UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____to_____.
Commission File No. 1-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0542208
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
1800 West Loop South
Suite 500
Houston, Texas 77027-3233
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding as of July 29, 2003 of the issuer's common
stock was 36,197,715 and of the issuer's restricted voting common stock was
2,605,709.
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and
June 30, 2003............................................................... 2
Consolidated Statements of Operations for the nine months ended
June 30, 2002 and 2003...................................................... 3
Consolidated Statements of Operations for the three months ended
June 30, 2002 and 2003...................................................... 4
Consolidated Statement of Stockholders' Equity for the nine months ended
June 30, 2003............................................................... 5
Consolidated Statements of Cash Flows for the nine months ended
June 31, 2002 and 2003...................................................... 6
Consolidated Statements of Cash Flows for the three months ended
June 30, 2002 and 2003...................................................... 7
Condensed Notes to Consolidated Financial Statements............................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 31
Item 4. Controls and Procedures............................................. 32
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 33
Signatures .................................................................... 34
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
September 30, June 30,
2002 2003
------------ ------------
(Audited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 32,779 $ 40,342
Accounts receivable:
Trade, net of allowance of $6,262 and $5,652 respectively ........... 237,310 245,192
Retainage ........................................................... 62,482 68,090
Related parties ..................................................... 153 121
Costs and estimated earnings in excess of billings on
uncompleted contracts ............................................... 46,314 42,793
Inventories ............................................................. 23,651 20,334
Prepaid expenses and other current assets ............................... 35,041 31,859
------------ ------------
Total current assets ................................................ 437,730 448,731
PROPERTY AND EQUIPMENT, net ............................................. 61,577 55,517
GOODWILL, net ........................................................... 198,220 198,005
OTHER NON-CURRENT ASSETS ................................................ 24,112 23,746
------------ ------------
Total assets ..................................................... $ 721,639 $ 725,999
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of other long-term debt .......... $ 570 $ 307
Accounts payable and accrued expenses ................................... 141,398 140,419
Income taxes payable .................................................... -- 185
Billings in excess of costs and estimated earnings on
uncompleted contracts ............................................... 51,548 44,756
------------ ------------
Total current liabilities ........................................... 193,516 185,667
OTHER LONG-TERM DEBT, net of current maturities ......................... 504 235
SENIOR SUBORDINATED NOTES, net of $3,797 and $3,347
unamortized discount, respectively .................................. 247,935 247,929
OTHER NON-CURRENT LIABILITIES ........................................... 25,252 29,225
------------ ------------
Total liabilities ................................................ 467,207 463,056
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding ...................................... -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
38,439,984 shares issued ......................................... 385 385
Restricted voting common stock, $.01 par value, 2,605,709 shares .... --
issued, authorized and outstanding ............................... 26 26
Treasury stock, at cost, 1,421,068 and 2,260,760 shares, respectively (9,774) (13,113)
Additional paid-in capital .......................................... 428,427 427,690
Retained deficit .................................................... (164,632) (152,045)
------------ ------------
Total stockholders' equity ....................................... 254,432 262,943
------------ ------------
Total liabilities and stockholders' equity ....................... $ 721,639 $ 725,999
============ ============
The accompanying condensed notes to consolidated financial statements are an integral part of
these financial statements.
2
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Nine Months Ended June 30,
----------------------------
2002 2003
------------ ------------
(Unaudited)
Revenues .................................................... $ 1,106,479 $ 1,067,051
Cost of services (including depreciation) ................... 936,058 913,181
------------ ------------
Gross profit ........................................... 170,421 153,870
Selling, general and administrative expenses ................ 133,083 114,272
Restructuring charges ....................................... 5,556 --
------------ ------------
Income from operations ................................. 31,782 39,598
------------ ------------
Other (income)/expense:
Interest expense ....................................... 19,766 19,196
(Gain) loss on sale of assets .......................... (157) 204
Other expense (income), net ............................ 524 (270)
------------ ------------
20,133 19,130
------------ ------------
Income before income taxes and cumulative effect of change in 11,649 20,468
accounting principle
Provision for income taxes .................................. 3,919 7,881
Cumulative effect of change in accounting principle, net
of tax ................................................ 283,284 --
------------ ------------
Net income (loss) ........................................... $ (275,554) $ 12,587
============ ============
Basic earnings (loss) per share:
Basic earnings per share before cumulative effect
of change in accounting principle ..................... $ 0.19 $ 0.32
============ ============
Cumulative effect of change in accounting principle ......... $ (7.10) $ 0.00
============ ============
Basic earnings (loss) per share ............................. $ (6.91) $ 0.32
============ ============
Diluted earnings (loss) per share:
Diluted earnings per share before cumulative
effect of change in accounting principle .............. $ 0.19 $ 0.32
============ ============
Cumulative effect of change in accounting principle
$ (7.10) $ 0.00
============ ============
Diluted earnings (loss) per share ........................... $ (6.91) $ 0.32
============ ============
Shares used in the computation
of earnings (loss) per share (Note 6):
Basic .................................................. 39,877,209 39,188,518
============ ============
Diluted ................................................ 39,877,209 39,297,446
============ ============
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
3
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Three Months Ended June 30,
---------------------------
2002 2003
------------ ------------
(Unaudited)
Revenues ......................................... $ 374,819 $ 375,339
Cost of services (including depreciation) ........ 316,328 321,930
------------ ------------
Gross profit ................................ 58,491 53,409
Selling, general and administrative expenses ..... 39,918 38,193
------------ ------------
Income from operations ...................... 18,573 15,216
------------ ------------
Other (income)/expense:
Interest expense ............................ 6,337 6,397
(Gain) loss on sale of assets ............... (24) 234
Other expense (income), net ................. 47 (215)
------------ ------------
6,360 6,416
------------ ------------
Income before income taxes ....................... 12,213 8,800
Provision for income taxes ....................... 4,736 3,389
------------ ------------
Net income ....................................... $ 7,477 $ 5,411
============ ============
Basic earnings per share ......................... $ 0.19 $ 0.14
============ ============
Diluted earnings per share ....................... $ 0.19 $ 0.14
============ ============
Shares used in the computation
of earnings per share (Note 6):
Basic ....................................... 39,936,914 38,789,237
============ ============
Diluted ..................................... 40,073,939 39,161,593
============ ============
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Restricted Voting
Common Stock Common Stock Treasury Stock Additional Retained Total
-------------------- -------------------- --------------------- Paid-In Earnings Stockholders'
Shares Amount Shares Amount Shares Amount Capital (Deficit) Equity
----------- -------- ---------- -------- ---------- -------- ---------- ---------- -------------
BALANCE, September
30, 2002........... 38,439,984 $ 385 2,605,709 $ 26 (1,421,068) $ (9,774) $ 428,427 $ (164,632) $ 254,432
Issuance of stock
(unaudited)........ - - - - 12,399 76 (20) - 56
Purchase of treasury
stock (unaudited).. - - - - (1,397,183) (6,795) - - (6,795)
Receipt of treasury
stock (unaudited).. - - - - (70,330) (270) - - (270)
Exercise of stock
options (unaudited) - - - - 366,440 2,101 11 - 2,112
Issuance of stock
under employee
stock purchase
plan (unaudited)... - - - - 248,982 1,549 (728) - 821
Net income (unaudited). - - - - - - - 12,587 12,587
----------- -------- ---------- -------- ---------- -------- ---------- ---------- -------------
BALANCE, June 30, 2003
(unaudited)..... 38,439,984 $ 385 2,605,709 $ 26 (2,260,760) $(13,113) $ 427,690 $ (152,045) $ 262,943
=========== ======== ========== ======== =========== ========= ========== =========== =============
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
5
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended June 30,
--------------------------
2002 2003
--------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $(275,554) $ 12,587
Adjustments to reconcile net income to net cash
provided by operating activities, net of acquisitions and divestitures -
Cumulative effect of change in accounting principle .................. 283,284 --
Allowance for doubtful accounts ...................................... 2,385 1,046
Depreciation and amortization ........................................ 12,707 10,931
Loss (gain) on sale of property and equipment ........................ (157) 204
Non-cash compensation expense ........................................ 1,422 --
Gain on divestiture .................................................. -- (26)
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net ........................................ 40,736 156
Inventories ..................................................... (5,713) 3,216
Costs and estimated earnings in
excess of billings on uncompleted contracts ................ 14,266 3,939
Prepaid expenses and other current assets ....................... 9,083 3,375
Other noncurrent assets ......................................... 2,659 1,652
Increase (decrease) in:
Accounts payable and accrued expenses ........................... (40,254) 5,509
Billings in excess of costs and estimated
earnings on uncompleted contracts .......................... 7,006 (10,240)
