UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: August 20, 2003
Commission File No. 001-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0542208
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1800 West Loop South
Suite 500
Houston, Texas 77027
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
ITEM 7. EXHIBITS
(C) Exhibits
Exhibit No. Description
----------- ---------------
99.1 Press Release dated August 20, 2003.
99.2 Integrated Electrical Services, Inc. Company and
Investment Profile Report dated August 2003.
ITEM 9. REGULATION FD DISCLOSURE
On August 20, 2003, the Company released a press release and an updated
internally generated report describing the Company and Investment Profile of
Integrated Electrical Services, Inc. The press release is attached to this Form
8-K as Exhibit 99.1. The Company and Investment Profile is attached to this Form
8-K as Exhibit 99.2.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ William W. Reynolds
--------------------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer
Dated: August 20, 2003
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Press Release dated August 20, 2003.
99.2 Integrated Electrical Services, Inc. Company and Investment
Profile Report dated August 2003.
Exhibit 99.1
[Logo] IES NEWS RELEASE
Contacts: William W. Reynolds, CFO
Integrated Electrical Services, Inc.
713-860-1500
FOR IMMEDIATE RELEASE Ken Dennard / kdennard@drg-e.com
Karen Roan / kroan@drg-e.com
DRG&E / 713-529-6600
IES Updates "Company & Investment Profile"
HOUSTON -- AUGUST 20, 2003 -- Integrated Electrical Services, Inc. (NYSE: IES)
today announced that it has updated its "Company & Investment Profile," which
can be found on the company's website at www.ies-co.com under the investor
relations section, and is being furnished on Form 8-K to the Securities and
Exchange Commission. The "Company & Investment Profile" includes updated
discussions of IES' performance, strategies, industry outlook, peer analysis and
guidance along with expanded discussion about the company's organizational
systems, processes and controls, and competitive landscape.
This profile is being published and updated by IES in continuation of the
company's effort to provide greater disclosure and increased transparency to the
investment community. Given structural and regulatory changes impacting the
securities industry and challenging capital market conditions, it is the
company's intent to take greater responsibility and a more proactive role in
communicating with investors.
Investors and interested parties are encouraged to visit the investor
relations section on the company's website, http://www.ies-co.com, to download
the Adobe Acrobat formatted file of the updated "Company & Investment Profile."
Also, management will be meeting with analysts and institutional investors
in various cities over the next several months to provide an update on the
company's strategy and reviewing the "Company & Investment Profile."
Integrated Electrical Services, Inc. is a leading national provider of
electrical solutions to the commercial and industrial, utility, residential and
service markets. The company offers electrical system design and installation,
contract maintenance and service to large and small customers, including general
contractors, developers and corporations of all sizes.
This press release includes certain statements, including statements relating to
the Company's expectations of future operating results that may be deemed
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition to historical information, this
document contains forward-looking statements made by the management of IES. Such
statements are typically identified by terms expressing future expectation or
goals. These forward-looking statements, although made in good faith, include
assumptions, expectations, predictions, intentions or beliefs about future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in these forward-looking
statements. Factors that might cause such differences include, but are not
limited to, inherent uncertainties relating to estimating future results,
fluctuations in operating results because of down-turns in levels or types of
construction, incorrect estimates used in entering fixed-price contracts,
difficulty in managing operations in existing, geographically-diverse
operations, the high level of competition in the construction industry, the
impact of variations in interest rates, general level of the economy, changes in
the level of competition in the electrical industry, changes in the costs of
labor, changes in the cost or availability of bonds required for certain types
of projects, inability to find sufficient numbers of trained employees,
inability to successfully achieve or maintain planned business objectives,
inaccurate estimates used in percentage of completion calculations, the unknown
effect of U.S. involvement in armed conflict, and seasonal variation in the
ability to perform work. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinion only as the
date hereof. We take no obligation to revise or publicly release the results of
any revision of these forward-looking statements. If any revisions are made to
this document, the revisions will necessarily be delayed from the occurrence of
the event or receipt of the information upon which the revision will be based.
Readers should carefully review the cautionary statement described in this and
other documents we file from time to time with the Securities and Exchange
Commission, including annual reports on Form 10-K.
[LOGO] IES
August 2003 www.ies-co.com
Integrated Electrical Services
(NYSE: IES)
Company & Investment Profile
- --------------------------------------------------------------------------------
Key Investment Points
o IES is the largest provider of electrical contracting services in the
U.S., with approximately 140 locations across the country. Its size,
diverse customer base and breadth of services give the Company significant
advantages in the marketplace and cushion it from economic swings.
o The Company's size also allows it to provide nationwide service to larger
customers.
o In 2004, many sectors where IES has significant strength and tends to have
higher profit margins, such as manufacturing facilities, hotels, office
buildings and retail centers, are expected to have significant
construction growth.
o IES is well-positioned to take advantage of any power grid upgrade work.
7% of IES' current backlog is from power utility work including electrical
infrastructure projects. IES has two subsidiaries dedicated to this type
of work and four others with a focus in this area.
o Management's Back to Basics and One Company. One Plan. initiatives have
maintained backlog, lowered costs and increased cash flow.
o IES generated record cash flow from operations of $53.4 million in 2002
and through June 30, 2003 has generated $36.7 million. A portion of the
cash is being used to pay down debt and execute on a 2 million share
common stock repurchase program, which is 75% complete with approximately
1.5 million shares repurchased at 6/30/03.
o IES' executive incentive plan, while discretionary, is aligned with
shareholder expectations and is structured such that executives may
receive up to a target bonus when IES achieves certain levels of
profitability.
o IES maintains strong corporate governance policies, including split CEO
and Chairman positions and a seven-person board with four outside
directors.
