investment Points .................................. 1
Summary Financial Data ................................. 2
Summary ................................................ 5
Three-Phase Strategic Plan ............................. 7
Recent Financial Results and Guidance .................. 14
Company Overview ....................................... 17
Organizational Systems, Processes and
Controls ............................................... 25
IES Management Team .................................... 29
Corporate Governance ................................... 31
Industry Overview ...................................... 32
Outlook and Valuation .................................. 39
Income Statement ....................................... 44
Balance Sheet .......................................... 45
Statement of Cash Flows ................................ 46
Appendix
--------
Construction Accounting Primer ......................... 47
3
Disclosure Statement
- --------------------------------------------------------------------------------
This report was prepared by Integrated Electrical Service, Inc. ("IES" or the
"Company"). The opinions shared in this document are the beliefs of management
at the time of printing.
This document includes certain statements, including statements relating to the
Company's expectations of future operating results that may be deemed
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition to historical information, this
document contains forward-looking statements made by the management of IES. Such
statements are typically identified by terms expressing future expectation or
goals. These forward-looking statements, although made in good faith, include
assumptions, expectations, predictions, intentions or beliefs about future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in these forward-looking
statements. Factors that might cause such differences include, but are not
limited to, inherent uncertainties relating to estimating future results,
fluctuations in operating results because of down-turns in levels or types of
construction, incorrect estimates used in entering fixed-price contracts,
difficulty in managing operations in existing, geographically-diverse
operations, the high level of competition in the construction industry, the
impact of variations in interest rates, general level of the economy, changes in
the level of competition in the electrical industry, changes in the costs of
labor, changes in the cost or availability of bonds required for certain types
of projects, inability to find sufficient numbers of trained employees,
inability to successfully achieve or maintain planned business objectives,
inaccurate estimates used in percentage of completion calculations, the unknown
effect of U.S. involvement in armed conflict, and seasonal variation in the
ability to perform work. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinion only as the
date hereof. We take no obligation to revise or publicly release the results of
any revision of these forward-looking statements. If any revisions are made to
this document, the revisions will necessarily be delayed from the occurrence of
the event or receipt of the information upon which the revision will be based.
Readers should carefully review the cautionary statement described in this and
other documents we file from time to time with the Securities and Exchange
Commission, including annual reports on Form 10-K.
IES cautions readers that the following important factors as well as others, in
some cases have affected, and in the future could affect, IES' actual results
and could cause IES' results in the future to differ materially from the goals
and expectations expressed herein and in any other forward-looking statements
made by or on behalf of IES.
Maintaining or achieving growth from operations is dependent primarily on
achieving anticipated level of earnings before depreciation, amortization, and
other non-cash charges, controlling expenditures to budgeted levels, collecting
accounts receivable, and maintaining costs at current or lower levels.
In addition to the factors addressed above, financial performance may be
affected by many other important factors including the following: the ability of
IES to attract and retain key personnel; the amount and rate of growth in IES'
general and administrative expenses; the ability of IES to stay within the
limits of the credit ratios set out in its debt covenants; changes in inflation
or other general economic conditions affecting the domestic construction and
electrical contracting industry; unanticipated legal proceedings and
unanticipated outcomes of legal proceedings; changes in accounting policies and
practices required by generally accepted accounting principles, the Securities
and Exchange Commission and other regulatory bodies.
4
Summary
- --------------------------------------------------------------------------------
Integrated Electrical Services ("IES" or the "Company") is the largest single
source provider of electrical contracting services in the United States. It
provides a broad range of services including designing, building, maintaining
and servicing electrical systems including data communications for commercial,
industrial and residential customers. The Company is headquartered in Houston,
Texas.
Since the Company's inception in 1997, it has developed a national footprint of
approximately 150 locations currently serving the continental 48 states with
concentration in the Sunbelt. At the time of its IPO in January 1998, the
Company had run-rate revenues of approximately $313 million. Since that time,
IES has grown rapidly through acquisitions and internal growth. From 1997 to
2002, revenues increased at a compounded annual growth rate of approximately
47%. Included in that growth was approximately 8% organic or "same store sales"
growth compared to an industry growth rate of 5%, according to F.W. Dodge,
during the same period.
EXHIBIT 1
IES HAS A NATIONWIDE PRESENCE
IES OPERATES IN 150 LOCATIONS ACROSS THE U.S.
(U.S. MAP)
IES' business includes providing system design, installation, maintenance and
service to general contractors, developers and companies of all sizes. IES has
two business segments, Commercial/Industrial and Residential. In 2002, 81% of
revenues were from Commercial/Industrial and 19% of revenues were from
Residential. IES' service and maintenance work is done within the
Commercial/Industrial segment and accounted for 10% of IES'
Commercial/Industrial revenues.
Shortly after being named CEO in October 2001, H. Roddy Allen led the
implementation of a three-phase strategic plan to strengthen the Company during
the recent reduction in construction spending, further integrate the Company and
focus on future growth. The first phase of the strategy, Back to Basics, is
largely in place and is an ongoing process. Phase II, One Company. One Plan. is
underway, and focuses on the integration of the Company. Phase III, Continued
Growth, will seek to grow the Company via internal and acquisition-driven
growth.
5
As part of Phase III, IES will consider compelling acquisition opportunities. In
February 2003, IES acquired substantially all the assets of Encompass Electrical
Technologies - Rocky Mountains, Inc. (formerly known as Riviera Electric), a
provider of electrical contracting services based in Denver, Colorado, with
locations throughout the state of Colorado. The assets acquired by IES generated
revenues of $84 million for the calendar year ended December 31, 2002. The
purchase price was $2.7 million net of cash acquired plus the assumption of
certain liabilities.
6
Three-Phase Strategic Plan
The strategic plan is a multi-year three-phase plan with Phase I actions to
build backlog, control costs, and generate strong cash flow; Phase II actions to
integrate IES' subsidiaries; and finally Phase III to focus on continued growth.
The three phases of the plan are detailed in Exhibit 2 below:
EXHIBIT 2
A WELL-DEFINED AND SUCCESSFUL STRATEGY
- -----------------------------------------------------------------------------------------
Phase I Phase II Phase III
- -----------------------------------------------------------------------------------------
BACK TO THE BASICS ONE COMPANY. ONE PLAN. CONTINUED GROWTH
- Build Backlog - Regional Structure - Organic Growth
- Control Costs - Financial Reporting and - Greenfield Growth
- Focus on Cash Flow Planning - Strategic Acquisitions
- Employees - Continue Back to Basics
- Safety - Continue One Company. One
- Procurement Plan.
- Customers
- Continue Back to Basics
----- REENGINEER BALANCE SHEET -----
Status: In Place and Ongoing Status: 2/3 Complete Status: Early Stages
- -----------------------------------------------------------------------------------------
PHASE I - BACK TO BASICS
Results to date of Phase I have been strong, as demonstrated by the Company's
results in fiscal 2002, when cash flow from operations reached record levels and
profitability improved consistently throughout the year, as shown in Exhibit 3
below.
EXHIBIT 3
IMPROVED PERFORMANCE
OPERATING INCOME MARGIN IN 2002 IMPROVED IN EACH QUARTER THROUGHOUT THE YEAR.
(Dollars in Millions) 1Q02 2Q02 3Q02 4Q02 2002
- --------------------------------------------------------------------------------
Revenues $375.2 $356.5 $374.8 $368.9 |$1,475.4
Operating Income Before |
One-Time Charges* 7.5 11.3 18.6 22.0 | 59.4
GAAP Operating Income 3.5 9.8 18.6 10.1 | 41.8
Diluted EPS Prior to Charges* $0.02 $0.08 $0.19 $0.22 | $0.50
|
Restructuring Charges ($0.06) ($0.03) - - | ($0.09)
One-Time Charges - - - (0.16) | (0.16)
Diluted EPS ($0.04) $0.05 $0.19 $0.06 | $0.25
|
Gross Margin 15.3% 15.3% 15.6% 17.1% | 15.8%
Operating Income Margin Before |
One-Time Charges* 2.0% 3.2% 5.0% 6.0% | 4.0%
GAAP Operating Income Margin 0.9% 2.7% 5.0% 2.7% | 2.8%
Cash flow from Operations ($2.5) $12.3 $37.5 $6.1 | $53.4
* Before one-time charges of $15.2 million ($9.9 million after tax) for
reorganizing the business and an increase in accruals for self insurance
liabilities.
7
As the impact of the implementation of Back to Basics was realized throughout
fiscal 2002, the Company showed steady and significant improvement in key
profitability metrics on a quarterly basis, despite posting its strongest
revenues in the first quarter. Operating income margins more than doubled over
the four-quarter period while EPS prior to one-time charges increased from $0.02
per share in the first quarter to $0.22 in the fourth quarter.
IES has focused on doing business more efficiently in order to improve
profitability in this tighter market. Examples include: the national procurement
program which has strengthened IES' relationship with vendors and reduced its
overall cost to procure goods; the focus on serving customers on a more national
basis allowing for cost savings from repeat projects; and the initiative to
reduce overhead costs.
Build Backlog
Backlog is a key indicator of the future revenues of the Company, and building
that backlog was a primary element of Back to Basics. IES was able to increase
its backlog in 2002 in a market where commercial and industrial construction
spending was down 18%, according to statistics from F.W. Dodge. The primary
components of backlog are commercial and industrial projects, since most service
work (except for long-term service contracts) and most single-family residential
projects are not included in backlog due to the short-term nature of the
projects. The Company's strong backlog performance serves to highlight the
advantages of its size and diverse customer base, and helps it navigate through
difficult economic periods.
The table below demonstrates how IES has increased its backlog over the last
three years. The Company divested three non-core businesses in 2002, and the
backlog associated with these divestitures was removed in each year. At the end
of the second quarter of 2003 IES had backlog of $798 million.
EXHIBIT 4
RECORD BACKLOG IN FISCAL 2002 DESPITE WEAK CONSTRUCTION SPENDING
IN 2002 IES' BACKLOG INCREASED BY $12 MILLION, WHILE THE COMMERCIAL AND
INDUSTRIAL CONSTRUCTION MARKET WAS DOWN 18%.
BACKLOG GROWTH*
(BAR CHART)
(Dollars in Millions)
1999 $644
2000 $726
2001 $789
2002 $801
Q2 2003 $798
* Prior years have been restated to exclude divestitures. Backlog includes
project work which the Company has a signed contract for, but is not yet
complete.
8
Control Costs
Reigning in costs is a key element of the Back to Basics strategy. Throughout
2002, particular effort was focused on reducing selling, general and
administrative ("SG&A") costs. By the fourth quarter, significant progress had
been made; that quarter's SG&A was only $41.1 million versus $57.3 million a
year earlier. This is a 28% reduction, as summarized in Exhibit 5. IES continues
to lower costs in 2003, and in the second quarter selling general and
administrative costs were $37.5 million, a $3.6 million reduction over fourth
quarter levels and an 8.8% improvement in the overall cost structure of the
firm.
EXHIBIT 5
SIGNIFICANTLY LOWER SG&A COSTS
IES REDUCED SG&A EXPENSES BY 28% IN FISCAL 2002.
(Dollars in Millions) 4Q 2001 4Q 2002
---------- ----------
Corporate SG&A decreased 59% $ 11.0 $ 4.5
Field SG&A decreased 21% 46.3 36.6
---------- ----------
Overall SG&A decreased 28% $ 57.3 $ 41.1
In conjunction with these cost-saving efforts, IES took a $4.0 million
restructuring charge against earnings in the first quarter of 2002 and a $1.6
million charge in the second quarter of 2002, associated primarily with
workforce reductions. These charges reduced earnings per share by about $0.09
per share for fiscal 2002. With costs reduced and the Company streamlined, IES
is now well positioned to take advantage of future economic growth.
Focus on Cash Flow
Management has been successful in improving free cash flow generation (cash flow
from operations less capital expenditures). Cash flow from operations increased
from $8.6 million in 2001 to $53.4 million in 2002. Meanwhile IES was able to
reduce capital expenditures from $25.8 million in 2001 to $11.9 million in 2002.
IES' 2002 free cash flow was an all-time high of $41.5 million, a positive swing
of $58.7 million from fiscal 2001's cash flow use ($17.2) million. IES' guidance
for free cash flow generation in 2003 is between $30 million and $40 million and
in the first six months of fiscal 2003 IES has already generated free cash flow
of $13.3 million. IES presents free cash flow because management believes it is
a good measure of cash available for shareholders. Exhibit 6 illustrates the
free cash flow generation over the past four years and 2003 projected free cash
flow.
EXHIBIT 6
RECORD LEVELS OF FREE CASH FLOW IN FISCAL 2002
FREE CASH FLOW*
-----------------------------
1999 -19.9
2000 14.8
2001 -17.2
2002 41.5
2003P 30.0 - 40.0
* Cash Flow from Operations less Capital Expenditures.