Other current liabilities ....................................... (539) 185
Other noncurrent liabilities .................................... (4,058) 4,186
--------- ---------
Net cash provided by operating activities .................. 47,273 36,720
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment .............................. 867 1,787
Additions to property and equipment ....................................... (7,545) (7,304)
Purchase of business, net of cash acquired ................................ -- (2,723)
Sale of business .......................................................... -- 1,084
Investments in securities ................................................. (300) (500)
Additions to note receivable from affiliate ............................... (583) --
--------- ---------
Net cash used in investing activities ...................... (7,561) (7,656)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ................................................................ 74,558 37
Repayments of debt ........................................................ (86,331) (16,176)
Proceeds from sale of interest rate swap .................................. 1,530 --
Payments of debt issuance costs ........................................... -- (679)
Purchase of treasury stock ................................................ (523) (6,795)
Proceeds from exercise of stock options ................................... 534 2,112
--------- ---------
Net cash used in financing activities ...................... (10,232) (21,501)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........................... 29,480 7,563
CASH AND CASH EQUIVALENTS, beginning of period ................................. 3,475 32,779
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ....................................... $ 32,955 $ 40,342
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest ............................................................. $ 13,757 $ 12,321
Income taxes ......................................................... $ 4,861 $ 599
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
6
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended June 30,
---------------------------
2002 2003
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 7,477 $ 5,411
Adjustments to reconcile net income to net cash
provided by operating activities, net of acquisitions and divestitures --
Allowance for doubtful accounts .................................... 1,121 385
Depreciation and amortization ...................................... 4,133 3,590
Loss (gain) on sale of property and equipment ...................... (24) 234
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net ...................................... 4,608 (9,945)
Inventories ................................................... 89 1,141
Costs and estimated earnings in
excess of billings on uncompleted contracts .............. 3,827 2,642
Prepaid expenses and other current assets ..................... (312) 2,703
Other noncurrent assets ....................................... 4,566 1,229
Increase (decrease) in:
Accounts payable and accrued expenses ......................... 10,854 13,786
Billings in excess of costs and estimated
earnings on uncompleted contracts ........................ 3,404 (4,258)
Other current liabilities ..................................... (74) (177)
Other noncurrent liabilities .................................. (2,209) 1,188
-------- --------
Net cash provided by operating activities ................ 37,460 17,929
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ............................ 456 247
Additions to property and equipment ..................................... (1,554) (1,842)
-------- --------
Net cash used in investing activities .................... (1,098) (1,595)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings .............................................................. 175 10
Repayments of debt ...................................................... (6,284) (146)
Payments for debt issuance costs ........................................ -- (679)
Purchase of treasury stock .............................................. (523) (3,419)
Proceeds from exercise of stock options ................................. 516 2,112
-------- --------
Net cash used in financing activities .................... (6,116) (2,122)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 30,246 14,212
CASH AND CASH EQUIVALENTS, beginning of period ............................... 2,709 26,130
-------- --------
CASH AND CASH EQUIVALENTS, end of period ..................................... $ 32,955 $ 40,342
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest ........................................................... $ 391 $ 261
Income taxes ....................................................... $ 659 $ 599
The accompanying condensed notes to consolidated financial statements are
an integral part of these financial statements.
7
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW
Integrated Electrical Services, Inc. (the "Company" or "IES"), a Delaware
corporation, was founded in June 1997 to create a leading national provider of
electrical services, focusing primarily on the commercial and industrial,
residential, low voltage and service and maintenance markets.
The accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required for complete
financial statements, and therefore should be reviewed in conjunction with the
financial statements and related notes thereto contained in the Company's annual
report for the year ended September 30, 2002, filed on Form 10-K with the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Actual operating results for the nine
months ended June 30, 2003, are not necessarily indicative of the results that
may be expected for the fiscal year ended September 30, 2003.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a description of these policies, refer to Note 2 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2002.
SUBSIDIARY GUARANTIES
All of the Company's operating income and cash flows are generated by its wholly
owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding 9 3/8% senior subordinated notes due 2009 (the "Senior Subordinated
Notes"). The Company is structured as a holding company and substantially all of
its assets and operations are held by its subsidiaries. There are currently no
significant restrictions on the Company's ability to obtain funds from its
subsidiaries by dividend or loan. The separate financial statements of the
subsidiary guarantors are not included herein because (i) the subsidiary
guarantors are all of the direct and indirect subsidiaries of the Company; (ii)
the subsidiary guarantors have fully and unconditionally, jointly and severally
guaranteed the Senior Subordinated Notes; and (iii) the aggregate assets,
liabilities, earnings and equity of the subsidiary guarantors is substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. As a result, the presentation of separate financial
statements and other disclosures concerning the subsidiary guarantors is not
deemed material.
8
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are primarily used in the Company's revenue recognition of construction in
progress, fair value assumptions in analyzing goodwill impairment, allowance for
doubtful accounts receivable and self-insured claims liability.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The results of the Company's operations, particularly from residential
construction, are seasonal, depending on weather trends, with typically higher
revenues generated during the spring and summer and lower revenues during the
fall and winter. The commercial and industrial aspect of its business is less
subject to seasonal trends, as this work generally is performed inside
structures protected from the weather. The Company's service business is
generally not affected by seasonality. In addition, the construction industry
has historically been highly cyclical. The Company's volume of business may be
adversely affected by declines in construction projects resulting from adverse
regional or national economic conditions. Quarterly results may also be
materially affected by gross margins for both bid and negotiated projects, the
timing of new construction projects and any acquisitions. Accordingly, operating
results for any fiscal period are not necessarily indicative of results that may
be achieved for any subsequent fiscal period.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 establishes requirements for
recognition of a liability for a cost associated with an exit or disposal
activity based with an objective of recording the initial liability at fair
value. The Company adopted SFAS No 146 effective January 1, 2003. The adoption
had no impact on the Company's financial position or results of operations.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure," which
amends SFAS No. 123, "Accounting for Stock-Based Compensation," by providing
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock options and other stock-based employee
compensation. The Company adopted SFAS 148 on January 1,
9
2003. The adoption of SFAS 148 did not have a material impact on the Company's
financial position or results of operations.
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others," ("Interpretation 45"), will significantly
change current practice in accounting for, and disclosure of, guarantees.
Interpretation 45 requires a guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation 45 also expands the disclosures required
to be made by a guarantor about its obligations under certain guarantees that it
has issued. Interpretation 45's disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions are
applicable on prospective basis to guarantees issued or modified after December
31, 2002. The types of guarantees that the Company is party to include surety
bonds and letter of credit. The Company adopted Interpretation 45 effective
January 1, 2003. The adoption does not have a material impact on the Company's
results of operations or financial position.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities," ("Interpretation 46").
The objective of Interpretation 46 is to improve the financial reporting by
companies involved with variable interest entities. Until now, one company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interest. Interpretation 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain of
disclosure requirements apply to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
Company has minority interests in two private equity firms, Enertech Capital
Partners II, L.P. and EPV Holdings LLC, which may fall under this
interpretation. For more information regarding the Company's investments in
these entities, see the Company's Annual Report on Form 10-K for the year ended
September 30, 2002. The Company does not believe the adoption of this statement
will have a material impact on its results of operations or financial position.
STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation arrangements using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 - "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations. Under APB 25, if the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The Company's stock
options have all been granted with exercise prices at fair value, therefore no
compensation expense has been recognized under APB 25. During the nine months
ended June 30, 2002, the Company recorded compensation expense of $1,422 in
connection with a restricted stock award (See Note 8).
10
The following table illustrates the effect on net income and earnings per share
assuming the compensation costs for IES' stock option and purchase plans had
been determined using the fair value method at the grant dates amortized on a
pro rata basis over the vesting period as required under SFAS No. 123 -
"Accounting for Stock-Based Compensation" for the three and nine months ended
June 30, 2002 and 2003 (in thousands, except for per share data):
Three months ended June 30, Nine months ended June 30,
------------------------------- -------------------------------
2002 2003 2002 2003
------------- ------------- ------------- -------------
Net income (loss), as reported............ $ 7,477 $ 5,411 $ (275,554) $ 12,587
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects............. --- --- 875 ---
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects............. 508 302 2,806 1,057
------------- ------------- ------------- -------------
Pro forma net income (loss) for SFAS
No.123................................ $ 6,969 $ 5,109 $ (277,485) $ 11,530
============= ============= ============== =============
Earnings (loss) per share:
Basic - as reported.................... $ 0.19 $ 0.14 $ (6.91) $ 0.32
Basic - pro forma for SFAS No. 123..... $ 0.17 $ 0.13 $ (6.96) $ 0.29
Earnings (loss) per share:
Diluted - as reported.................. $ 0.19 $ 0.14 $ (6.91) $ 0.32
Diluted - pro forma for SFAS No. 123... $ 0.17 $ 0.13 $ (6.96) $ 0.29
2. ACQUISITIONS
On February 27, 2003, the Company completed the acquisition of Riviera Electric
LLC accounted for as a purchase. The total consideration paid in this
transaction was approximately $2.7 million, comprised entirely of cash, net of
cash acquired. The fair value of the tangible net assets acquired exceeded the
total consideration paid. As a result, the long-term fixed assets of the
acquisition were reduced to zero. The accompanying balance sheets include
allocations of the purchase price to the assets acquired and liabilities assumed
based on preliminary estimates of fair value and are subject to final
adjustment.
11
The unaudited pro forma data presented below assume that the acquisition had
occurred at the beginning of the periods presented.
Nine Months Ended June 30, Three Months Ended June 30,
------------------------------ ---------------------------
2002 2003 2002 2003
------------- ------------- ----------- -----------
Revenues ................................... $ 1,167,677 $ 1,101,716 $ 395,881 $ 375,339
Net income before cumulative effect of
change in accounting principle .......... $ 7,730 $ 13,471 $ 8,892 $ 5,411
Net income (loss) .......................... $ (271,393) $ 13,471 $ 8,892 $ 5,411
Basic earnings per share before cumulative
effect of change in accounting principle $ 0.19 $ 0.34 $ 0.22 $ 0.14
Cumulative effect of change in accounting
principle .............................. $ (7.10) $ 0.00 $ 0.00 $ 0.00
Basic earnings (loss) per share ............ $ (6.81) $ 0.34 $ 0.22 $ 0.14
Diluted earnings per share before
cumulative effect of change in
accounting principle ................... $ 0.19 $ 0.34 $ 0.22 $ 0.14
Cumulative effect of change in accounting
principle .............................. $ (7.10) $ 0.00 $ 0.00 $ 0.00
Diluted earnings (loss) per share .......... $ (6.81) $ 0.34 $ 0.22 $ 0.14
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill attributable to each of
the Company's reporting units is tested for impairment by comparing the fair
value of each reporting unit with its carrying value. Fair value is determined
using discounted cash flows, market multiples and market capitalization.
Significant estimates used in the methodologies include estimates of future cash
flows, future short-term and long-term growth rates, weighted average cost of
capital and estimates of market multiples for each of the reportable units. The
Company performs its impairment tests annually during the first fiscal quarter
absent any impairment indicators requiring more frequent impairment tests.
Based on the Company's impairment tests performed upon adoption of SFAS No. 142,
it recognized a charge of $283.3 million ($7.10 per share) in the first quarter
of 2002 to reduce the carrying value of goodwill of its reporting units to its
implied fair value. Under SFAS No. 142, the impairment adjustment recognized at
adoption of the new rules was reflected as a cumulative effect of change in
accounting principle in the statement of operations for the year ended September
30, 2002. The Company performed its annual impairment test on October 1, 2002
and determined that there was no impairment of recorded goodwill.
12
The carrying amount of goodwill attributable to each reportable operating unit
with goodwill balances and changes therein follows (in thousands):
September 30, 2002 Divestiture June 30, 2003
------------------- ---------------- --------------
Commercial and
Industrial $ 140,695 $ 215 $ 140,480
Residential 57,525 - 57,525
------------------- ---------------- --------------
$ 198,220 $ 215 $ 198,005
=================== ================ ==============
4. RESTRUCTURING CHARGES
In October 2001, the Company began implementation of a workforce reduction
program. The purpose of this program was to cut costs by reducing the number of
administrative staff both in the field and at the home office. The total number
of terminated employees was approximately 450. As a result of the program
implementation, the Company recorded pre-tax restructuring charges of $5.6
million associated with 45 employees during the nine months ended June 30, 2002.
The charges were based on the costs of the workforce reduction program and
include severance and other special termination benefits. At June 30, 2003,
approximately $1.2 million of these charges have not been paid and are included
in accrued expenses.
5. DEBT
Credit Facility
- ---------------
On May 27, 2003, the Company amended its $150.0 million revolving credit
facility to a $125.0 million revolving credit facility with a syndicate of
lending institutions to be used for working capital, capital expenditures,
acquisitions and other corporate purposes that matures May 22, 2006, as amended
(the "Credit Facility"). Amounts borrowed under the Credit Facility bear
interest at an annual rate equal to either (a) the London interbank offered rate
(LIBOR) plus 1.75 percent to 3.50 percent, as determined by the ratio of the
Company's total funded debt to EBITDA (as defined in the Credit Facility) or (b)
the higher of (i) the bank's prime rate or (ii) the Federal funds rate plus 0.50
percent plus an additional 0.25 percent to 2.00 percent, as determined by the
ratio of the Company's total funded debt to EBITDA. Commitment fees of 0.375
percent to 0.50 percent are assessed on any unused borrowing capacity under the
Credit Facility. The Company's existing and future subsidiaries guarantee the
repayment of all amounts due under the facility, and the facility is secured by
the capital stock of those subsidiaries and the accounts receivable of the
Company and those subsidiaries. Borrowings under the Credit Facility are limited
to 66 2/3% of outstanding receivables (as defined in the agreement). The Credit
Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of cash dividends on
the common stock, restricts the ability of the Company to repurchase shares of
common stock or to retire its Senior Subordinated Notes, restricts the ability
of the Company to incur other indebtedness and requires the Company to comply
with various affirmative and negative covenants including certain financial
covenants. Among other restrictions, the financial covenants include a minimum
net worth requirement, a maximum total consolidated funded debt to EBITDA ratio,
a maximum senior consolidated debt to EBITDA ratio and a minimum interest
coverage ratio. For more information regarding the Covenants to its Credit
Facility, as amended, see the Company's filing on Form 8-K dated May 28,
13
2003. The Company was in compliance with the financial covenants of its Credit
Facility, as amended, at June 30, 2003. As of June 30, 2003, the Company had no
borrowings outstanding under its Credit Facility, letters of credit outstanding
under its Credit Facility of $26.5 million, $0.5 million of other borrowings and
available borrowing capacity under its Credit Facility of $98.5 million.
Senior Subordinated Notes
- -------------------------
On January 25, 1999 and May 29, 2001, the Company completed offerings of $150.0
million and $125.0 million Senior Subordinated Notes, respectively. The offering
completed on May 29, 2001 yielded $117.0 million in proceeds to the Company, net
of a $4.2 million discount and $3.9 million in offering costs. The proceeds from
the May 29, 2001, offering were used primarily to repay amounts outstanding
under the Credit Facility. The Senior Subordinated Notes bear interest at 9 3/8%
and mature on February 1, 2009. The Company pays interest on the Senior
Subordinated Notes on February 1 and August 1 of each year. The Senior
Subordinated Notes are unsecured obligations and are subordinated to all
existing and future senior indebtedness. The Senior Subordinated Notes are
guaranteed on a senior subordinated basis by all of the Company's subsidiaries.
Under the terms of the Senior Subordinated Notes, the Company is required to
comply with various affirmative and negative covenants including: (i)
restrictions on additional indebtedness, and (ii) restrictions on liens,
guarantees and dividends. During the year ended September 30, 2002, the Company
retired approximately $27.1 million of these Senior Subordinated Notes.