9
In addition to the large reduction in SG&A expenses, better management of
working capital helped increase cash generation. Days Sales Outstanding ("DSO")
in accounts receivable, a measure of capital tied up in financing receivables,
was 81 days in the first quarter of 2001. Renewed focus on collecting
receivables reduced this figure by 8 days to 73 days in the first quarter of
2002. DSO's fell a further 3 days to 70 by the third quarter, and closed out the
year at 73 days at the end of the fourth quarter. The eight-day swing in DSOs
represented about $32 million in cash. At the end of the second quarter of 2003,
DSOs were 78 days.
The table below illustrates how IES' move from a significant growth phase into
an integrated company is positively impacting its capital structure:
EXHIBIT 7
CASH FLOW TRENDS ILLUSTRATE INTEGRATION
IES IMPROVED ITS FREE CASH FLOW GENERATION BY $58.7 MILLION IN FISCAL 2002.
(Dollars in Millions) 1999 2000 2001 2002
------------ ------------ ------------ ------------
CASH FLOW FROM OPERATIONS $ (6.3) $ 43.2 $ 8.6 $ 53.4
CAPITAL EXPENDITURES (12.9) (28.4) (25.8) (11.9)
------------ ------------ ------------ ------------
FREE CASH FLOW $ (19.2) $ 14.8 $ (17.2) $ 41.5
ACQUISITION EXPENDITURES (106.5) (33.2) (0.2) --
DIVESTITURE PROCEEDS -- -- -- 7.5
------------ ------------ ------------ ------------
CASH FLOW AFTER ACQ/DIVEST $ (125.7) $ (18.4) $ (17.4) $ 49.0
DECREASE (INCREASE) IN DEBT $ (137.5) $ (16.0) $ (44.0) $ 39.1
As shown in the table, negative cash flow from operations and a high level of
spending characterized 1999. IES was focused on acquisition growth and spent
over $100 million in cash to acquire some 40 electrical contractors with about
$415 million in annualized revenues. In 2000, IES slowed its aggressive
acquisition growth goals and focused on integration. Acquisition spending fell
to $33 million in cash for 2000 and ceased in 2001. In 2002, with Back to Basics
implemented, acquisition spending eliminated and capital expenditures reduced,
free cash flow increased sharply. IES also streamlined its business by divesting
non-core and/or under performing operations, raising another $7.5 million in
cash.
IES EXPECTS TO GENERATE BETWEEN $30 MILLION AND $40 MILLION OF FREE CASH FLOW IN
FISCAL 2003.
IES will continue to work diligently to maximize cash flow generation. In
addition to focusing on an efficient base business and controlling capital
expenditures, IES is proactive in reviewing and implementing tax planning
opportunities. As a result of effective tax planning, IES expects to reduce cash
taxes paid in 2003 and 2004 and expects this to improve the Company's free cash
flow and contributes to IES' expectation to generate between $30 million and $40
million in free cash flow. This is an increase over the original guidance given
in December of at least $20 million to $30 million in free cash flow.
FINANCIAL REENGINEERING
Across all three phases of IES' strategic plan, IES is reengineering the
Company's capital structure. IES is utilizing its free cash flow to set a solid
foundation for the future. The Company reduced debt by $39.1 million in fiscal
2002, and in August of 2002, it began a two million share common stock
repurchase program. Through March 31, 2003 IES has repurchased about 1.1 million
shares under the program, further confirmation of management's belief that IES
is on the right track and positioned to generate significant free cash flow. The
Company plans to continue to retire debt over the next two to three years as
long as the price of IES' debt remains attractive, and plans to reduce total
debt levels to under $200 million from its $249 million level today.
10
IES had a $150 million credit facility led by JP Morgan that was undrawn. On May
27th, 2003, IES extended its facility for an additional two years from May 2004
to May 2006. At the time of the extension, IES reduced the size of its facility
from $150 million to $125 million in keeping with the Company's more
conservative capital structure. However, there is an accordiaon feature in the
facility such that IES can increase the facility to $150 million. At the time of
the extension, the covenant requirements for IES' Debt to EBITDA ratio were
changed from 3.50x in June 2003 to 3.75x in June and there after it was changed
from 3.25x to 3.75x in September, 3.5x in December and down to 3.25x in June
2004 and thereafter. The EBIT to Interest coverage ratio was changed from 2.50x
in June to 2.00x and up to 2.25x in September and then up to 2.50x in March 2004
and thereafter. In addition, the provisions of the extension limit the amount of
outstanding debt and capital stock that can be repurchased to the lesser of $70
million or $30 million plus 50% of cumulative net income if there is no
outstanding balance on the facility. If there is an outstanding balance on the
facility it is the lesser of $50 million or $30 million plus 50% of cumulative
net income. Additionally, capital stock purchases are limited to $20 million in
aggregate.
IES has not drawn on the current facility since April 2002 and as of March 31st,
2003, IES had $26.1 million in cash on its balance sheet. Current cash levels
combined with the lack of current financing needs allowed IES to reduce its
facility to $125 million. Reducing the facility saved IES approximately $160,000
at the time of the extension and will save the Company approximately $160,000
each year through 2006 in annual commitment fees for the undrawn portion of the
facility.
PHASE II - ONE COMPANY. ONE PLAN.
With Back to Basics in place and its benefits ongoing, management moved to Phase
II of its strategic plan, One Company. One Plan. The primary goal of One
Company. One Plan. is to achieve a higher level of integration among the
operating units. Even with the divestiture of under-performing subsidiaries and
the combination of some subsidiaries, IES can further streamline the
organization and recognize significant value from increased integration. The
focus of Phase II is instituting a regional structure, implementing a unified
financial planning and reporting system, unifying employee programs and
incentives, further improving the Company's safety record, generating savings
through a centralized procurement program and servicing customers on a more
national basis. Early results indicate that the program is on track to be as
successful as Back to Basics.
Regional Structure
IES has implemented a regional structure with six Regional Operating Officers
reporting directly to the Chief Operating Officer, Rick China and the Chief
Executive Officer, H. Roddy Allen. For 2003, corporate planning was done on a
regional basis and incentive plan goals are based on regional targets. This has
already created a stronger team environment within each region; the subsidiaries
are more frequently sharing customers and jointly executing projects.
Financial Reporting and Planning System
The financial planning and reporting system, Forefront, has been implemented at
70% of the Company's subsidiaries. This system allows IES direct access to
detailed subsidiary financials at any time and gives each subsidiary enhanced
project management tools. The system has already helped IES to shorten the
monthly financial closing process by two to three days.
Employees
IES has established a common healthcare plan throughout the Company. In
addition, IES has put in place a common field incentive and bonus plan focused
on overall corporate performance, as well as regional performance. IES'
executive incentive plan, while discretionary, is structured so that executives
and subsidiary leaders may receive up to a target bonus compensation when IES
achieves certain levels of profitability.
Safety
IES' focus on safety is generating continuously improving performance.
Recordable accidents, a key safety measure, have dropped from 9.72 per 100
employees in fiscal 2000 to 3.04 per 100 employees in the first half of 2003, as
shown in Exhibit 8 below. The
11
industry average is approximately eight recordable accidents per 100 employees
according to the Bureau of Labor Statistics, so IES has improved to less than
half the industry average. In addition to protecting its workers, this should
lead to lower insurance costs.
EXHIBIT 8
PHASE II INITIATIVES PRODUCING TANGIBLE RESULTS
IES' RECORDABLE ACCIDENTS ARE LESS THAN HALF THE INDUSTRY AVERAGE.
RECORDABLE ACCIDENTS
(per 100 employees)
(BAR CHART)
2000 9.72
2001 6.41
2002 4.65
2003 YTD 3.04
Source: Company records.
Procurement
The national procurement initiative is generating positive results. At the end
of fiscal 2001, IES began forging relationships and alliances with
manufacturers, service providers and distributors. The relationships have
created more consolidated purchasing on the part of IES and the benefits include
improved pricing, volume-based rebates, increased service commitments, funding
of IES company-wide in-house procurement tools and partial sponsorship of
Company events. As part of this initiative, IES implemented a system that allows
the Company to track the majority of the goods and services purchased. In 2001,
IES could only track 30% of its procurement spending. Today that percentage is
over 70% and IES' goal is to reach over 90% by the end of 2003. In 2002, IES
earned $2.1 million in volume based incentives and, as a result of this
initiative, has reduced the direct cost of goods and services purchased. IES
expects increased benefits from the program during this fiscal year.
Customers
IES is committed to managing relationships with nation-wide customers and
providing services to larger customers across the country. IES maintains a
customer database so projects across all subsidiaries are tracked and the data
is available in one centralized location. This database is particularly
important due to IES' unique triangular relationship with its customers. IES
typically works for a general contractor; however, the ultimate customer is the
end user, such as Walgreen's or 3M. It is key for IES to maintain and foster
relationships with both of these groups and it has become a particular focus of
the Company.
12
PHASE III - CONTINUED GROWTH
Phase III will be implemented as market conditions begin to improve. However,
IES will consider compelling growth opportunities as they present themselves, as
was the case with Riviera Electric in Colorado. With the implementation of
Phases I and II, the foundation for effective growth is substantially in place.
The Company is more streamlined and efficient and is functioning more as a
unified organization than a federation of different entities.
The Company's acquisition and expansion plans will be strategically focused and
will occur at a manageable pace, with strategic fit and acquisition quality
being the drivers of the process.
In the case of Riviera, the state of Colorado is projected to have 7% compound
annual growth in construction spending over the next three years, which is over
three times the projected U.S. construction growth level. Previously, IES did
not have a strong presence in Colorado. Backlog for work to be completed in the
state of Colorado was $7.7 million as of December 31, 2002. Riviera had backlog
of $23 million in December of 2002 and at the beginning of calendar 2002, (prior
to the bankruptcy filing of the previous owner, Encompass Services), Riviera had
backlog of approximately $48 million. IES believes over time it will be able to
build that backlog back up since Riviera had not added significant projects
since July 2002 as a result of Encompass' financial difficulties.
EXHIBIT 9
GROWTH IN CONSTRUCTION SPENDING IN COLORADO
COLORADO IS EXPECTED TO GROW THREE TIMES AS FAST AS THE OVERALL U.S.
CONSTRUCTION MARKET.
Year Ended September 30,
--------------------------------------------------------- '02-'05
(Dollars in Billions) 2002 2003E 2004E 2005E CAGR
---------- ---------- ---------- ---------- ----------
CONSTRUCTION IN COLORADO $ 11.0 $ 11.1 $ 12.1 $ 13.5
Growth Rate -5.5% 0.6% 9.4% 11.5% 7.0%
Source: F.W. Dodge December 2002.
CAGR = Compound Annual Growth Rate.
Riviera has locations in Denver, Colorado Springs, Loveland, Boulder,
Silverthorne, Eagle, and Aspen, Colorado and provides electrical contracting
services to the commercial, industrial, service and retrofit markets.
In calendar 2002, Riviera had strong financial performance, with revenues of $84
million, and pro forma EBITDA of $7.6 million. Riviera has historically
generated gross margins between 19.5% and 21.5% and has been able to keep SG&A
as a percentage of revenues between 10.5% and 11.0% for an operating income
margin of 8.5% to 10.5%. Given the current condition of Riviera and the
depressed backlog levels as a result of the stress Encompass' financial
difficulties created, it is unlikely that Riviera will be able to generate
comparable returns in 2003. However, IES expects at this time that the
transaction will be accretive to earnings in fiscal 2003 and the acquisition
will return to its prior performance over time. IES filed a Form 8-K with the
SEC on May 12, 2003 which includes the audited financial statements for Riviera
Electric.
13
Recent Financial Results and Guidance
- --------------------------------------------------------------------------------
IES REPORTED EARNINGS OF $0.09 PER SHARE, WITHIN THE GUIDANCE RANGE FOR THE
SECOND QUARTER OF 2003.
The Second Quarter
The Company posted earnings for the fiscal second quarter ended March 31, 2003
of $0.09 per share versus $0.08 per share a year ago. The $0.08 a year ago is
prior to a restructuring charge of $0.03. Results for the quarter were within
the previously issued guidance of $0.08 to $0.12 per share. Revenues were $343.1
million versus $356.5 million a year ago. This was a 3.7% decline reflecting
$12.2 million of lost revenues on divested or closed subsidiaries that were
included in revenues for the second quarter last year, but not during the second
quarter this year, and unfavorable weather conditions in the northeast and the
south.
Highlights of the second quarter included:
* SG&A as a percentage of revenue fell 130 basis points to 10.9% of revenues
from 12.2% one year ago.
* $187 million of new larger project work was added to backlog.
* Free cash flow generation of $12.6 million. Free cash flow is cash flow
from operations less capital expenditures and management believes it is a
good measure of cash available for shareholders.