Debt consists of the following (in thousands):
September 30, June 30,
2002 2003
------------------ ----------------
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 9.50%........ 137,885 137,885
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of 10.00%....... 110,000 110,000
Other.................................................................... 1,074 542
------------------ ----------------
Total debt......................................................... 248,959 248,427
Less - short-term debt and current maturities of long-term debt.......... (570) (307)
Less - unamortized discount on Senior Subordinated Notes................. (3,797) (3,347)
Add - fair value of terminated interest rate hedge....................... 3,847 3,391
------------------ ----------------
Total long-term debt............................................... $ 248,439 $ 248,164
================== ================
14
6. EARNINGS (LOSS) PER SHARE
The following table reconciles the numerators and denominators of the basic and
diluted earnings (loss) per share for the nine months ended June 30, 2002 and
2003 (in thousands, except share information):
Nine Months Ended June 30,
----------------------------
2002 2003
------------ ------------
Numerator:
Net income (loss) ........................... $ (275,554) $ 12,587
============ ============
Denominator:
Weighted average shares outstanding - basic . 39,887,209 39,188,518
Effect of dilutive stock options ............ -- 108,928
------------ ------------
Weighted average shares outstanding - diluted 39,887,209 39,297,446
============ ============
Earnings (loss) per share:
Basic ....................................... $ (6.91) $ 0.32
Diluted ..................................... $ (6.91) $ 0.32
For the nine months ended June 30, 2002 and 2003, stock options of 6.2 million
and 4.6 million, respectively, were excluded from the computation of diluted
earnings per share because the options exercise prices were greater than the
average market price of the Company's common stock.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share for the three months ended June 30, 2002 and 2003 (in
thousands, except share information):
Three Months Ended June 30,
---------------------------
2002 2003
----------- -----------
Numerator:
Net income .................................. $ 7,477 $ 5,411
=========== ===========
Denominator:
Weighted average shares outstanding - basic . 39,936,914 38,789,237
Effect of dilutive stock options ............ 137,025 372,356
----------- -----------
Weighted average shares outstanding - diluted 40,073,939 39,161,593
=========== ===========
Earnings per share:
Basic ....................................... $ 0.19 $ 0.14
Diluted ..................................... $ 0.19 $ 0.14
For the three months ended June 30, 2002 and 2003, stock options of 4.4 million
and 2.9 million, respectively, were excluded from the computation of diluted
earnings per share because the
15
options exercise prices were greater than the average market price of the
Company's common stock.
7. OPERATING SEGMENTS
The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Certain information is disclosed, per SFAS No. 131,
based on the way management organizes financial information for making operating
decisions and assessing performance.
The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on income from operations of the respective business units prior to
unallocated home office expenses. Management allocates costs between segments
for selling, general and administrative expenses, goodwill impairment,
depreciation expense, capital expenditures and total assets. Those methods used
for allocation may change in the future.
Segment information for the nine months ended June 30, 2002 and 2003 is as
follows (in thousands):
Nine Months Ended June 30, 2002
-----------------------------------------------------------
Commercial/
Industrial Residential Other Total
------------- ----------- --------- -----------
Revenues..................................... $ 903,126 $ 203,353 $ - $1,106,479
Cost of services (including depreciation).... 778,589 157,469 - 936,058
------------- ----------- --------- -----------
Gross profit................................. 124,537 45,884 - 170,421
Selling, general and administrative.......... 87,556 24,886 20,641 133,083
Restructuring charges........................ - - 5,556 5,556
------------- ----------- --------- -----------
Operating income............................. $ 36,981 $ 20,998 $ (26,197) $ 31,782
============= =========== ========== ===========
Other data:
Depreciation expense......................... $ 10,530 $ 768 $ 1,409 $ 12,707
Capital expenditures......................... 4,807 434 2,304 7,545
Total assets................................. 516,578 99,973 94,687 711,238
16
Nine Months Ended June 30, 2003
-----------------------------------------------------------
Commercial/
Industrial Residential Other Total
------------- ----------- --------- -------------
Revenues.................................. $ 862,028 $ 205,023 $ - $ 1,067,051
Cost of services (including depreciation). 752,128 161,053 - 913,181
------------- ----------- --------- -------------
Gross profit.............................. 109,900 43,970 - 153,870
Selling, general and administrative....... 75,265 24,949 14,058 114,272
------------- ----------- --------- -------------
Operating income.......................... $ 34,635 $ 19,021 $ (14,058) $ 39,598
============= =========== ========== =============
Other data:
Depreciation expense...................... $ 8,546 $ 926 $ 1,459 $ 10,931
Capital expenditures...................... 4,475 548 2,281 7,304
Total assets.............................. 507,452 107,505 111,042 725,999
Segment information for the three months ended June 30, 2002 and 2003 is as
follows (in thousands):
Three Months Ended June 30, 2002
-----------------------------------------------------------
Commercial/
Industrial Residential Other Total
------------- ----------- --------- -----------
Revenues..................................... $ 302,152 $ 72,667 $ - $ 374,819
Cost of services (including depreciation).... 261,343 54,985 - 316,328
------------- ----------- --------- -----------
Gross profit................................. 40,809 17,682 - 58,491
Selling, general and administrative.......... 25,029 8,406 6,483 39,918
------------- ----------- --------- -----------
Operating income............................. $ 15,780 $ 9,276 $ (6,483) $ 18,573
============= =========== ========== ===========
Other data:
Depreciation expense......................... $ 3,511 $ 158 $ 464 $ 4,133
Capital expenditures......................... 980 170 404 1,554
Total assets................................. 516,578 99,973 94,687 711,238
Three Months Ended June 30, 2003
--------------------------------------------------------------
Commercial/
Industrial Residential Other Total
Revenues.................................. $ 305,649 $ 69,690 $ - $ 375,339
Cost of services (including depreciation). 266,999 54,931 - 321,930
------------- ----------- --------- -----------
Gross profit.............................. 38,650 14,759 - 53,409
Selling, general and administrative....... 25,143 8,090 4,960 38,193
------------- ----------- --------- -----------
Operating income.......................... $ 13,507 $ 6,669 $ (4,960) $ 15,216
============= =========== ========== ===========
Other data:
Depreciation expense...................... $ 2,650 $ 423 $ 517 $ 3,590
Capital expenditures...................... 1,222 188 432 1,842
Total assets.............................. 507,452 107,505 111,042 725,999
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
17
8. 1999 INCENTIVE COMPENSATION PLAN
In November 1999, the Board of Directors adopted the 1999 Incentive Compensation
Plan (the "1999 Plan"). The 1999 Plan authorizes the Compensation Committee of
the Board of Directors or the Board of Directors to grant employees of the
Company awards in the form of options, stock appreciation rights, restricted
stock or other stock based awards. The Company has up to 5.5 million shares of
Common Stock authorized for issuance under the 1999 Plan.
The Company granted a restricted stock award of 400,000 shares under its 1999
Plan. The market value of the stock on the date of grant for this award was $2.3
million. The award became fully vested and was fully amortized during the nine
months ended June 30, 2002. Accordingly, the Company had no amortization expense
related to this award during the nine months ended June 30, 2003.
9. COMMITMENTS AND CONTINGENCIES
Subsidiaries of the Company are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty and it is possible that the
results of legal proceedings may materially adversely affect us, in the opinion
of the Company, all such proceedings are either adequately covered by insurance
or, if not so covered, should not ultimately result in any liability which would
have a material adverse effect on the financial position, liquidity or results
of operations of the Company. The Company expenses routine legal costs related
to such proceedings as incurred.
The Company has committed to invest up to $5.0 million in EnerTech Capital
Partners II L.P. ("EnerTech"). EnerTech is a private equity firm specializing in
investment opportunities emerging from the deregulation and resulting
convergence of the energy, utility and telecommunications industries. Through
June 30, 2003, the Company had invested $2.3 million under its commitment to
EnerTech.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following should be read in conjunction with the response to Part I, Item 1
of this Report. Any capitalized terms used but not defined in this Item have the
same meaning given to them in Part I, Item 1.
This report on Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements are based on our expectations and involve risks and
uncertainties that could cause our actual results to differ materially from
those set forth in the statements. Such risks and uncertainties include, but are
not limited to, the inherent uncertainties related to estimating future results,
fluctuations in operating results because of downturns in levels of
construction, incorrect estimates used in entering into fixed price contracts,
difficulty in managing the operation and
18
growth of existing and newly acquired businesses, the high level of competition
in the construction industry and the effects of seasonality. The foregoing and
other factors are discussed in our filings with the SEC including our Annual
Report on Form 10-K for the year ended September 30, 2002.
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified the
accounting principles which we believe are most critical to our reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition, the assessment
of goodwill impairment, our allowance for doubtful accounts receivable and the
recording of our self-insurance liabilities. These accounting policies, as well
as others, are described in the Notes to the Consolidated Financial Statements
of our Annual Report on Form 10-K for the year ended September 30, 2002 and at
relevant sections in this discussion and analysis.
We enter into contracts principally on the basis of competitive bids. We
frequently negotiate the final terms and prices of those contracts with the
customer. Although the terms of our contracts vary considerably, most are made
on either a fixed price or unit price basis in which we agree to do the work for
a fixed amount for the entire project (fixed price) or for units of work
performed (unit price). We also perform services on a cost-plus or time and
materials basis. We are generally able to achieve higher margins on fixed price
and unit price than on cost-plus contracts. We currently generate, and expect to
continue to generate, more than half of our revenues under fixed price
contracts. The cost of labor and materials, however, may vary from the costs we
originally estimated. Variations from estimated contract costs along with other
risks inherent in performing fixed price and unit price contracts may result in
actual revenue and gross profit for a project differing from those we originally
estimated and could result in losses on projects. Depending on the size of a
particular project, variations from estimated project costs could have a
significant impact on our operating results for any fiscal quarter or year. We
believe our exposure to losses on fixed price contracts is limited in aggregate
by the high volume and relatively short duration of the fixed price contracts we
undertake. Additionally, we derive a significant amount of our revenues from new
construction and from the southern part of the United States. Downturns in new
construction activity or in construction in the southern United States could
affect our results.
We complete most projects within one year, while we frequently provide service
and maintenance work under open-ended, unit price master service agreements
which are renewable annually. We recognize revenue on service and time and
material work when services are performed. Work performed under a construction
contract generally provides that the customers accept completion of progress to
date and compensate us for services rendered measured in terms of units
installed, hours expended or some other measure of progress. Revenues from
construction contracts are recognized on the percentage-of-completion method in
accordance with the American Institute of Certified Public Accountants Statement
of Position 81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Percentage-of-completion for construction contracts
is measured principally by the percentage of costs incurred and accrued to date
for each contract to the estimated total costs for each contract at completion.
We generally consider contracts to be substantially complete upon departure from
the work site and acceptance by the customer. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor,
19
supplies, tools, repairs and depreciation costs. Changes in job performance, job
conditions, estimated contract costs and profitability and final contract
settlements may result in revisions to costs and income and the effects of these
revisions are recognized in the period in which the revisions are determined.
Provisions for total estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
We evaluate goodwill for potential impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Included in this evaluation are certain assumptions and estimates to
determine the fair values of reporting units such as estimates of future cash
flows, discount rates, as well as assumptions and estimates related to the
valuation of other identified intangible assets. Changes in these assumptions
and estimates or significant changes to the market value of our common stock
could materially impact our results of operations or financial position.
We provide an allowance for doubtful accounts receivable for unknown collection
issues in addition to reserves for specific accounts receivable where collection
is considered doubtful. Inherent in the assessment of the allowance for doubtful
accounts receivable are certain judgments and estimates including, among others,
our customers' access to capital, our customers' willingness to pay, general
economic conditions and the ongoing relationships with our customers.
We are self-insured for workers' compensation, auto liability, general liability
and employee-related health care claims, subject to large deductibles. Losses up
to the deductible amounts are accrued based upon our estimates of the liability
for claims incurred and an estimate of claims incurred but not reported. The
accruals are derived from actuarial studies, known facts, historical trends and
industry averages utilizing the assistance of an actuary to determine the best
estimate of the ultimate expected loss. We believe such accruals to be adequate.
However, insurance liabilities are difficult to assess and estimate due to
unknown factors, including the severity of an injury, the determination of our
liability in proportion to other parties, the number of incidents not reported
and the effectiveness of our safety program. Therefore, if actual experience
differs from than the assumptions used in the actuarial valuation, adjustments
to the reserve may be required and would be recorded in the period that the
experience becomes known.
20
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 2003
The following table presents selected unaudited historical financial information
for the nine months ended June 30, 2002 and 2003.
Nine Months Ended June 30,
--------------------------------------------------------
2002 % 2003 %
-------------- ------------ --------------- ------------
(dollars in millions)
Revenues................................................. $ 1,106.5 100% $ 1,067.1 100%
Cost of services (including depreciation)................ 936.1 85% 913.2 86%
-------------- ------------ --------------- ------------
Gross profit..................................... 170.4 15% 153.9 14%
Selling, general & administrative expenses............... 133.0 12% 114.3 10%
Restructuring charges.................................... 5.6 1% - 0%
-------------- ------------ --------------- ------------
Income from operations........................... 31.8 2% 39.6 4%
Interest and other expense, net.......................... 20.1 2% 19.1 2%
-------------- ------------ --------------- ------------
Income before income taxes and cumulative effect of change 11.7 0% 20.5 2%
in accounting principle...........................
-------------- ------------ --------------- ------------
Provision for income taxes............................... 3.9 0% 7.9 1%
Cumulative effect of change in accounting
principle, net of tax............................. 283.3 26% - 0%
-------------- ------------ --------------- ------------
Net income (loss)................................ $ (275.5) -25% $ 12.6 1%
============== ============ =============== ============
REVENUES
Percent of Total Revenues
---------------------------------
Nine Months ended June 30,
---------------------------------
2002 2003
---- ----
Commercial and Industrial 81% 81%
Residential 19% 19%
--- ---
Total Company 100% 100%
==== ====
Total revenues decreased $39.4 million, or 4%, from $1,106.5 million for the
nine months ended June 30, 2002, to $1,067.1 million for the nine months ended
June 30, 2003. This decrease in revenues is primarily the result of $37.5
million of lost revenues on divested or closed companies that were included in
revenues for the nine months ended June 30, 2002, but not during the nine months
ended June 30, 2003. This decrease in revenues is additionally impacted by an
economic slowdown that began in 2001. This slowdown has led to increased bidding
activity across the country for available work during the nine months ended June
30, 2003. Lastly, revenues were impacted by a decrease in revenues from
communications work.
Commercial and industrial revenues decreased $41.1 million, or 5%, from $903.1
million for the nine months ended June 30, 2002, to $862.0 million for the nine
months ended June 30, 2003. This decrease in revenues is primarily the result of
$37.5 million of lost revenues on divested or closed companies that were
included in revenues for the nine months ended June 30, 2002, but not during the
nine months ended June 30, 2003. This decrease in revenues is additionally
21
impacted by increased bidding activity across the country for available work
during the nine months ended June 30, 2003.
Residential revenues increased $1.6 million, or 1%, from $203.4 million for the
nine months ended June 30, 2002, to $205.0 million for the nine months ended
June 30, 2003, primarily as a result of increased awards of construction
contracts in markets we serve.
GROSS PROFIT
Segment Gross Profit Margins
as a Percent of Segment Revenues
-----------------------------------
Nine Months ended June 30,
-----------------------------------
2002 2003
---- ----
Commercial and Industrial 14% 13%
Residential 23% 21%
--- ---
Total Company 15% 14%
=== ===
Gross profit decreased $16.5 million, or 10%, from $170.4 million for the nine
months ended June 30, 2002, to $153.9 million for the nine months ended June 30,
2003. Gross profit margin as a percentage of revenues decreased form 15% for the
nine months ended June 30, 2002 to 14% for the nine months ended June 30, 2003,
primarily as the result of increased competition for available work.
Commercial and industrial gross profit decreased $14.6 million, or 12%, from
$124.5 million for the nine months ended June 30, 2002, to $109.9 million for
the nine months ended June 30, 2003. Commercial and industrial gross profit
margin as a percentage of revenues decreased from 14% for the nine months ended
June 30, 2002, to 13% for the nine months ended June 30, 2003. This decrease in
gross profit margin as a percentage of revenues was primarily the result of
increased bidding activity for available work and lower margins on work in the
communications market.