* Through March 31, IES has repurchased 1.1 million shares under its stock
repurchase program announced last August.
IES added $187 million of new larger project work, which is defined as projects
greater than $300,000, to backlog during the second quarter compared to $155
million added during our first fiscal quarter of 2003 and $108 million added in
our second fiscal quarter of 2002. Backlog at the end of the second quarter of
2003 was $798 million compared to $766 million at the end of the first fiscal
quarter of 2003 and $783 million at the end of the second fiscal quarter of
2002.
$187 MILLION OF NEW LARGER PROJECT WORK WAS ADDED TO BACKLOG IN Q2 2003.
Review of New Projects in the second quarter:
* $28 million of manufacturing and heavy industrial projects
* $22 million of high-rise hotel and condominium and mid-rise apartment
projects
* $21 million of work at retail centers
* $21 million of work at schools and community centers
* $20 million of work at office buildings
* $13 million of new healthcare projects
* $8 million of wastewater treatment facility work
The $28 million increase in manufacturing and heavy industrial projects is a
significant increase to that category from 7% of total backlog in the first
quarter of fiscal 2003 to 9% of backlog in the second quarter. In addition the
$20 million increase in office building projects increases that category from 5%
of total backlog in the first quarter of fiscal 2003 to 7% of total backlog in
the second quarter.
14
IES REPORTED EARNINGS OF $0.10 PER SHARE, AT THE TOP OF THE GUIDANCE RANGE FOR
THE FIRST QUARTER OF 2003.
The First Quarter
The Company posted earnings for the fiscal first quarter ended December 31, 2002
of $0.10 per share versus $0.02 per share a year ago. The $0.02 a year ago is
prior to a charge for adoption of SFAS 142 and a restructuring charge. Results
for the quarter were at the top of the previously issued guidance of $0.06-$0.10
per share. Revenues came in at $348.6 million versus $375.2 million a year ago.
This was a 7% decline reflecting divestitures of non-core assets in the fourth
quarter of 2002, a significant slow down in telecommunications work versus a
year ago and continued weakness in the commercial and industrial construction
market. See Exhibit 10 below for a detailed breakdown of the decrease in
revenues versus the first quarter of 2001. IES continued to have record
performance from its residential division, as the residential construction
market remains quite robust. IES' residential revenues were $76.9 million for
the first quarter of 2003 versus $67.1 million for the period one year ago which
is a 14.6% increase.
EXHIBIT 10
Q1 2003 VERSUS Q1 2002 CHANGES IN REVENUES
- -----------------------------------------------------------------
(Dollars in Millions) Change in Revenues
- -----------------------------------------------------------------
Divestitures ($14)
Telecommunications ($10)
Commercial/Industrial ($12)
Residential/Other $8
- -----------------------------------------------------------------
Highlights of the first quarter included:
* SG&A as a percentage of revenue fell over 200 basis points to 11.1% of
revenues from 13.3% one year ago.
* $155 million of new larger project work was added to backlog.
* Operating margin increased 170 basis points to 3.7%.
* Free cash flow was positive at $0.7 million in a quarter that normally uses
cash. Free cash flow is cash flow from operations less capital expenditures
and management believes it is a good measure of cash available for
shareholders.
Backlog for the quarter was down to $776 million versus a record $801 million in
the fourth fiscal quarter of 2002. This is a typical seasonal decline. The
decline in SG&A expense and the generation of free cash flow continues to
demonstrate the success of the Company's Back to Basics program. SG&A expense
for the quarter was $38.6 million versus $49.8 million a year ago, a decrease of
22.5%.
$155 MILLION OF NEW LARGER PROJECT WORK WAS ADDED TO BACKLOG IN Q1 2003.
Review of New Projects in the first quarter:
* $33 million of high-rise hotel, condominium and mid-rise apartment projects
* $24 million of new healthcare projects
* $20 million of wastewater and water treatment facility work
* $19 million of work at retail centers
* $17 million of work at school and community centers
* $11 million of manufacturing and heavy industrial projects
* $7 million of work at office buildings
The $20 million increase in wastewater and water treatment facilities is
significant and increased that category from 2% of backlog to 4% of backlog.
15
Fiscal Q3 2003 and Full-Year 2003 Financial Guidance
For the third fiscal quarter, management expects to earn between $0.14 and $0.20
per share. Guidance for the full year fiscal 2003 is unchanged at $0.53 to $0.60
per share with free cash flow (cash flow from operations less capital
expenditures) of $30 to $40 million.
EXHIBIT 11
QUARTERLY EPS TRENDS YEAR-TO-DATE
- ----------------------------------------------------------
2001 2002* 2003
- ----------------------------------------------------------
Q1 - Dec $0.17 $0.02 $0.10 A
Q2 - Mar $0.20 $0.08 $0.09 A
Q3 - Jun $0.26 $0.19 $0.14-$0.20 E
Q4 - Sep $0.08 $0.22
-------- -------- ---------------
Full Year $0.70 $0.50 $0.53 - $0.60 E
- ----------------------------------------------------------
* Excludes all one-time charges and charges related to
a cumulative effect of change in accounting principle.
16
Company Overview
- --------------------------------------------------------------------------------
Founded in 1997 to consolidate the electrical contracting business, IES quickly
grew to become the largest provider of electrical services in the industry with
revenues of approximately $1.5 billion. IES provides a broad range of electrical
services including designing, building and maintaining both low and high voltage
electrical systems for commercial, industrial, municipal, utility, and
residential customers.
EXHIBIT 12
IES' GEOGRAPHIC DIVERSITY OF BACKLOG - 03/31/03
(PIE CHART)
Southeast 36%
South 31%
Northwest 3%
Northeast 6%
Mid Atlantic 13%
Midwest 4%
Southwest 7%
IES' national presence mitigates the region specific economic slowdowns. IES'
presence in the southwest and in Florida has been particularly beneficial
through this most recent construction decline because these areas were less
impacted than some of the other regions of the U.S. Since 1997, much of the
Company's revenues have been derived from the fast growing Sunbelt states. These
states stand to benefit from expected favorable population movement over the
next decade.
A diverse revenue mix- The Company services a wide variety of customers which
also cushions it from sector declines. The impact of a slowdown in a particular
industry tends to be muted when compared to its smaller, more geographically
concentrated competitors. In addition, IES' expertise in a variety of industries
allows it to be flexible and to share its expertise across regions. For
instance, with the recent increase in healthcare construction spending, one of
the Company's subsidiaries, whose specialty is healthcare facilities
construction, trained and aided other IES subsidiaries so the Company is able to
perform complex healthcare projects across the U.S.
17
EXHIBIT 13
IES' DIVERSITY OF CLIENTS HAS SERVED IT WELL IN A TOUGH ECONOMIC ENVIRONMENT
CURRENT MIX OF BACKLOG - 3/31/03
(BAR CHART)
Hotels/Condos 13%
Health Care 13%
Utilities 12%
Institutions 13%
Apartments 8%
Airports 7%
Heavy Industry/Manufacturing 9%
Other Commercial 5%
Retail 5%
Office Buildings 7%
Highway 4%
Communications 2%
Government 1%
Service 1%
Nationwide presence- The Company's nationwide presence and name recognition
helps it to compete for larger, national contracts with customers that operate
throughout the U.S. This represents a growing market and IES has made
significant progress in pursuing these sizable accounts. A few of IES' current
national customers include Wal-Mart, Marriott, Nordstrom's, Intel, Starbucks,
Ryland Homes and Pulte Homes. Given its size, IES still maintains customer
diversity because no single customer accounts for more than 10% of total
revenues.
Additionally, IES believes its size and national service offering uniquely
positions it as the only single source non-union electrical contracting service
provider able to execute projects on a national basis. IES is able to take on
very large, and complex projects often with a national scope that would strain
the capabilities and resources of most of its competitors.
Strong growth opportunities- The Sunbelt focus, as well as market share gains,
and customer satisfaction have helped IES grow organically about 3% faster than
the construction industry as a whole over the last several years. Over 50% of
business is from repeat customers. Currently, over 70% of the Company's revenues
come from sunbelt states. According to F.W. Dodge, in 2003 sunbelt states are
projected to have slightly positive growth versus a 2% decline across the entire
U.S. In 2004, Sunbelt states are projected to have a 6% growth rate versus 5%
for the entire U.S.
18
Access to Resources - Access to resources is key to success especially in this
difficult environment. Many of IES' competitors have reduced access to both
bonding capacity and capital, which is constraining their ability to effectively
compete and bid on many jobs. As a result of size and track record, IES has more
than adequate capacity. This, in conjunction with IES' access to a $125 million
credit facility, provides a significant competitive advantage over most of its
local competitors. IES is able to bid on larger projects that require bonding
and working capital.
Proprietary Systems and Processes - IES has proprietary systems and processes
which help the Company bid on projects, manage projects once they have been
awarded and maintain and track customer information. In addition, IES has
developed and perfected techniques and processes for installation on a variety
of different projects including its prefabrication process that have been
implemented throughout the organization. Through the consolidation of over 85
entities, IES has taken the best practices and leveraged those systems and
processes across the entire organization for best in class practices.
Utilization of Prefabrication Processes - IES' size and 100% merit shop
environment has allowed the firm to quickly implement best practices across the
Company as it relates to prefabrication. IES has invested in and utilizes
prefabrication facilities to pre-assemble electrical components that can later
be installed on site. This is safer, more cost effective and more efficient for
IES and the customer. IES has prefabrication centers strategically located to
service the U.S. for larger scale projects.
19
Operations Overview
IES has two principal operating segments (1) Commercial/Industrial and (2)
Residential. For the year ended September 30, 2002, the Commercial/Industrial
segment accounted for approximately 81% of revenues and Residential made up the
remainder. Exhibit 14 below illustrates IES' revenue by type of work over the
past 5 years and shows the increase in communications work in 2000 and 2001 and
then the fall-off as the communications infrastructure was overbuilt. Note that
the Commercial/Industrial segment data for segment reporting purposes contains
both the communications and the service and maintenance business segments, which
had previously been reported separately. Residential revenues increased 11%,
while Commercial/Industrial revenues declined in 2002 as a result of the 18%
decrease in commercial and industrial construction spending in 2002.
EXHIBIT 14
HISTORICAL REVENUES BY TYPE
REVENUE BY TYPE
(Dollars in Millions)
1998 1999 2000 2001 2002 6 Months 2003
- ---------------------------------------------------------------------------------------------------
Commercial and Industrial $238 $716 $1,127 $1,120 $1,002 $459
Residential $111 $176 $251 $257 $282 $135
Service and Maintenance $35 $69 $132 $136 $119 $52
Communications $3 $74 $163 $180 $72 $46
Segment data for the last three fiscal years is detailed on the following page
in Exhibit 15.
20
EXHIBIT 15
OPERATING SEGMENT DATA
- -----------------------------------------------------------------------------------------------
(Dollars in Millions) % Chg. % Chg.
2000 2001 2001/2000 2002 2002/2001
- -----------------------------------------------------------------------------------------------
Revenues
Commercial and Industrial $1,421.4 $1,435.8 1.0% $1,193.4 -16.9%
Residential 250.9 257.4 2.6% 282.0 9.6%
Gross Profit
Commercial and Industrial $244.8 $249.1 1.8% $159.9 -35.8%
Residential 55.0 58.5 6.4% 61.7 5.5%
Operating Income
Commercial and Industrial $89.8 $99.9 11.2% $36.5 -63.5%
Residential 29.9 26.1 -12.7% 34.6 32.6%
Gross Profit Margin
Commercial and Industrial 17.2% 17.3% 0.7% 13.4% -22.8%
Residential 21.9% 22.7% 3.7% 21.9% -3.7%
Operating Income Margin
Commercial and Industrial 6.3% 7.0% 10.1% 3.1% -56.0%
Residential 11.9% 10.1% -14.9% 12.3% 21.0%
- -----------------------------------------------------------------------------------------------
The Commercial/Industrial margins over the 2001-2002 period experienced
substantial decline as a result of the slowing in the economy and construction
spending. Over that time period, higher margin projects in backlog were replaced
with lower margin jobs as the bidding environment became more competitive and
the number of new projects declined.
While over 70% of IES' work is from new construction, when there is a decrease
in construction spending, renovation and service work increases because
businesses and individuals modify or renovate the old in favor of building new
facilitates. That trend is demonstrated in the increase in IES' revenues from
renovation work from 19% in 2001 to 22% in 2002. However, that trend appears to
be changing and in the first six months of fiscal 2003 with new construction
actually increasing to 73% of total revenues and only 19% from renovation and 8%
from service and maintenance. See Exhibit 16 on the next page.