Residential gross profit decreased $1.9 million, or 4%, from $45.9 million for
the nine months ended June 30, 2002, to $44.0 million for the nine months ended
June 30, 2003. Residential gross profit margin as a percentage of revenues
decreased two percentage points from 23% for the nine months ended June 30, 2002
to 21% for the nine months ended June 30, 2003, primarily as the result of
increased pricing pressure for available work.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $18.7 million, or 14%,
from $133.0 million for the nine months ended June 30, 2002, to $114.3 million
for the nine months ended June 30, 2003. Selling, general and administrative
expenses as a percentage of revenues decreased two percentage points from 12%
for the nine months ended June 30, 2002 to 10% for the nine months ended June
30, 2003. This decrease results from a company wide effort focused on reduction
of costs. This effort included a significant reduction of certain administrative
field and home office personnel expenses during the nine months ended June 30,
2002.
22
RESTRUCTURING CHARGE
In October 2001, we began implementation of a workforce reduction program. The
purpose of this program was to reduce the number of administrative staff both in
the field and in the home office. As a result of the program implementation, we
recorded pre-tax restructuring charges of $5.6 million during the nine months
ended June 30, 2002. The charges were based on the cost of the workforce
reduction program, including severance and other special termination benefits.
At June 30, 2003, approximately $1.2 million of these charges have not been paid
and are included in accounts payable and accrued expenses.
INCOME FROM OPERATIONS
Income from operations increased $7.8 million, or 25%, from $31.8 million for
the nine months ended June 30, 2002, to $39.6 million for the nine months ended
June 30, 2003. This increase in income from operations was primarily attributed
to decreased selling, general and administrative expenses year over year and
restructuring charges of $5.6 million incurred during the nine months ended June
30, 2002, offset by decreased revenues year over year and decreased margins
earned on those revenues.
NET INTEREST AND OTHER EXPENSE
Interest and other expense, net decreased from $20.1 million for the nine months
ended June 30, 2002, to $19.1 million for the nine months ended June 30, 2003,
primarily as a result of decreased interest expense attributable to decreased
average borrowings over the period. The decrease is additionally impacted by
$0.2 million in other income from our captive insurance program during the nine
months ended June 30, 2003 that was not a component of other income for the nine
months ended June 30, 2002.
PROVISION FOR INCOME TAXES
During the nine months ended June 30, 2003, we recorded a tax provision of
38.5%. We recorded a tax provision of 33.6% for the nine months ended June 30,
2002. The effective tax rate for the nine months ended June 30, 2002 includes
the impact of the projected utilization of certain net operating loss
carryforwards.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In October 2001, we adopted SFAS No. 142,"Goodwill and Other Intangible Assets,"
which establishes new accounting and reporting requirements for goodwill and
other intangible assets. Under SFAS No. 142, all goodwill amortization ceased
effective October 1, 2001. Additionally, under SFAS No. 142, the impairment
adjustment recognized at adoption of the new rules was reflected as a cumulative
effect of change in accounting principle in the statement of operations for the
year ended September 30, 2002. We recognized a charge of $283.3 million ($7.10
per share) in the first quarter of 2002 to reduce the carrying value of goodwill
of its reporting units to its implied fair value. The Company performed its
annual impairment test on October 1, 2002 and determined that there was no
impairment of recorded goodwill.
23
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2003
The following table presents selected unaudited historical financial information
for the three months ended June 30, 2002 and 2003.
Three Months Ended June 30,
--------------------------------------------------------
2002 % 2003 %
-------------- ------------ --------------- ------------
(dollars in millions)
Revenues................................................. $ 374.8 100% $ 375.3 100%
Cost of services (including depreciation)................ 316.3 84% 321.9 86%
-------------- ------------ --------------- ------------
Gross profit..................................... 58.5 16% 53.4 14%
Selling, general & administrative expenses............... 39.9 11% 38.2 10%
-------------- ------------ --------------- ------------
Income from operations........................... 18.6 5% 15.2 4%
Interest and other expense, net.......................... 6.4 2% 6.4 2%
-------------- ------------ --------------- ------------
Income before income taxes............................... 12.2 3% 8.8 2%
Provision for income taxes............................... 4.7 1% 3.4 1%
-------------- ------------ --------------- ------------
Net income....................................... $ 7.5 2% $ 5.4 1%
============== ============ =============== ============
REVENUES
Percent of Total Revenues
-------------------------------
Three Months ended June 30,
-------------------------------
2002 2003
---- ----
Commercial and Industrial 81% 81%
Residential 19% 19%
--- ---
Total Company 100% 100%
==== ====
Total revenues increased $0.5 million, or 0%, from $374.8 million for the three
months ended June 30, 2002, to $375.3 million for the three months ended June
30, 2003. This increase in revenues is primarily the result of increased work
performed in the commercial and industrial markets, offset by $11.0 million of
lost revenues on divested or closed companies that were included in revenues for
the three months ended June 30, 2002, but not during the three months ended June
30, 2003.
Commercial and industrial revenues increased $3.5 million, or 1%, from $302.1
million for the three months ended June 30, 2002, to $305.6 million for the
three months ended June 30, 2003. This increase in revenues is primarily the
result of the timing of industrial work performed, offset by $11.0 million of
lost revenues on divested or closed companies that were included in revenues for
the three months ended June 30, 2002, but not during the three months ended June
30, 2003.
Residential revenues decreased $3.0 million, or 4%, from $72.7 million for the
three months ended June 30, 2002, to $69.7 million for the three months ended
June 30, 2003, primarily as a result of decreased multi-family construction
activity in the Southeast. This decrease in revenues is additionally impacted by
increased bidding activity across the country for available work during the
three months ended June 30, 2003.
24
GROSS PROFIT
Segment Gross Profit Margins
as a Percent of Segment Revenues
--------------------------------
Three Months ended June 30,
--------------------------------
2002 2003
---- ----
Commercial and Industrial 14% 13%
Residential 24% 21%
--- ---
Total Company 16% 14%
=== ===
Gross profit decreased $5.1 million, or 9%, from $58.5 million for the three
months ended June 30, 2002, to $53.4 million for the three months ended June 30,
2003. Gross profit margin as a percentage of revenues decreased from 16% for the
three months ended June 30, 2002, to 14% for the three months ended June 30,
2003. This decrease in gross profit margin as a percentage of revenues was
primarily the result of increased bidding activity for available work and lower
margins on work across our entire market.
Commercial and industrial gross profit decreased $2.1 million, or 7%, from $40.8
million for the three months ended June 30, 2002, to $38.7 million for the three
months ended June 30, 2003. Commercial and industrial gross profit margin as a
percentage of revenues decreased from 14% for the three months ended June 30,
2002, to 13% for the three months ended June 30, 2003. This decrease in gross
profit margin as a percentage of revenues was primarily the result of increased
bidding activity for available work and lower margins on work in the
communications market.
Residential gross profit decreased $2.9 million, or 17%, from $17.7 million for
the three months ended June 30, 2002, to $14.8 million for the three months
ended June 30, 2003. Residential gross profit margin as a percentage of revenues
decreased from 24% for the three months ended June 30, 2002, to 21% for the
three months ended June 30, 2003. This decrease in gross profit margin as a
percentage of revenues was primarily the result of increased bidding activity
for available work, decreased multi-family construction activity in the
Southeast and lower margins on work in the residential market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $1.7 million, or 4%, from
$39.9 million for the three months ended June 30, 2002, to $38.2 million for the
three months ended June 30, 2003. Selling, general and administrative expenses
as a percentage of revenues decreased one percentage point from 11% for the
three months ended June 30, 2002 to 10% for the three months ended June 30,
2003. This decrease results from a company wide effort focused on reduction of
costs.
INCOME FROM OPERATIONS
Income from operations decreased $3.4 million, or 18%, from $18.6 million for
the three months ended June 30, 2002, to $15.2 million for the three months
ended June 30, 2003. This decrease in income from operations was primarily
attributed to decreased revenues year over year and
25
decreased margins earned on those revenues, offset by decreased selling, general
and administrative expenses year over year.
NET INTEREST AND OTHER EXPENSE
Interest and other expense, net remained the same at $6.4 million for the three
months ended June 30, 2002 and June 30, 2003.
PROVISION FOR INCOME TAXES
During the three months ended June 30, 2003, we recorded a tax provision of
38.5%. We recorded a tax provision of 38.8% for the three months ended June 30,
2002. The higher effective tax rate in the prior period was attributable to the
taxable effect of the sale of a business during the three months ended June 30,
2002.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, we had cash and cash equivalents of $40.3 million, working
capital of $263.1 million, no outstanding borrowings under our credit facility,
$26.5 million of letters of credit outstanding, and available capacity under our
credit facility of $98.5 million. The amount outstanding under our senior
subordinated notes was $247.9 million. All debt obligations are on our balance
sheet.
During the nine months ended June 30, 2003, we generated $36.7 million of net
cash from operating activities. This net cash provided by operating activities
was comprised of net income of $12.6 million, increased by $12.2 million of
non-cash charges related primarily to depreciation expense and provision for
allowance for doubtful accounts, and further increased by changes in working
capital. Working capital changes consisted of a $10.2 million decrease in
billings in excess of costs and estimated earnings on uncompleted projects and a
$3.9 million decrease in costs and estimated earnings in excess of billings on
uncompleted contracts. Working capital changes also included a $3.2 decrease in
inventory and a $5.5 million increase in accounts payable and accrued expenses
as a result of the timing of payments made, with the balance of the change due
to other working capital changes. Net cash used in investing activities was $7.7
million, consisting primarily of $7.3 million used for capital expenditures and
$2.7 million used in the acquisition of a business, net of cash acquired; offset
by $1.1 million received from divestitures and $1.8 million in proceeds from the
sale of fixed assets. Net cash used in financing activities was $21.5 million,
resulting primarily from $16.2 million in repayments of debt and repurchases of
the senior subordinated notes, $0.7 million in payments made for debt issuance
costs, and $6.8 million used in the acquisition of treasury stock, offset by
$2.1 million received from the exercise of stock options.
On May 27, 2003, we amended our $150.0 million revolving credit facility to a
$125.0 million revolving credit facility with a syndicate of lending
institutions to be used for working capital, capital expenditure, acquisitions
and other corporate purposes that matures May 22, 2006, as amended. Amounts
borrowed under the credit facility bear interest at an annual rate equal to
either (a) the London interbank offered rate (LIBOR) plus 1.75 percent to 3.50
percent, as determined by the ratio of our total funded debt to EBITDA (as
defined in the credit facility) or (b) the higher of (i) the bank's prime rate
or (ii) the Federal funds rate plus 0.50 percent plus an
26
additional 0.25 percent to 2.00 percent, as determined by the ratio of our total
funded debt to EBITDA. Commitment fees of 0.375 percent to 0.50 percent are
assessed on any unused borrowing capacity under the credit facility. Our
existing and future subsidiaries guarantee the repayment of all amounts due
under the facility, and the facility is secured by the capital stock of those
subsidiaries and the accounts receivable of the company and those subsidiaries.
Borrowings under the credit facility are limited to 66 2/3% of outstanding
receivables (as defined in the agreement). The credit facility requires the
consent of the lenders for acquisitions exceeding a certain level of cash
consideration, prohibits the payment of cash dividends on the common stock,
restricts our ability to repurchase shares of common stock or to retire senior
subordinated notes, restricts our ability to incur other indebtedness and
requires us to comply with various affirmative and negative covenants including
certain financial covenants. Among other restrictions, the financial covenants
include a minimum net worth requirement, a maximum total consolidated funded
debt to EBITDA ratio, a maximum senior consolidated debt to EBITDA ratio and a
minimum interest coverage ratio. For more information regarding the covenants to
our credit facility, as amended, see our filing on Form 8-K dated May 28, 2003.
We were in compliance with the financial covenants of our credit facility, as
amended, at June 30, 2003. As of July 29, 2003, we had no outstanding borrowings
on our credit facility.
On January 25, 1999 and May 29, 2001, we completed our offerings of $150.0
million and $125.0 million senior subordinated notes, respectively. The offering
completed on May 29, 2001 yielded $117.0 million in proceeds, net of a $4.2
million discount and $3.9 million in offering costs. The proceeds from the May
29, 2001 offering were used primarily to repay amounts outstanding under our
credit facility. The notes bear interest at 9 3/8% and will mature on February
1, 2009. We pay interest on the notes on February 1 and August 1 of each year.
The notes are unsecured senior subordinated obligations and are subordinated to
all of our existing and future senior indebtedness. The notes are guaranteed on
a senior subordinated basis by all of our subsidiaries. Under the terms of the
notes, we are required to comply with various affirmative and negative covenants
including (1) restrictions on additional indebtedness, and (2) restrictions on
liens, guarantees and dividends. During the year ended September 30, 2002, we
retired approximately $27.1 million of these senior subordinated notes. At June
30, 2003, we had $247.9 million in outstanding senior subordinated notes.
Effective October 1, 2001, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill attributable to each of
our reporting units is tested for impairment by comparing the fair value of each
reporting unit with its carrying value. Fair value is determined using
discounted cash flows, market multiples and market capitalization. Significant
estimates used in the methodologies include estimates of future cash flows,
future short-term and long-term growth rates, weighted average cost of capital
and estimates of market multiples for each of the reportable units. We will
perform our impairment tests annually during the first fiscal quarter absent any
impairment indicators requiring more frequent impairment tests.
Based on our impairment tests performed upon adoption of SFAS No. 142, we
recognized a charge of $283.3 million ($7.10 per share) in the first quarter of
2002 to reduce the carrying value of goodwill of our reporting units to its
implied fair value. Under SFAS No. 142, the impairment adjustment recognized at
adoption of the new rules was reflected as a cumulative effect of change in
accounting principle in the statement of operations for the year ended
27
September 30, 2002. We performed our annual impairment test on October 1, 2002
and determined that there was no impairment of recorded goodwill.
We utilized approximately $2.7 million cash, net of cash acquired to purchase
Riviera Electric LLC in Denver, Colorado on February 27, 2003.
All of our operating income and cash flows are generated by our wholly owned
subsidiaries, which are the subsidiary guarantors of our outstanding senior
subordinated notes. The separate financial statements of the subsidiary
guarantors are not included herein because (i) the subsidiary guarantors are all
of the direct and indirect subsidiaries of the Company; (ii) the subsidiary
guarantors have fully and unconditionally, jointly and severally guaranteed the
senior subordinated notes; (iii) the aggregate assets, liabilities, earnings and
equity of the subsidiary guarantors is substantially equivalent to the assets,
liabilities, earnings and equity of the Company on a consolidated basis; and
(iv) the presentation of separate financial statements and other disclosures
concerning the subsidiary guarantors is not deemed material.
Other Commitments. As is common in our industry, we have entered into certain
off balance sheet arrangements that expose us to increased risk. Our significant
off balance sheet transactions include liabilities associated with noncancelable
operating leases, letter of credit obligations and surety guarantees.
We enter into noncancelable operating leases for many of our vehicle and
equipment needs. These leases allow us to retain our cash when we do not own the
vehicles or equipment and we pay a monthly lease rental fee. At the end of the
lease, we have no further obligation to the lessor. We may determine to cancel
or terminate a lease before the end of its term. Typically we are liable to the
lessor for various lease cancellation or termination costs and the difference
between the then fair market value of the leased asset and the implied book
value of the leased asset as calculated in accordance with the lease agreement.
Some of our customers require us to post letters of credit as a means of
guaranteeing performance under our contracts and ensuring payment by us to
subcontractors and vendors. If our customer has reasonable cause to effect
payment under a letter of credit, we would be required to reimburse our creditor
for the letter of credit. Depending on the circumstances surrounding a
reimbursement to our creditor, we may have a charge to earnings in that period.
To date we have not had a situation where a customer has had reasonable cause to
effect payment under a letter of credit. At June 30, 2003, $1.8 million of our
outstanding letters of credit were to collateralize our customers.
Some of the underwriters of our casualty insurance program require us to post
letters of credit as collateral. This is common in the insurance industry. To
date we have not had a situation where an underwriter has had reasonable cause
to effect payment under a letter of credit. At June 30, 2003, $24.7 million of
our outstanding letters of credit were to collateralize our insurance program.