21
EXHIBIT 16
SHIFT IN REVENUE MAKE-UP
RENOVATION WORK INCREASED IN 2002 AS A RESULT OF A REDUCTION IN NEW CONSTRUCTION
REVENUE BY TYPE
- -----------------------------------------------------------------------------
2001 2002 6 Months 2003
- -----------------------------------------------------------------------------
New Construction 72% 69% 73%
Renovation 19% 22% 19%
Service and Maintenance 9% 9% 8%
- -----------------------------------------------------------------------------
Commercial/Industrial
IES' Commercial/Industrial business provides design and installation of
electrical systems (both low and high voltage) as well as providing ongoing
service and maintenance. Commercial projects include: high-rise structures such
as hotels, apartment buildings, condominiums and office building; retail stores
and centers; hospitals and healthcare facilities; schools and community centers
including stadiums and arenas; and projects specifically related to low voltage
installations including communications. Industrial projects include:
manufacturing and heavy industrial facilities; distribution centers; utility and
power generation, including substations and power line installation;
high-technology centers; water and wastewater treatment facilities; government
and military installations; airports; and highway projects. Below is a list of
IES' top general contractor customers in the Commercial/Industrial market and
the top end customers sorted alphabetically. IES typically works for a general
contractor although in some cases the Company does work directly for the end
user. IES is awarded work as a result of both of these relationships and the
Company is focused on fostering relationships and maintaining customer
satisfaction with the end customer as well as the general contractor.
22
EXHIBIT 17
TOP COMMERCIAL/INDUSTRIAL CUSTOMERS
- --------------------------------------------------------------------------
End Customers General Contractors
- --------------------------------------------------------------------------
3M Austin Company
Blue Cross/Blue Shield Batson-Cook
Four Season's Hotels Beers Construction
Gaylord Entertainment Boran Craig Barber
Hilton Hotel Corporation Bovis Construction
Home Depot Bradbury & Stamm Construction
Honda Brasfield & Gorrie
Hyatt Corporation Centex Construction
Intel English Construction
Kohl's HC Beck
Marriott International Hensel Phelps Construction
Midlothian Energy Hubbard Construction Group
Nissan Kraft Construction
Omni Hotel Lemoine Company
Publix Manhattan Construction
Ritz Carlton Hotel Company MB Kahn Construction
Six Continents Metric Construction
Target R.J. Griffin & Company
Walgreen's Robbins & Morton
Wal-Mart Whiting Turner Construction
- --------------------------------------------------------------------------
After IES completes the work on these projects the Company is in the best
position to provide ongoing service and maintenance. It is common for IES to
take on long-term service contracts with end customers.
Residential
IES is the largest residential electrical contractor in the country. IES'
residential segment is composed of three different types of projects: single
family homes, often tract homes with entire subdivisions built at one time;
high-end single family custom homes, which are often quite large and typically
include the latest trends in security and technology; and multifamily low rise
apartments, condominiums and town homes. IES works for some of the largest
single family and multifamily developers in the country. See Exhibit 18 for IES'
top customers by residential project type sorted alphabetically.
23
EXHIBIT 18
TOP RESIDENTIAL CUSTOMERS
- --------------------------------------------------------------------------------
Single Family Multifamily
- --------------------------------------------------------------------------------
Ashton Woods Homes Apartment Builders LTD
Beazer Homes Bovis Construction
First Texas (Broyd, Inc.) Camden Development
Gateway Homes (Champion Enterprises) Donohoe Construction
Gehan Homes Dwayne Henson and Associates
Grand Homes Fairfield Development
Kaufman & Broad Gibralter Construction Company
Kimball Hill Homes Global Construction Company
Lennar Homes Greystar Development
Mansions Custom Homes JPI Construction
Newmark Homes Lowder Construction Company
Perry Homes Morgan Group
Plantation Homes (McGuyer Home Builders) The Norsourth Corp.
Pulte Homes Peachtree Residential
Royce Homes Picerne
Ryland Homes Postwood Builders (Long Lake)
Torrey Homes (D. R. Horton) Pride Builders
Trendmaker Homes (Weyerhaeuser) Spanos Construction
Weekley Homes TCR Bissonnet Construction
Whitco Construction Company
- --------------------------------------------------------------------------------
Residential construction in 2002 and early 2003 has been particularly robust.
Record low interest rates are driving demand for new homes, creating record
levels of residential construction spending.
24
Organizational Systems, Processes and Controls
Overview
IES has in place an integrated system of internal controls, including management
of operations, information systems and financial activities. These controls
complement the regional operating structure established under the Company's One
Company. One Plan. strategy and are designed to provide a framework of
procedures, monitoring systems and certifications that enable the Company to
ensure compliance with company policies as well as applicable rules and laws.
Although IES management believes an effective structure is in place to manage
the business there are inherent risks in the contracting industry especially as
it pertains to fixed bid contracts that sometimes experiences fade in
profitability over the life of the contract. Although the structure and controls
are in place to minimize this and other risks, there is no guarantee that IES
will not experience financial difficulties as a result of these risks. See the
disclosure statement on page 4 for additional risk factors.
Management structure
The Company's Executive Committee, comprised of the Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Chief Technology and
Procurement Officer, Senior Vice President of Operations and Senior Vice
President of Human Resources, monitors the Company's operations and its progress
on the three-phase strategy.
The Executive Committee is supplemented by a regional operating structure
consisting of six geographically based regions. The regions are led by Regional
Operating Officers ("ROOs") that report directly to the Company's Chief
Operating Officer and Chief Executive Officer. Each ROO is supported by a
Regional Controller ("RC"), that is responsible for monitoring the financial
aspects of operations at each of the subsidiaries within the region. Together
the ROO and RC maintain control and consistent application of policies and
procedures throughout the Company. Together they provide a control environment
to address financial operating results and issues, as well as upcoming events,
opportunities or concerns, and carry out company initiatives.
At the end of each quarter, the regions host a series of "Home and Away"
meetings. The CEO, COO, CFO, Regional Operating Officers and the Presidents of
the subsidiaries attend these Home & Away meetings. Every other quarter, regions
conduct these meetings at or near their "home" locations and on opposite
quarters attend an "away" meeting at the home office in Houston. These meetings
facilitate face-to-face sharing of results, events, opportunities and concerns
and allow for sharing of best practices and cross-selling among the
subsidiaries.
Information Systems
All of the Company's locations are joined on a common Wide Area Network ("WAN").
This platform enables the Company to access and monitor the computer servers at
each subsidiary location and facilitates efficient communication across the
Company. Stringent controls are in place limiting access to the data stored on
each location's server.
The Company is approximately 70% complete in the implementation of a fully
integrated Enterprise Resource Planning ("ERP") system known as Forefront. The
Company expects
25
that this implementation will be substantially complete by December 2003. This
system, while allowing real time access to subsidiary and project data,
facilitates the implementation of common and consistent financial controls
throughout the Company.
The Company's ERP system is complemented by consolidation software known as the
Financial Manager's Workbench. The implementation of this software is
substantially complete and is already used for contract analysis and budgeting.
Timely access to data - The Company monitors the performance of each of its
subsidiaries monthly, and compiles an internal report that discusses each
subsidiary's operations compared to key operating metrics. Included in these
metrics is a comparison to budgeted results, prior results, change in gross
margin and operating income percentages, change in headcount, accounts
receivable and performance measures such as days sales outstanding. The Company
also maintains an evolving contract status report for work in progress ("WIP
report") that details the financial data for every significant contract in
progress throughout the Company. This WIP report contains the updated contract
prices, cost estimates, percentage completion calculations, and calculations for
the variance between revenues and billings on a job-by-job basis.
The Company utilizes the Financial Manager's Workbench, a component of the firms
Enterprise Resource Planning system, to conduct detailed analyses on the WIP
report data and other operating metrics and presents financial reports,
including a "Rack and Stack" report that lays out each subsidiary compared to
its other IES peers. These reports are used by the management team to conduct
financial review meetings, semi-monthly Regional Operating Officer meetings and
the quarterly Home and Away meetings.
Real-time response - As the Company monitors the performance of each subsidiary,
certain metrics may indicate a potential for problems at a particular location.
These indices include a decline in operating results or a turnover in subsidiary
management. In this event, the subsidiary is placed "at watch." The subsidiary
is monitored closely and, if management deems necessary, the subsidiary is
placed "at risk." The "at risk" program involves bi-weekly operational and
financial meetings with the subsidiary management, regional management and
certain members of IES management, including the Company's Chief Operating
Officer. The subsidiary's operations are closely monitored and the home office
must approve any new work that is bid.
Certifications
The information obtained from these meetings and reports provides the Company
with a strong platform to support its financial certification process. Section
302 of the Sarbanes-Oxley Act of 2002 ("SOX") requires the Company's Chief
Executive Officer and Chief Financial Officer to certify the accuracy of the
quarterly and annual financial statements of the Company. The purpose of the
control environment and financial monitoring is to provide the Company's
management with information that enables them to accurately and reliably make
that certification. In this vein, each subsidiary president and controller
provides a certification to IES management, and each Regional Operating Officer
and Regional Controller provides a similar certification to management. These
internal certifications include the scope, definitions and expectations outlined
in the Sarbanes-Oxley certifications. The certification process includes a
detailed positive affirmation as to the knowledge of the accuracy of presented
operational results, fraud, theft and controls in place. Each certification is
signed and reviewed each fiscal quarter, then presented to IES management to aid
in the certification process required by SOX. These certifications are not a new
control in response to the SOX. In fact, the Company has required quarterly
certifications for many years and annual certifications since the inception of
the firm.
26
Under section 404 of the SOX, the Company's Chief Executive Officer and Chief
Financial Officer will be required to assess annually on the effectiveness and
reliability of the Company's internal control environment. To comply with this
regulation, the Company established a five-phased approach to defining,
documenting and testing its internal control framework. The five phases include
defining the Company's system of internal controls, establishing a core working
group to implement the project, assessing the current state of its internal
controls, filling any gaps in the framework with industry best practices, and
testing the controls to ensure they are effectively working. While final rules
detailing when and how certifications are to be made are not yet known, the
Company is continuing to press forward with its documentation and gap analysis.
Currently the Company is in phase three of its five phase project for fiscal
2003.
Internal audit program
IES utilizes all of its corporate resources to monitor the Company's operations.
The Company has in place an internal audit program that requires each subsidiary
to undergo an internal audit at least once every three years. In addition to
these routine audits, internal audits may occur as a "surprise" event or if the
subsidiary is placed in the "at risk" program. The internal audit reports are
distributed to the subsidiary's management, the executive committee and to the
Company's Audit Committee of the Board of Directors. Audit findings are
addressed and a revisit is performed six months after the initial internal audit
to ensure compliance.
Ethics hotline
IES has established a confidential toll-free hotline for the purpose of
reporting known or suspected events of theft, fraud or other financial abuse.
The hotline is monitored by a third party and reported to the Company. Reported
incidents are communicated to the proper management to investigate. The reported
incidents, results of investigations and corrective actions taken are
communicated to the Company's Audit Committee.
Operational policies and procedures
IES has established and published operating guidelines in accordance with
Generally Accepted Accounting Principles and applicable laws, as well as the
Company's best practices. These guidelines encompass all aspects of operational
and financial reporting, from the estimating and bidding process to the
financial reporting process. The controls over the estimating and bidding
procedures allow each location to select the projects for bid, but increasing
levels of approval from Regional and Executive management are required based on
the size and type of job before the bid can be finalized and submitted.
Subsidiaries are limited by the size of job they may undertake based on their
backlog and ability to manage additional growth. Subsidiaries are further
restricted from undertaking non-standard work or work outside of their technical
expertise. This level of management oversight and approval extends through the
term of the contract once it is awarded, and is covered in the operational
meetings held throughout the Company.
Financial policies and procedures
Financial controls are established and published in a manual provided to
regional management. These financial controls include accounting policies in
accordance with Generally Accepted Accounting Principles that address revenue
recognition, credit
27
and cash management, financial accounting standards and business
responsibilities. Adherence to these policies is verified by assertions made by
each location's management, regional management, internal audit and by control
checks performed at the Company's corporate headquarters. Financial controls
also include requirements for processing data, storing records and segregating
of duties. Monthly operating results are transmitted via a standardized model
that utilizes automatic data checks to ensure the accuracy and reliability of
the data presented. These checks ensure high integrity in the internal reports
used by management.
28
The IES Management Team
- --------------------------------------------------------------------------------
IES is fortunate to have a wealth of talent as a result of acquiring over 80
companies, many of them leading operators in their regions. Currently, 8 of the
13 officers, have previously served as presidents of acquired subsidiaries.
H. "Roddy" Allen, P.E.- became Chief Executive Officer and President of IES in
October 2001. Mr. Allen originally was President of H.R. Allen, which was
acquired by IES in 1998. Since joining IES, Mr. Allen has held the following
positions:
* 2001 to present: Chief Executive Officer and President
* 2001-2001: Chief Operating Officer
* 2000-2001: Senior Vice President of Eastern Operations
* 1998-2000: Regional Operating Officer, President of H.R. Allen
Richard L. China- became Chief Operating Officer in October 2001. Prior to
serving in the COO capacity, Mr. China was President of IES Communications and
also served as a Regional Operating Officer. Mr. China joined IES in 1999
through the acquisition of Primo Electric Company, where he served as President.
William W. Reynolds- has been the Chief Financial Officer and Executive Vice
President since June 2000. Mr. Reynolds joined IES after serving as Vice
President and Treasurer of Peoples Energy Corporation from 1998 to 2000. From
1997 to 1998, Mr. Reynolds was Vice President and Project Finance Corporate
Officer for MCN Energy Group, Inc. Prior to that, he spent seventeen years with
BP Amoco in a variety of positions both internationally and domestically.
Britton Rice- has served as the Chief Technology and Procurement Officer and
Senior Vice President of IES since 2000. Mr. Rice also serves as the President
of Britt Rice Electric, L.P., an IES subsidiary. Mr. Rice joined IES in 1999
through the acquisition of Britt Rice Electric, where he was the founder and
President.
Margery M. Harris- serves as Senior Vice President of Human Resources. She
joined the company in 2000 from Santa Fe Snyder Corporation, where she served as
Vice President of Human Resources. Prior to that, Ms. Harris was a lead
consultant with Hewitt Associates, a total compensation consulting firm.
Robert Stalvey- serves as Senior Vice President of Operations and acting
Regional Operating Officer of Region 6. He previously served as Vice President
of Special Projects. In 1976, he became co-owner of Ace Electric, one of the
original 16 IES subsidiaries.
Curt L. Warnock- has served as Vice President, Law of IES since October 2002 and
prior to that as Assistant General Counsel to the Company. Previously, Mr.
Warnock spent twenty years with two other publicly traded Fortune 1000 companies
in various legal positions.
David A. Miller- has been Vice President and Chief Accounting Officer of IES
since October 2002. Between January 1998 and October 2002 he served as Financial
Reporting Manager, Assistant Controller, Controller and Chief Accounting Officer
of IES. Before joining IES, Mr. Miller held various positions in public
accounting and private industry. Mr. Miller is a Certified Public Accountant.
29
Daniel Petro- has been the Senior Regional Operating Officer of Region 1 since
2002. Prior to that Mr. Petro was the President of the Eastern Region. Mr. Petro
was the President and founder of Amber Electric from 1979 to 1998, when Amber
Electric was acquired by IES. Prior to this he was an Electrical Instructor for
Orange County Schools.
Thomas Stalvey- became Regional Operating Officer of Region 2 in 2000. In 1975,
Mr. Stalvey founded and served as President of Ace Electric. In 1998, Ace
Electric was acquired by IES. Mr. Stalvey taught Electric Technology for
Valdosta Technical College from 1970 to 1972 and was Residential Construction
Manager for Wilkes Construction Company from 1971 to 1975.
Richard Humphrey- has been Regional Operating Officer of Region 3 since 2001. He
was the President of Arc Electric from 1972 to 2000. Arc Electric was acquired
by IES in 1998.
Ernest P. Breaux, Jr.- is the Regional Operating Officer of Region 4. He was a
project engineer /estimator for Ernest P. Breaux Electrical from 1968 to 1974,
Vice President from 1974 to 1983 and President & CEO from 1983 to 2001. Ernest
P. Breaux Electrical was purchased by IES in 2001.
Miles Dickinson- became the Regional Operating Officer of Region 5 in 2002. Mr.
Dickinson was President of Delco Electric from 1979 to 2001. Delco Electric was
acquired by IES in 1999. Mr. Dickinson was an estimator and project manager for
McGuire Electric from 1974 to 1977 and served as Vice President of McGuire
Electric from 1977 to 1978.
30
Corporate Governance
- --------------------------------------------------------------------------------
Since IES' initial public offering ("IPO") in 1998, the Company has divided the
duties of Chairman of the Board and Chief Executive Officer between two
individuals. As a governance policy, this prevents a concentration of control
with one person. Since the IPO, Byron Snyder has served as Chairman; and since
late 2001, H. Roddy Allen has served as Chief Executive Officer.
The IES board has significant representation from independent directors. The
Board of Directors consists of 7 directors of which four are independent
directors. The inside board members include H. Roddy Allen, the President and
Chief Executive Officer, Rick China, the Chief Operating Officer and Byron
Snyder, the Chairman of the Board and founder of IES. This stands in contrast to
the original board in 1998, consisting of 11 members, many of whom were among
the sixteen owners of the founding companies.
The Board has four committees: Audit, Compensation, Nominating/Governance and
Executive. The Audit, Compensation, and Nominating/Governance committees are
entirely composed of independent directors.
During fiscal 2002, IES implemented an evaluation process in which those
reporting directly to the CEO and the Board of Directors review the CEO
anonymously and rate him on key business and management strengths. These ratings
are reviewed by the board and serve as an early warning system for any potential
problems that might arise.
IES also maintains a growing internal audit function, an important consideration
for a Company that has grown through acquisition and has numerous subsidiaries
across the country. Currently every subsidiary (about 60, given that some of the
acquisitions have been merged with other subsidiaries) undergoes an internal
audit at least once every three years with approximately 20 internal audits
performed each year.
31
Industry Overview
- --------------------------------------------------------------------------------
The electrical and low voltage contracting industry is highly fragmented, with
over 70,000 electrical contractors operating across the United States in 2001.
Most are small, private "mom and pop" operations. Three quarters of these
companies have less than 10 employees, according to the U.S. Department of
Commerce. Only a little over 1% have more than 100 employees and just a handful,
like IES, have thousands of workers and the advantages of significant scale. IES
has approximately 13,000 employees. Below is a table that shows the breakdown of
the size of electrical contractors based on number of employees. It clearly
demonstrates the significant fragmentation of the industry. Interestingly some
of IES' largest competitors in each individual local market are companies with
20 to 100 employees.
EXHIBIT 19
ELECTRICAL CONTRACTORS SEGMENTED BY NUMBER OF EMPLOYEES
- ----------------------------------------------------
# of Employees Percent of Electrical Contractors
- ----------------------------------------------------
1 to 4 57.0%
5 to 9 19.4%
10 to 19 12.3%
20 to 49 7.7%
50 to 99 2.2%
100 or more 1.4%
------
100.0%
- ----------------------------------------------------
Source: Electrical Contractor Magazine
At the end of 2001, the electrical contracting market was estimated at $95
billion. As the largest electrical contractor with $1.5 billion in revenues, IES
still only represents 1.6% of the market (see Exhibit 20 below).
EXHIBIT 20
ANNUAL ELECTRICAL CONTRACTOR REVENUES ARE APPROACHING $100 BILLION
ELECTRICAL CONTRACTOR SALES
- -------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001
- -------------------------------------------------------------------------------
53 59.3 64.3 72 76.5 89.5 95
- -------------------------------------------------------------------------------
Source: Electrical Contractor Magazine
32
Virtually all construction and renovation work in the U.S. requires electrical
contracting services. Electrical and low voltage work usually runs between
8%-12% of the cost of a commercial or industrial project and 5%-10% of the cost
of a residential project. This percentage is substantially higher in high-end
residential home building. Growth in the electrical contracting market has
accelerated in recent years due to:
o Complexity as a result of the increase in computer, security and
communications systems in the workplace. Computers, printers and on-line
access are a part of virtually every workstation, increasing the electrical
and low voltage demands placed on a given system. New telecommunications
systems have also increased the burden, as well as networking of local and
wide area computer systems.
o The pace of electrical renovation of existing structures has increased,
primarily as a result of more advanced computer and communications systems.
o There has been an increased focus on cost savings through energy management
systems.
o New electrical codes for power efficiency and safety.
o National energy standards have been revised stressing energy-efficient
lighting fixtures and other equipment.
o As the workplace has become more complex and more dependent on technology,
there has been an increased demand for backup power systems.
o Increased security requirements have also increased demand and
sophistication of security systems.
o Increased demand for preventive maintenance to minimize disruption of
power.
The electrical contracting industry had a difficult year in 2002 due to the
reduction in commercial and industrial construction spending. Commercial and
industrial construction, which accounts for about 80% of revenues for IES, was
down 18% according to figures from F.W. Dodge. The strong demand in the late
1990's and in early 2000 increased the supply of providers, which made the
decreases in 2002 and 2003 particularly difficult due to the excess supply of
electrical service providers. However, the growth drivers for the industry
detailed above are long-term in nature and will continue to generate demand for
electrical contracting services throughout the next several decades.
Residential construction, driven by record low mortgage rates, drove spending on
single family housing construction up an estimated 15% in 2002 according to F.W.
Dodge. The low rates are so appealing that many people who would typically be
apartment dwellers are becoming first-time homeowners instead. This is causing
the single family home and condominium market to remain quite strong in 2003,
but it is beginning to cause some slowdown in multifamily construction.
Specialty Contractors
IES is currently the only "pure play" publicly traded electrical contractor in
operation. Specialty contractor competitors provide other services besides
electrical contracting such as mechanical contracting and building maintenance
as well as other services. Below is an overview of some of the publicly traded
specialty contractors. The only specialty contractors listed below that IES
typically competes directly against are EMCOR and
33
Quanta Services. However, EMCOR's primarily union affiliation tends to keep
their focus in the northern cities and areas with a high level of union
affiliation where IES has less of a presence and Quanta Services primarily
services the power utility sector and this type of work is less than 10% of IES'
revenues while it represents over 50% of Quanta's revenues.
Information below is from public filings of each company and is included herein
as summary. Further information on these companies may be obtained from those
filings.
EMCOR- operates internationally with locations in the United States, Canada,
Europe, the Middle East and Far East and South Africa. Through over 75 operating
companies, EMCOR employs 28,000 workers and generated almost $4 billion in
revenues in 2002. The company divides its business into three segments; (1)
mechanical construction (2) electrical construction and (3) facilities
management. Facilities services make up about 17% of revenues and the rest are
approximately equally divided between electrical and mechanical work. EMCOR's
work tends to be concentrated in larger cities due to its union affiliation.
This has allowed the company to win public transportation work to buffer it
during the economic slowdown.
Quanta Services- Quanta is a leading provider of specialized contracting
services, with a focus on the electric power, telecommunications, broadband
cable and gas pipeline industries. The company provides a range of services,
including the design, installation, maintenance and repair of many types of
network infrastructure. Quanta has offices in 40 states, and operations in all
50 states, as well as Canada. Revenues in 2002 were approximately $1.75 billion
with 53% from electric and gas utility, 16% from telecom, 12% from cable
television and 19% from other.
Comfort Systems- The company focuses almost exclusively on the heating,
ventilation and air conditioning market (known as HVAC) and is a leading
provider of these services, and had 2002 revenues of $820 million. In 2002, the
company sold 19 union affiliated subsidiaries representing about $650 million in
revenues to EMCOR. Comfort Systems now has 84 locations in 57 cities throughout
the US.
Dycom- is headquartered in Palm Beach Gardens, Florida and is one of the larger
telecommunications services companies. The company has 28 operating
subsidiaries. Dycom currently serves over 100 different customers in 48 states,
with approximately 5,700 employees, based out of more than 200 locations
throughout the United States. Revenues for fiscal year 2002 exceeded $600
million. In 2002, Dycom acquired Arguss, a provider of infrastructure services
to cable and telecommunications companies, for about $85 million, expanding its
geographical footprint within its existing customer base. For the six months
ended January 2003 the revenue breakdown was 88.3% telecommunications services,
9.1% underground utility locating and 2.6% construction and maintenance to
electrical utilities.
Below is a chart that illustrates how IES' revenue and focus differs from some
of its closer publicly traded peers. Notice that IES' is the only publicly-
traded pure play electrical contractor in the group. In addition, IES is the
only publicly-traded completely merit shop electrical contractor, giving it
significantly more flexibility to utilize prefabrication and pre-assembly on
projects which saves money and time.
34
EXHIBIT 21
IES VERSUS ITS CLOSEST PEERS
- ----------------------------------------------------------------------------------------
Revenues(1)
------------------------------ MRR (2) as Unionized
EC MC FS Other % of Revenue Workforce
- ----------------------------------------------------------------------------------------
IES 100% - - - 31% -
Comfort Systems 3% 90% - 7% 48% -
EMCOR (3) 29% 44% 17% 10% 40% 75%
Quanta Services 53% - - 47% 40% 39%
- ----------------------------------------------------------------------------------------
(1) EC= Electrical Contracting, MC= Mechanical Contracting, FS= Facilities Services
(2) MRR = Maintenance, Repair and Renovation
(3) Not pro forma for the recnet acquisition of a facilities services business.