Many of our customers require us to post performance and payment bonds issued by
a surety. Those bonds guarantee the customer that we will perform under the
terms of a contract and that we will pay subcontractors and vendors. In the
event that we fail to perform under a contract or pay subcontractors and
vendors, the customer may demand the surety to pay or perform under
28
our bond. Our relationship with our surety is such that we will indemnify the
surety for any expenses it incurs in connection with any of the bonds it issues
on our behalf. To date, we have not incurred significant expenses to indemnify
our surety for expenses it incurred on our behalf. As of June 30, 2003, our cost
to complete projects covered by surety bonds was approximately $241 million.
We have committed to invest up to $5.0 million in EnerTech Capital Partners II,
L.P. ("EnerTech"). EnerTech is a private equity firm specializing in investment
opportunities emerging from deregulation and resulting convergence of the
energy, utility and telecommunications industries. Through June 30, 2003, we had
invested $2.3 million under our commitment to EnerTech.
Our future contractual obligations include (in thousands):
Less than
one year 2004 2005 2006 2007 Thereafter Total
--------- --------- --------- --------- --------- ---------- ----------
Debt and capital lease obligations $ 307 $ 168 $ 49 $ 14 $ 4 $ 247,885 $ 248,427
Operating lease obligations....... $ 3,795 $ 9,542 $ 7,354 $ 4,396 $ 2,375 $ 3,682 $ 31,144
Our other commercial commitments expire as follows (in thousands):
Less than
one year 2004 2005 2006 2007 Thereafter Total
--------- --------- --------- --------- --------- ---------- ----------
Standby letters of credit......... $ 26,480 $ -- $ -- $ -- $ -- $ -- $ 26,480
Other commercial commitments...... $ -- $ -- $ -- $ -- $ -- $ 2,700 (1) $ 2,700
(1) Balance of investment commitment in EnerTech.
Outlook. The following statements are based on current expectations. These
statements are forward-looking and actual results may differ materially.
Economic conditions across the country are challenging. We continue to focus on
collecting receivables and reducing days sales outstanding. To improve our
position for continued success, we continue to take steps to reduce costs. We
have made significant cuts in administrative overhead at the home office and in
the field. Although we have seen signs of improvement in our quarter ended June
30, 2003, the economic outlook for the remainder of fiscal 2003 is still
somewhat uncertain. We expect earnings per share in the fourth quarter of fiscal
2003 to range between $0.21 and $0.28 per share. For the year ended September
30, 2003, we expect earnings to range between $0.53 and $0.60 per share.
We expect to generate cash flow from operations. Our cash flows from operations
tend to track with the seasonality of our business and historically have
improved in the latter part of our fiscal year. We anticipate that our cash flow
from operations will provide sufficient cash to enable us to meet our working
capital needs, debt service requirements and planned capital expenditures for
property and equipment through the next twelve months. Our ability to generate
cash flow from operations is dependent on many factors, including demand for our
products and services, the availability of work at margins acceptable to us and
the ultimate collectibility of our receivables.
29
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations, particularly from residential construction, are
seasonal, depending on weather trends, with typically higher revenues generated
during the spring and summer and lower revenues during the fall and winter. The
commercial and industrial aspect of our business is less subject to seasonal
trends, as this work generally is performed inside structures protected from the
weather. Our service business is generally not affected by seasonality. In
addition, the construction industry has historically been highly cyclical. Our
volume of business may be adversely affected by declines in construction
projects resulting from adverse regional or national economic conditions.
Quarterly results may also be materially affected by gross margins for both bid
and negotiated projects, the timing of new construction projects and any
acquisitions. Accordingly, operating results for any fiscal period are not
necessarily indicative of results that may be achieved for any subsequent fiscal
period.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 establishes requirements for
recognition of a liability for a cost associated with an exit or disposal
activity based with an objective of recording the initial liability at fair
value. We adopted SFAS No 146 effective January 1, 2003. The adoption had no
impact on our financial position or results of operations.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure," which
amends SFAS No. 123, "Accounting for Stock-Based Compensation," by providing
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock options and other stock-based employee
compensation. We adopted SFAS 148 on January 1, 2003. The adoption of SFAS 148
did not have a material impact on our financial position or results of
operations.
Financial Accounting Standards Board Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others", ("Interpretation 45"), will significantly
change current practice in accounting for, and disclosure of, guarantees.
Interpretation 45 requires a guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation 45 also expands the disclosures required
to be made by a guarantor about its obligations under certain guarantees that it
has issued. Interpretation 45's disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions are
30
applicable on prospective basis to guarantees issued or modified after December
31, 2002. The types of guarantees that we are party to include surety bonds and
letter of credit. We adopted Interpretation 45 effective January 1, 2003, which
did not have a material impact on our results of operations or financial
position.
In January 2003, the Financial Accounting Standards Board issued interpretation
No. 46, "Consolidation of Variable Interest Entities", ("Interpretation 46").
The objective of Interpretation 46 is to improve the financial reporting by
companies involved with variable interest entities. Until now, one company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interest. Interpretation 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain of
disclosure requirements apply to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. We
have minority interests in two private equity firms, Enertech Capital Partners
II, L.P. and EPV Holdings LLC, which may fall under this interpretation. For
more information regarding our investments in these entities, see our Annual
Report on Form 10-K for the year ended September 30, 2002. We do not believe the
adoption of this statement will have a material impact on our results of
operations or financial position as we do not have activities with any entities
that would fall under this interpretation at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management is actively involved in monitoring exposure to market risk and
continues to develop and utilize appropriate risk management techniques. We are
not exposed to any significant market risks from commodity price risk or foreign
currency exchange risk. Our exposure to significant market risks includes
outstanding borrowings under our floating rate credit facility. Management does
not use derivative financial instruments for trading purposes or to speculate on
changes in interest rates or commodity prices.
As a result, our exposure to changes in interest rates results from our
short-term and long-term debt with both fixed and floating interest rates. The
following table presents principal or notional amounts (stated in thousands) and
related interest rates by year of maturity for our debt obligations and their
indicated fair market value at June 30, 2003:
2003 2004 2005 2006 2007 Thereafter Total
----------- ----------- ----------- ---------- ---------- ------------- ---------
Liabilities -Debt:
Fixed Rate (senior subordinated
notes)........................ $ -- $ -- $ -- $ -- $ -- $ 247,885 $ 247,885
Interest Rate................... 9.375% 9.375% 9.375% 9.375% 9.375% 9.375% 9.375%
Fair Value of Debt:
Fixed Rate $ 251,603
31
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report on Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
principal executive officer and principal financial officer concluded, based on
this evaluation, that the Company's disclosure controls and procedures are
effective in alerting them timely to material information relating to the
Company required to be included in the Company's periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.
32
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
99.1 Certification of Herbert R. Allen, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section
906 of The Sarbanes-Oxley Act of 2002.
99.2 Certification of William W. Reynolds, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted to
Section 906 of The Sarbanes-Oxley Act of 2002.
B. REPORTS ON FORM 8-K
On April 1, 2003, the Company filed a Current Report on Form 8-K
in connection with its press release dated April 1, 2003.
On May 12, 2003, the Company filed a Current Report on Form 8-K
in connection with its acquisition of Riviera Electric LLC.
On May 28, 2003, the Company filed a Current Report on Form 8-K
in connection with its press release dated May 28, 2003.
33
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
INTEGRATED ELECTRICAL SERVICES, INC.
Date: August 4, 2003 By: /s/ William W. Reynolds
-----------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer
34
CERTIFICATION
I, Herbert R. Allen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
Electrical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls;
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
35
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: August 4, 2003
/s/ Herbert R. Allen
---------------------------
Herbert R. Allen
Chief Executive Officer
36
CERTIFICATION
I, William W. Reynolds, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
Electrical Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls;
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
37
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: August 4, 2003
/s/ William W. Reynolds
-----------------------
William W. Reynolds
Chief Financial Officer
38
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Integrated Electrical Services, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2003 (the "Report"),
I, Herbert R. Allen, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Herbert R. Allen
- -----------------------------
Herbert R. Allen
Chief Executive Officer
August 4, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Integrated Electrical Services, Inc.
(the "Company") on Form 10-Q for the period ending June 30, 2003 (the "Report"),
I, William W. Reynolds, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ William W. Reynolds
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William W. Reynolds
Chief Financial Officer
August 4, 2003