Competitors
Typically, IES bids against a larger national competitor like EMCOR or one of
the larger private players such as Rosendin or Fisk on national projects or
large regional projects such as an airport. In addition to publicly traded
peers, IES competes against private regional players that range from $40 million
to over $300 million in revenues, as well as smaller local competitors the can
range anywhere from $2 million to $30 million in revenues. There are 10 private
electrical contractors with revenues between $200 million and $600 million. Of
those players, approximately seven are companies IES competes against and, even
then, it is only occasionally and in selected markets. There are another 100 or
so companies in the $40 million to $200 million range and of those companies IES
competes against approximately 40 in local and regional markets as well as in
certain segments such as utilities or multifamily residential.
On larger single site projects, IES is likely to bid against large regional or
local players with access to bonding and capital such as Fisk (owned by Tyco),
Red Simpson or Infrasource, to name a few. However, on smaller projects that
make up the greatest percentage of IES' revenues, the Company's largest
competitors are often smaller private electrical contractors that have anywhere
from $2 million to $30 million in revenue. These smaller players are actually
the organizations IES bids against most frequently in each local market.
To provide more insight into the competitive landscape, the next few pages
contain a review of the larger private electrical contractors over $200 million,
as well larger players that IES competes against. Included in the description
are the areas where IES competes against these companies. Surprisingly, as can
be seen from the data, many of the larger regional players rarely compete with
IES for work. This is most likely the result of the geographic markets served.
Larger Private Electrical Contractors and Major IES Competitors
MYR Group is the largest private electrical contractor, with 2001 revenues of
about $627 million and subsidiaries in 19 states. The company is headquartered
in Illinois and provides a complete range of power line and electrical services
for electric utilities, telecommunications providers, commercial and industrial
facilities and government
35
agencies across the US. The company was founded in 1891 and has a unionized
workforce. IES rarely competes against MYR Group.
Cupertino Electric, Inc. is headquartered in Sunnyvale, CA and had 2001 revenues
of $509 million, making it the 6th ranked electrical contractor in the country
according to ENR Magazine. Cupertino was founded in 1954 and is a provider of
electrical infrastructure for technology companies and energy systems, including
distributed generation for data centers and other high tech facilities. The
company is unionized and competes with IES occasionally in northern Nevada.
SASCO is headquartered in Cerritos, CA and generated 2001 revenues of $450
million with over 1,800 employees. The company has eight offices on the West
Coast extending from Southern California to the Northwest. SASCO's top market
segments include commercial, health care, semiconductor, industrial, data and
special systems. SASCO has a unionized workforce and IES rarely competes in this
company's markets.
Massachusetts Electric Construction Company was founded in 1928 and is
headquartered in Boston, MA. In 2001, revenues were $377 million, making it the
7th ranked electrical contractor in the country according to ENR Magazine. The
company specializes in mass transit, railroads, high technology, production
facilities and electric power generation. The company employs over 1,800
electricians and is licensed to work in 29 states. The company is unionized and
is not a major competitor to IES due to our market focus.
Rosendin Electric, Inc. was founded in 1919. Rosendin now has over 1500
employees and branch offices in: San Francisco and Los Angeles, CA; Mesa, AZ;
Rio Rancho, NM; Hillsboro, OR. Sales in 2001 were approximately $365 million. In
2000, the employees completed their buyout of the family-owned business to
become the largest employee-owned electrical contractor. The Company is
unionized. IES competes with Rosendin in Arizona and New Mexico, especially on
larger projects.
Fisk Corp. was founded in 1913 and in November 2000 Tyco acquired it. Fisk is
headquartered in Houston, TX with offices in Dallas, Las Vegas, Miami, New
Orleans and San Antonio. Fisk offers voice, data and electrical services to
large national and global accounts. Fisk designs, installs and maintains a
variety of electrical and data systems including large complex projects. The
company is unionized. IES competes with Fisk in several markets including
Florida and Texas.
Xcelecom is headquartered in Hamden, CT and provides specialty contracting
services and voice-data-video integrated solutions to customers in the Eastern
United States from Boston to Florida. The company has annual revenue topping
$300 million and operations stretching over ten states and sixteen locations.
Xcelecom is owned by UIL Holding Corp and is unionized. IES does not typically
compete in the same local markets.
Unity International Group has headquarters in New York and London and has been
in business for over 50 years. Revenues in 2001 totaled about $248 million. The
company provides integrated structured cabling, electrical and information
technology consulting services to clients worldwide. Services include the
design, installation and maintenance of telecommunications, life safety and
security systems, audio-visual and mechanical systems. Unity is union and is not
a significant competitor to IES because it does not typically service the same
geographic area as IES.
36
Sachs Electric Company is based in St. Louis, MO and generated 2001 revenues of
approximately $232 million. The company was founded in 1925. It now operates on
a national scale with over 1,400 employees. Key markets include power and
industrial, telecommunications, technology and commercial (design and build).
Sachs is a union contractor and IES rarely competes in this market.
Infrasource (formerly Exelon) had 2001 revenues of $230 million and is
headquartered in Pennsylvania. The company provides electrical contracting
services and specializes in electrical utility services, industrial services,
metering, underground work and telecommunications. The company is a union
contractor and IES competes with them on power and utility projects across the
south.
Morrow-Meadows Corp. is headquartered in Walnut, CA and generated revenues in
2001 of about $201 million. The company was founded approximately 40 years ago
and is now a full service electrical contractor. The company is active in
datacom and design engineering. Morrow-Meadows is union and IES competes with
them in southern CA.
Red Simpson Inc. had 2001 revenues of approximately $194 million and is
headquartered in Alexandria, LA. The company provides power line services in the
southern US. The company's major focuses are transmission, overhead and
underground distribution substations and fiber optics. Red Simpson is a
non-union contractor and is a competitor to IES in the utility markets in Texas,
Louisiana, Alabama, Oklahoma and Florida.
Bergelectric Corp. was founded in 1946 and is headquartered in Los Angeles, CA.
The company provides a full range of electrical contracting services throughout
the Western United States and Mexico. In addition to its headquarters, the
company maintains branch offices in San Diego, Las Vegas, Portland, Denver and
Orlando. In 2001, the company posted revenues of $186 million. The company is
non-union and competes with IES in Southern, CA.
Consolidated Electrical Services (CES) is headquartered in Boston, MA and
generates annual revenues of about $160 million. Founded in 1976, CES has
offices in Boston, Hartford, Charleston, Charlotte, Denver and Raleigh and over
1,000 employees. A full service electrical contractor, CES specializes in voice
and data engineering, voice and network cabling, computer power systems, fire
alarm systems, energy management and security systems. The company is unionized
and competes with IES in Massachusetts.
Wayne J. Griffin Electric, Inc. is headquartered in Holliston, MA and has
operations in New England, Alabama, Georgia, and North Carolina. Revenues in
2001 were $112 million. The company was founded in 1978 and offers services in
several markets, including industrial and high technology buildings,
correctional facilities, office buildings and hotels, healthcare facilities,
schools and universities, clean rooms, biotech facilities and others. Griffin is
a non-union company and competes with IES in New England and along the southeast
coast.
ANECO Electrical Construction is headquartered in Clearwater, FL and has 2001
revenues of $112 million. The company provides electrical and telecommunications
services to the commercial, entertainment, industrial, medical, government and
institutional building markets in the southeastern US. The company is non-union
and is a competitor to IES primarily in Florida.
Inglett & Stubbs had 2001 revenues of $110 million. The company was founded in
1955 and is headquartered in Mableton, GA. The company's historical focus has
been metropolitan Atlanta and Georgia for commercial, industrial, and
institutional projects. In
37
recent years expertise on high-end technically difficult projects has led to
Inglett & Stubbs providing services on a national basis. In addition to the
company's low and medium voltage electrical expertise, it offers mechanical,
building automation, environmental control system services, water treatment,
custodial, building security, landscaping, and minor general construction
services. The company is non-union and competes with IES in Georgia.
Commonwealth Electric is headquartered in Lincoln, Nebraska with locations in:
Omaha, NE; Des Moines, IA; and Phoenix and Tucson, AZ. Revenues are estimated to
be approximately $100 million. The company's specialties include service
projects, power plants, industrial, commercial and institutional work. The
company is unionized and competes with IES primarily in Arizona.
Miller Electric Co. generated $83 million in revenues in 2001. The company has
about 800 employees and has offices in Miami and Gainesville, FL and Florence,
SC. Top markets include commercial, industrial, hospitals, government, highways
and bridges. Miller is a union contractor and competes with IES in Florida and
on the southeast coast.
Ludvik Electric Co. is a Denver-based Engineering and Construction firm founded
in 1980. The company has performed work throughout the Western United States and
Hawaii, with 2001 revenues of $83 million. Projects include government,
infrastructure, commercial, industrial, health care, pharmaceutical, food and
beverage, and defense enterprises. The Company is non-union and competes with
IES in Colorado.
Patrick Power Corporation is headquartered in Ft. Lauderdale, FL and has 2001
revenues of approximately $70 million. Specialties include general power and
lighting, power generation, medium and high voltage systems, telecommunications
systems, fire alarm systems and lighting protection systems. The company is
non-union and competes with IES in Florida.
38
Outlook and Valuation
- --------------------------------------------------------------------------------
After years of economic expansion, the economy stumbled in 2002 and the
beginning of 2003. The events of September 11th have demonstrated that
unpredictable events can have a significant impact on the economy and on equity
valuations. Below is an analysis of F.W. Dodge's outlook for construction
spending by sector in 2003 through 2005. Although 2003 is expected to remain
soft, 2004 and 2005 are projected to be much stronger in commercial and
industrial spending according to F. W. Dodge with particular strength in markets
where IES has expertise and a history of earning higher profits, which include
office buildings, retail centers, hotels and manufacturing facilities.
Residential construction spending is expected to remain quite strong with only a
1% decrease in 2003 and the multi-family construction outlook for 2004 is quite
strong with 12% expected growth.
Market Outlook
Below is an analysis of F.W. Dodge's expectations for 2003 through 2005, as well
as some analysis on profitability trends through cycles in the construction
industry. This analysis should help investors to develop projections for IES'
performance over the next few years.
F.W. Dodge anticipates that construction spending will slide very slightly,
about 2%, in fiscal 2003, as single-family housing construction takes a
well-deserved rest after a record few years with a 1% decrease. Total
non-building construction is projected to decline 7% in fiscal 2003 and overall
non-residential building construction is projected to be down 2%. There are
several factors impacting construction this year. With declining incomes and tax
dollars, states and the federal government have seen projected budget surpluses
quickly turn to deficits and public works and institutional building projects
are expected to slow this year. Additionally, while interest rates are now low
and have recently come down, F.W. Dodge believes some upward movement is
possible before the end of 2003 that will cause single-family housing starts to
flatten out. As for commercial and industrial, a weak employment market may
dampen demand for new projects.
Both 2004 and 2005 are projected to be strong years for construction spending
with an overall growth rate of 4% in 2004 and 4% in 2005. Double-digit growth is
expected in the commercial and industrial construction markets where the
majority of IES' revenue is generated.
EXHIBIT 22
U.S. CONSTRUCTION MARKET OUTLOOK
- ----------------------------------------------------------------------------
Market Growth
-----------------------------------
2003 2004 2005
- ----------------------------------------------------------------------------
Non-Residential Building Construction -2% 6% 11%
Residential Building Construction -1% 5% 0%
Non-Building Construction -7% 1% 4%
- ----------------------------------------------------------------------------
Source: F.W. Dodge March 2003 Construction Marketing Forecasting.
39
EXHIBIT 23
CONSTRUCTION GROWTH BY MARKET RANKED BY IES' Q2 2003 GROSS MARGIN
ALMOST ALL OF IES' MOST PROFITABLE MARKETS ARE PROJECTED TO HAVE SIGNIFICANT
GROWTH IN 2004.
- ----------------------------------------------------------------------------------------------------------
Company Data - 2003 Q2 F.W. Dodge - Proj. Const. Spending by Mkt.(1)
-------------------------------- ---------------------------------------------------
Gross Margin Rank % of
within Segments Revenue 2002 2003 2004
- ----------------------------------------------------------------------------------------------------------
Commercial
Office Buildings 1 5.9% -26% -4% 16%
Other Commercial 2 4.3% -6% -3% 11%
Retail 3 5.9% -5% -1% 6%
Hotels and Condos 4 9.4% -20% 6% 17%
Health Care 5 10.3% 13% -1% 1%
Institutions 6 8.9% -3% -1% 0%
Communications 7 4.5% Data Not Available
Industrial
Highway 1 1.9% 0% -3% 2%
Manufacturing 2 9.5% -36% -1% 19%
Airport 3 2.1% -2% 1% 7%
Distribution 4 1.3% -18% -5% 14%
Power and Utility(2) 5 6.5% -47% -30% -15%
Water 6 1.8% 15% -3% 4%
Government 7 0.6% -4% -6% 9%
Residential
Multifamily 1 6.1% 1% 4% 12%
Single family 2 13.5% 15% -1% 3%
Shading = Significant growth markets in '04
- ----------------------------------------------------------------------------------------------------------
(1) Source is December 2002 F.W. Dodge report and IES company data. Based on
December 31, year end.
(2) Market data includes electrical services provided for communications
infrastructure which is why this market is in such a state of decline.
Comparison of Historical Profitability Performance versus Construction Spending
The industry is highly cyclical and driven to a large extent by construction
expenditures. Growth in construction expenditures can vary widely from year to
year and this will have a flow-through impact on profitability of electrical,
mechanical and other contractors. Below is an analysis of 30 years of
construction expenditures compared to the EBITDA margins of Fluor Corp. (Fluor
has a long history of data and serves as a good proxy for the industry). IES
believes the analysis demonstrates that in periods of growth, overall
profitability and profit margins expand, and when construction spending
contracts, profit margins contract as well. Construction spending, the primary
business driver for IES and its competitors, is highly variable and can
significantly impact profitability.
40
EXHIBIT 24
COMPARISON OF HISTORICAL COMPANY PERFORMANCE AND CONSTRUCTION SPENDING
PROFIT MARGINS FOR CONSTRUCTION FIRMS EXPAND AND CONTRACT AS CONSTRUCTION
SPENDING INCREASES AND DECREASES.
CONSTRUCTION SPENDING VS. FLUOR'S EBTDA MARGIN FROM 1971 - 2002
(BAR CHART)
YR/YR CHANGE IN TOTAL
FLR EBITDA MARGIN CONSTRUCTION SPENDING
----------------- ---------------------
1971
1972 7.8% 14%
1973 11.0% 9%
1974 10.6% -7%
1975 10.0% -1%
1976 9.7% 21%
1977 9.6% 28%
1978 6.8% 14%
1979 6.4% 6%
1980 5.7% -11%
1981 7.2% 4%
1982 8.3% 0%
1983 8.9% 24%
1984 6.1% 10%
1985 nmf 10%
1986 0.9% 6%
1987 0.9% 4%
1988 3.2% 1%
1989 3.9% 3%
1990 3.7% -9%
1991 4.1% -6%
1992 5.3% 9%
1993 4.5% 8%
1994 4.9% 9%
1995 5.3% 3%
1996 5.4% 8%
1997 3.6% 9%
1998 5.0% 12%
1999 5.3% 10%
2000 4.5% 6%
2001 2.9% 5%
2002 3.3% 1%
Source: Historical Fluor Corp. records and F.W. Dodge Construction Industry
Data.
Exhibit 25 below illustrates IES and its peers' gross profit margin and
operating income margin over the past four years. With the exception of EMCOR,
which generates over 20% of its revenues from facilities maintenance, which is
not tied to construction, the profit margins have contracted as commercial and
industrial construction spending has declined.
EXHIBIT 25
PROFIT MARGINS HAVE DECLINED AS COMMERCIAL AND INDUSTRIAL CONSTRUCTION SPENDING
HAS DECLINED
Gross Profit Margin Operating Income Margin
------------------------------------ ------------------------------------
1999 2000 2001 2002 1999 2000 2001 2002
------ ------ ------ ------ ------ ------ ------ ------
IES 21.2% 17.9% 18.2% 15.0% 9.3% 3.9% 4.8% 2.8%
EMCOR 10.2% 10.3% 11.5% 12.2% 2.0% 2.3% 2.6% 2.9%
Com. Syst. 21.4% 17.9% 17.9% 17.7% 6.8% 1.3% 3.3% 2.0%
Dycom 27.1% 25.5% 25.6% 23.3% 13.0% 13.5% 11.8% -4.9%
Quanta 23.2% 23.1% 20.5% 13.5% 13.3% 12.6% 12.4% -8.9%
Based on historical analysis and assuming F.W. Dodge forecasts are correct, it
is possible that IES could see a 150 to 300 basis point improvement in operating
income margin over the course of 2004 and 2005.
IES' Weighted Average Cost of Capital ("WACC")
IES believes its cost of capital, based on a WACC analysis, is between 10% and
12%. WACC is the combination of IES' cost of debt, which is approximately 6%
after tax, and its cost of equity, which is between 15% and 16%. The calculation
is based on using the average beta for the specialty contracting industry
adjusted for the appropriate capital structure, a risk free rate of 3.75%, which
is the recent 10-year government bond rate, and a target debt to capital ratio
for IES of between 35% and 45%. The WACC analysis also includes a 3.1% size
premium for cost of equity given that IES is a small cap stock.
41
IES relative to its Peers
IES is the largest electrical contractor, however there are a number of
companies in similar market segments that are good proxies for valuation. IES'
publicly traded peers include EMCOR, Comfort Systems, Quanta Services and Dycom.
An analysis of select engineering and construction firms including Fluor, Shaw
Group and Jacobs Engineering has also been included because, although these
firms have a slightly different business model, they operate in the same markets
as IES and face a similar market environment.
EXHIBIT 26
IES PEER ANALYSIS
- --------------------------------------------------------------------------------------------------------------
EPS Price/Earnings
Fiscal Recent --------------------- --------------------------
Company Symbol Year Price 2002 2003E 2002 2003E
- ---------------------------------------------------------------------------------------------------------------
Specialty Contractors
EMCOR EME Dec. $48.75 $4.07 $4.38 12.0x 11.1x
Comfort Sys. FIX Dec. 2.46 0.14 NA 17.6 NA
Dycom DY Jul. 12.10 0.53 0.25 22.8 48.4
Quanta PWR Dec. 4.68 0.35 0.27 13.4 17.3
- ---------------------------------------------------------------------------------------------------------------
Median 15.5x 17.3x
Mean 16.4x 25.6x
- ---------------------------------------------------------------------------------------------------------------
Engineering/Construction
Shaw Group (2) SGR Aug. $11.45 $2.26 $1.34 5.1x 8.5x
Flour FLR Dec. 33.83 2.13 2.22 15.9 15.2
Jacobs JEC Sep. 39.59 1.98 2.29 20.0 17.3
- ---------------------------------------------------------------------------------------------------------------
Median 15.9x 15.2x
Mean 13.6x 13.7x
- ---------------------------------------------------------------------------------------------------------------
IES(1) IES Sep. $6.20 $0.50 $0.53-$0.60 12.4x 10.3x - 11.7x
- ---------------------------------------------------------------------------------------------------------------
Source: First Call and various equity analyst reports.
(1) 2002 financial data for IES is before one-time charges of $15.2 million ($9.9 million after
tax) and excludes the impact of SFAS 142.
(2) Shaw Group was not a member of the peer group included in IES' proxy statement.
42
EXHIBIT 27
IES PEER ANALYSIS
- ---------------------------------------------------------------------------------------------------------
Op. Income EBITDA TEV/Op. Inc. TEV/EBITDA Consensus
Company Symbol 2003E 2003E 2003E 2003E Growth Rate
- ---------------------------------------------------------------------------------------------------------
Specialty Contractors
EMCOR EME $128 $152 6.8x 5.7x 15%
Comfort Sys. FIX NA NA NA NA 12%
Dycom DY 22 64 20.4 7.0 13%
Quanta PWR 80 147 9.2 5.0 14%
- ---------------------------------------------------------------------------------------------------------
Median 9.2x 5.7x 14%
Mean 12.1x 5.9x 14%
- ---------------------------------------------------------------------------------------------------------
14%
Engineering/Construction
Shaw Group SGR $115 $160 6.7x 4.8x 13%
Flour FLR 260 340 8.9 6.8 12%
Jacobs JEC 198 238 11.0 9.2 15%
- ---------------------------------------------------------------------------------------------------------
Median 8.9x 6.8x 13%
Mean 8.9x 6.9x 13%
- ---------------------------------------------------------------------------------------------------------
IES(1) IES 13%
- ---------------------------------------------------------------------------------------------------------
Source: First Call, Value Line, various equity analysts reports. Consensus growth rates are from First Call.
(1) 2002 financial data for IES is before one-time charges of $15.2 million ($9.9 million after tax)
and excludes the impact of adopting SFAS 142.
43
Income Statement
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) FYE - September 30,
----------------------------
2000 2001 12/01A 3/02A 6/02A
----------------------------------------------------------------------------
Revenues $ 1,672,288 $ 1,693,213 $ 375,179 $ 356,481 $ 374,819
Cost of services (including depreciation) 1,372,537 1,385,589 317,950 301,780 316,328
----------------------------------------------------------------------------
Gross profit 299,751 307,624 57,229 54,701 58,491
Selling, general and administrative expenses 221,519 214,073 49,773 43,392 39,918
Restructuring charges* -- -- 4,000 1,556 --
Goodwill amortization 13,211 12,983 -- -- --
----------------------------------------------------------------------------
Income from operations 65,021 80,568 3,456 9,753 18,573
Other income (expense):
Interest expense (23,230) (26,053) (6,785) (6,644) (6,337)
Other, net 1,008 (134) (107) (237) (23)
----------------------------------------------------------------------------
Interest and other, net (22,222) (26,187) (6,892) (6,881) (6,360)
----------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 42,799 54,381 (3,436) 2,872 12,213
Provision (benefit) for income taxes 21,643 25,671 (1,623) 806 4,736
----------------------------------------------------------------------------
Net income (loss) before cumulative effect of
change in accounting principle 21,156 28,710 (1,813) 2,066 7,477
----------------------------------------------------------------------------
Cumulative effect of change in
accounting principle -- -- 283,284 -- --
----------------------------------------------------------------------------
Net income (loss) $ 21,156 $ 28,710 ($ 285,097) $ 2,066 $ 7,477
============================================================================
Diluted earnings (loss) per share before cumulative
effect of change in accounting principle $ 0.52 $ 0.70 ($ 0.04) $ 0.05 $ 0.19
============================================================================
Cumulative effect of change in
accounting principle $ 0.00 $ 0.00 ($ 7.13) $ 0.00 $ 0.00
============================================================================
Diluted earnings (loss) per share $ 0.52 $ 0.70 ($ 7.17) $ 0.05 $ 0.19
============================================================================
Diluted shares used in the computation
of earnings (loss) per share 40,410 40,900 39,759 40,002 40,073
Key Margins
Gross Margin 17.9% 18.2% 15.3% 15.3% 15.6%
SG&A Margin 13.2% 12.6% 13.3% 12.2% 10.6%
Operating Margin 3.9% 4.8% 0.9% 2.7% 5.0%
Interest Expense 1.4% 1.5% 1.8% 1.9% 1.7%
Pretax Margin 2.6% 3.2% -0.9% 0.8% 3.3%
Tax Rate 50.6% 47.2% 47.2% 28.1% 38.8%
Net Income Margin 1.3% 1.7% -0.5% 0.6% 2.0%
FYE - Sep.
--------------
9/02A 2002 12/02A 3/03A
------------------------------------------------------------
Revenues $ 368,951 $ 1,475,430 $ 348,577 $ 343,135
Cost of services (including depreciation) 317,786 1,253,844 297,221 294,030
Gross profit 51,165 221,586 51,356 49,105
Selling, general and administrative expenses 41,101 174,184 38,619 37,460
Restructuring charges* -- 5,556
Goodwill amortization -- -- -- --
------------------------------------------------------------
Income from operations 10,064 41,846 12,737 11,645
Other income (expense):
Interest expense (6,936) (26,702) (6,456) (6,343)
Other, net 1,331 964 (90) 175
------------------------------------------------------------
Interest and other, net (5,605) (25,738) (6,546) (6,168)
------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 4,459 16,108 6,191 5,477
Provision (benefit) for income taxes 2,256 6,175 2,384 2,108
------------------------------------------------------------
Net income (loss) before cumulative effect of
change in accounting principle 2,203 9,933 3,807 3,369
------------------------------------------------------------
Cumulative effect of change in
accounting principle -- 283,284 -- --
------------------------------------------------------------
Net income (loss) $ 2,203 ($ 273,351) $ 3,807 $ 3,369
------------------------------------------------------------
Diluted earnings (loss) per share before cumulative
effect of change in accounting principle $ 0.06 $ 0.25 $ 0.10 $ 0.09
===========================================================
Cumulative effect of change in
accounting principle $ 0.00 ($ 7.11) $ 0.00 $ 0.00
===========================================================
Diluted earnings (loss) per share $ 0.06 ($ 6.86) $ 0.10 $ 0.09
===========================================================
Diluted shares used in the computation
of earnings (loss) per share 39,908 39,848 39,472 39,372
Key Margins
Gross Margin 13.9% 15.0% 14.7% 14.3%
SG&A Margin 11.1% 11.8% 11.1% 10.9%
Operating Margin 2.7% 2.8% 3.7% 3.4%
Interest Expense 1.9% 1.8% 1.9% 1.8%
Pretax Margin 1.2% 1.1% 1.8% 1.6%
Tax Rate 50.6% 38.3% 38.5% 38.5%
Net Income Margin 0.6% 0.7% 1.1% 1.0%
Source: Integrated Electrical Services SEC documents
* Restructuring charges are associated with reorganizing the business and are primarily costs associated with reductions in staff.
44
Balance Sheet
- -------------------------------------------------------------------------------------------------------------------
September 30,
(Dollars in Thousands) -------------------------- December 31, March 31,
2001 2002 2002 2003
----------- ----------- ----------- -----------
Assets
Current Assets:
Cash and cash equivalents $ 3,475 $ 32,779 $ 19,062 $ 26,130
Accounts Receivable:
Trade, net of allowance 275,922 237,310 228,310 236,502
Retainage 64,933 62,482 61,844 67,193
Related party 222 153 144 148
Cost and estimated earnings in excess of billings on
uncompleted contracts 62,249 46,314 46,007 45,435
Inventories 21,855 23,651 22,677 21,475
Prepaid expenses and other current assets 23,858 35,041 35,066 34,562
----------- ----------- ----------- -----------
Total current assets 452,514 437,730 413,110 431,445
Property and equipment, net 70,343 61,577 58,899 57,746
Goodwill, net 482,654 198,220 198,005 198,005
Other noncurrent assets, net 27,992 24,112 23,683 24,296
----------- ----------- ----------- -----------
Total assets $ 1,033,503 $ 721,639 $ 693,697 $ 711,492
=========== =========== =========== ===========
Liabilities and Stockholder's Equity
Current Liabilities
Short-term debt and current maturities of long-term debt $ 679 $ 570 $ 467 $ 372
Accounts payable and accrued expenses 164,272 141,398 115,505 126,677
Income taxes payable 700 -- 167 362
Billings in excess of costs and estimated earnings on
uncompleted projects 50,234 51,548 45,383 49,014
----------- ----------- ----------- -----------
Total current liabilities 215,885 193,516 161,522 176,425
Long-term bank debt 12,000 -- -- --
Other long-term debt 872 504 381 305
Senior subordinated notes, net 273,210 247,935 247,932 247,930
Other noncurrent liabilities 2,892 25,252 26,651 28,037
----------- ----------- ----------- -----------
Total liabilities 504,859 467,207 436,486 452,697
Stockholders' Equity:
Preferred stock, $0.1 par value -- -- -- --
Common stock, $0.01 par value 383 385 385 385
Restricted voting common Stock, $0,01 par value 26 26 26 26
Additional paid in capital 428,697 428,427 428,420 427,679
Treasury stock, at cost (9,181) (9,774) (10,795) (11,839)
Retained earnings (deficit) 108,719 (164,632) (160,825) (157,456)
----------- ----------- ----------- -----------
Total shareholders' equity 528,644 254,432 257,211 258,795
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,033,503 $ 721,639 $ 693,697 $ 711,492
=========== =========== =========== ===========
Source: Integrated Electrical Service SEC documents.
45
Statement of Cash Flows
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended September 30, Quarter Ended December 31,
----------------------------------- -------------------------
2000 2001 2002 2001 2002
--------- --------- --------- --------- ---------
Cash Flows from Operating Activities
Net income (loss) $ 21,156 $ 28,710 ($273,351) ($285,097) $ 3,807
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cummulative effect of change in accounting principle -- -- 283,284 283,284 --
Allowance for doubtful accounts 1,768 912 4,324 705 379
Deferred income taxes (177) (4,938) 6,175 -- --
Depreciation and amortization 32,656 30,345 18,633 4,227 3,650
(Gain) loss on sale of property and equipment (145) (287) 1,547 (71) 59
Non-cash compensation charge 5,378 568 1,422 1,422 --
Gain on divestitures -- -- (2,145) -- (26)
Changes in operating assets and liabilities
Increase (decrease) in:
Accounts receivable, net (82,917) 26,163 30,943 6,637 8,401
Inventories (2,900) (4,979) (2,770) (5,622) 873
Costs and estimated earnings in excess of billings on
uncompleted contracts (11,489) (10,785) 14,524 11,745 105
Prepaid expenses an other current assets (1,096) (15,640) (9,824) 3,541 (27)
Other noncurrent assets (4,329) 2,840 3,199 (1,144) 429
Increase (decrease) in:
Accounts payable and accrued expenses 72,763 (37,831) (37,739) (31,537) (10,075)
Billings in excess of costs and estimated earnings on
uncompleted contracts 15,131 (6,414) 3,709 6,904 (6,101)
Other current liabilities (2,880) (250) 172 (452) 167
Other noncurrent liabilities 295 220 11,264 1,219 1,612
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities $ 43,214 $ 8,634 $ 53,367 ($ 4,239) $ 3,253
--------- --------- --------- --------- ---------
Cash Flows from Investing Activities
Proceeds from sale of property and equipment 2,742 1,467 895 170 1,056
Additions of property and equipment (28,381) (25,801) (11,895) (3,942) (2,529)
Purchase of businesses, net of cash acquired (33,225) (233) -- -- --
Sale of businesses -- -- 7,549 -- 1,084
Investments in securities (1,670) (5,599) (300) -- --
Additions to note receivable from affiliate -- (1,250) (583) (583) --
--------- --------- --------- --------- ---------
Net cash used in investing activities ($ 60,534) ($ 31,416) ($ 4,334) ($ 4,355) ($ 389)
--------- --------- --------- --------- ---------
Cash Flows from Financing Activities
Borrowings 63,434 231,744 74,613 44,291 5
Repayments of debt (48,278) (192,811) (97,941) (36,721) (15,835)
Proceeds from sale of interest rate swaps -- -- 4,040 -- --
Purchase of treasury stock -- (10,376) (984) -- (769)
Payments for debt issuance costs -- (5,358) -- -- --
Proceeds from issuance of stock -- 1,038 -- 1,712 18
Proceeds from issuance of stock to employees -- 980 -- -- --
Proceeds from exercise of stock options 3 270 543 4 --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities $ 15,159 $ 25,487 ($ 19,729) $ 9,286 ($ 16,581)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (2,161) 2,705 29,304 692 (13,717)
Cash and equivalents, beginning of period 2,931 770 3,475 3,475 32,779
--------- --------- --------- --------- ---------
Cash and equivalents, end of period $ 770 $ 3,475 $ 32,779 $ 4,167 $ 19,062
========= ========= ========= ========= =========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 23,151 $ 23,793 $ 23,117 $ 475 $ 277
Income taxes 24,832 30,667 5,091 3,383 --
Quarter Ended March 31,
-----------------------
2002 2003
--------- ---------
Cash Flows from Operating Activities
Net income (loss) ($283,031) $ 7,176
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cummulative effect of change in accounting principle 283,284 --
Allowance for doubtful accounts 1,264 661
Deferred income taxes -- --
Depreciation and amortization 8,574 7,341
(Gain) loss on sale of property and equipment (133) (30)
Non-cash compensation charge 1,422 --
Gain on divestitures -- (26)
Changes in operating assets and liabilities
Increase (decrease) in:
Accounts receivable, net 36,128 10,101
Inventories (5,802) 2,075
Costs and estimated earnings in excess of billings on
uncompleted contracts 10,439 1,297
Prepaid expenses an other current assets 4,517 672
Other noncurrent assets 2,971 423
Increase (decrease) in:
Accounts payable and accrued expenses (51,108) (8,277)
Billings in excess of costs and estimated earnings on
uncompleted contracts 3,602 (5,982)
Other current liabilities (465) 362
Other noncurrent liabilities (1,849) 2,998
--------- ---------
Net cash provided by (used in) operating activities $ 9,813 $ 18,791
--------- ---------
Cash Flows from Investing Activities
Proceeds from sale of property and equipment 411 1,540
Additions of property and equipment (5,991) (5,462)
Purchase of businesses, net of cash acquired -- (2,723)
Sale of businesses -- 1,084
Investments in securities (300) (500)
Additions to note receivable from affiliate (583) --
--------- ---------
Net cash used in investing activities ($ 6,463) ($ 6,061)
--------- ---------
Cash Flows from Financing Activities
Borrowings 74,383 27
Repayments of debt (80,046) (16,030)
Proceeds from sale of interest rate swaps 1,530 --
Purchase of treasury stock -- (3,376)
Payments for debt issuance costs -- --
Proceeds from issuance of stock -- --
Proceeds from issuance of stock to employees -- --
Proceeds from exercise of stock options 17 --
--------- ---------
Net cash provided by (used in) financing activities ($ 4,116) ($ 19,379)
--------- ---------
Net increase (decrease) in cash and cash equivalents (766) (6,649)
Cash and equivalents, beginning of period 3,475 32,779
--------- ---------
Cash and equivalents, end of period $ 2,709 $ 26,130
========= =========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 13,366 $ 12,061
Income taxes 4,202 --
Source: Integrated Electrical Service SEC documents.
46
Appendix I - Construction Accounting Primer
- --------------------------------------------------------------------------------
As an electrical contractor, IES uses construction accounting conventions as
prescribed under GAAP accounting. The primary issue surrounding construction
accounting is recognition of revenue from longer-term construction contracts.
With longer-term fixed-price contracts, contractors generally use the percentage
of completion method of accounting. This method requires companies to estimate
the percentage of a project that it has completed work on. There are several
acceptable methods for determining percentage of completion such as: the ratio
of costs incurred to date to the total expected costs at completion, the ratio
of labor hours or dollars incurred to date to the total expected labor hours or
dollars at completion, or any other rationale and systematic method. IES uses
the ratio of costs incurred to date to the total expected costs at completion to
estimate percentage of completion. Generally, if 40% of a project's cost has
been incurred over a 6 month period then the company should recognize 40% of the
revenues and 40% of the profits related to the project. The primary issue in
percentage of completion accounting is the use of estimates for total costs at
completion. If estimates change during a project, the impact of the change in
profitability is recognized in the period in which the estimate is changed. The
following example illustrates how changes in estimates can impact the
profitability across periods.
Example:
* Fixed price contract to be completed over 2 accounting periods.
* Total contract amount equals $1 million.
* Cost of project to contractor is $850,000 for a 15% margin at completion.
COMPANY ESTIMATES ARE CORRECT THROUGHOUT PROJECT
PERIOD 1 PERIOD 2 TOTAL
-------- -------- -----------
Revenue $500,000 $500,000 $ 1,000,000
Cost of Goods Sold 425,000 425,000 850,000
-------- -------- -----------
Gross Profit $ 75,000 $ 75,000 $ 150,000
Gross Margin 15.0% 15.0% 15.0%
THE PROJECT IS COMPLETED AT A HIGHER PROFIT THAN ORIGINALLY ESTIMATED
PERIOD 1 PERIOD 2 TOTAL
-------- -------- -----------
Revenue $500,000 $500,000 $ 1,000,000
Cost of Goods Sold 425,000 400,000 825,000
-------- -------- -----------
Gross Profit $ 75,000 $100,000 $ 175,000
Gross Margin 15.0% 20.0% 17.5%
In the second example above, the original profit estimates are significantly
understated. In period two, the profitability on the project rises as profits
"catch up" to reflect a 17.5% margin over the life of the contract. For
companies with long projects that last for 2 to 3 years, the risk of under- or
overstating revenues and profitability for several quarters exists, but for
companies with an average project life of 2 to 3 months, this risk is
substantially reduced. The average project life at IES is only 6 to 8 months so
any inaccuracies in estimates are corrected fairly quickly. Additionally,
because of IES' size and large number of projects, under- and overestimates
across the Company will tend to offset each other.
47
Under percentage of completion accounting, contract revenue is based on costs
incurred while customer billings may be impacted by other factors such as:
achieving certain milestones, acceptance of completed work by the customer or
some other schedule. Because of this discrepancy, contract revenue recognized is
usually different from the amount billed as the project progresses. When revenue
recognized exceeds customer billings the excess is reported as a current asset
referred to as "costs and estimated earnings in excess of billings on
uncompleted contracts". Sometimes it may be referred to as "underbillings" or
"unbilled receivables" although these are not GAAP terms.
Conversely, when customer billings exceed contract revenue recognized, the
excess is reported as a current liability referred to as "billings in excess of
costs and estimated earnings on uncompleted contracts". Sometimes it may be
referred to as "overbillings" although this is not a GAAP term. When calculating
days sales outstanding underbillings should be added to accounts receivable and
overbillings should be subtracted from accounts receivable.
The other balance sheet term that sometimes causes confusion is retainage. It is
a current asset on the balance sheet that is a subcategory of accounts
receivable. Often some portion of payment is held at the completion of a
contract for some period of time almost like a warranty. The amount of retainage
on a project is determined upfront when the terms of the contract are negotiated
and is typically 5% to 10% of the overall revenue on the project.
48
________________________________________________________________________________
NYSE: IES (C)2003 Integrated Electrical Services, Inc.
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.