(Amounts in Millions, except per share data)
- ----------------------------------------------------------------
Price (8/15/03) $6.10
52 Wk. High/Low $7.73 - $3.10
Total Shares (as of7/29/03) 38.8
Equity Market Cap. $237
Average Daily Volume (approximate) 100,000
Cash (as of 6/30/03) $40
Total Debt (as of 6/30/03) $248
Total Enterprise Value (TEV)* $445
Institutional Ownership (as of 6/30/03) 56%
Inside Ownership (as of 6/30/03) 25%
- ----------------------------------------------------------------
2003 EPS Guidance $0.53 - $0.60
2003 P/E Multiple 11.5x - 10.2x
Price / Sales Multiple 0.2x
Price / Book Value Per Share 0.9x
Book Value Per Share $6.78
- ----------------------------------------------------------------
* Total Enterprise Value = Equity Market Cap. + Debt - Cash
- -------------------------------------------------------------------
IES HAS OUTPERFORMED THE S&P 500
- -------------------------------------------------------------------
Jan-01 6.42 1366.01 1.13 1.04
Feb-01 6.04 1239.94 1.06 0.94
Mar-01 5.70 1160.33 1.00 0.88
Apr-01 5.50 1249.46 0.97 0.95
May-01 8.99 1255.82 1.58 0.96
Jun-01 9.75 1224.38 1.71 0.93
Jul-01 8.60 1211.23 1.51 0.92
Aug-01 8.20 1133.58 1.44 0.86
Sep-01 5.40 1040.94 0.95 0.79
Oct-01 3.70 1059.78 0.65 0.81
Nov-01 4.08 1139.45 0.72 0.87
Dec-01 5.12 1148.08 0.90 0.87
Jan-02 4.50 1130.20 0.79 0.86
Feb-02 4.35 1106.73 0.76 0.84
Mar-02 5.00 1147.39 0.88 0.87
Apr-02 5.25 1076.92 0.92 0.82
May-02 5.50 1067.14 0.97 0.81
Jun-02 6.25 989.82 1.10 0.75
Jul-02 5.35 911.62 0.94 0.69
Aug-02 4.94 916.07 0.87 0.70
Sep-02 3.74 815.28 0.66 0.62
Oct-02 3.80 885.76 0.67 0.67
Nov-02 3.90 936.31 0.69 0.71
Dec-02 3.85 879.82 0.68 0.67
Jan-03 4.35 855.70 0.76 0.65
Feb-03 3.84 841.15 0.67 0.64
Mar-03 4.08 874.74 0.72 0.67
Apr-03 5.73 917.52 1.01 0.70
May-02 6.2 925 1.09 0.70
Jun-03 7.25 974.50 1.22 0.74
Jul-03 7.26 990.31 1.13 0.72
================================================================
This document was produced by Integrated Electrical Services, Inc. and is not an
independent analyst report.
INTEGRATED ELECTRICAL SERVICES, INC. - Summary Financial Data
- --------------------------------------------------------------------------------
(Dollars in Millions)
- --------------------------------------------------------------------------------
SUMMARY INCOME STATEMENT
- --------------------------------------------------------------------------------
FYE - September 30,
---------------------------------------
2001 2002 2003E**
---- ---- -------
Revenue $1,693 $1,475 $1,475
Cost of Services 1,385 1,253 -
------ ------- -------------
Gross Profit 308 222 -
SG&A 214 174 -
Restruct. Charge - 6 -
Goodwill Amort. 13 - -
------ ------- -------------
Operating Income 81 42 -
Interest Expense (26) (27) -
Other, net - 1 -
------ ------- -------------
Pretax Income before Accounting Change 55 16 -
Taxes 26 6 -
Cumulative effect of Accounting Change - 283 -
------ ------- -------------
Net Income $ 29 $ (273) -
====== ======= =============
Net Income before Accounting Change $ 29 $ 10 -
Diluted EPS $ 0.70 $ (6.86) $0.53 - $0.60
Accounting Change* - (7.11) -
------ ------- -------------
Operating EPS* $0.70 $0.25 $0.53 - $0.60
Diluted Shares 40.9 39.8 -
* Before cumulative effect of change in accounting principle, net of tax.
** 2003 Company Guidance.
- --------------------------------------------------------------------------------
KEY MARGINS
- --------------------------------------------------------------------------------
FYE - September 30,
2001 2002
---- ----
Gross Margin 18.2% 15.1%
SG&A as % Revenues 12.6% 11.8%
Operating Margin 4.8% 2.8%
Pretax Margin 3.2% 1.1%
Net Margin 1.7% 0.7%
Return on Equity 5.5% 5.1%
Return on Assets 2.8% 2.3%
WACC (Weighted Average Cost of Capital) - Approximately 11%
- --------------------------------------------------------------------------------
2001 2002 2003*
- --------------------------------------------------------------------------------
52 Wk High $10.00 $6.50 $7.73
- --------------------------------------------------------------------------------
52 Wk Low $4.90 $3.07 $3.10
- --------------------------------------------------------------------------------
TEV/Op. Income High 7.9x 7.0x
- --------------------------------------------------------------------------------
TEV/Op. Income Low 3.3x 5.7x
- --------------------------------------------------------------------------------
P/E High 10.5x 13.0x 14.6x-12.9x
- --------------------------------------------------------------------------------
P/E Low 5.2x 6.1x 5.9x-5.2x
- --------------------------------------------------------------------------------
* Share prices in 2003 are YTD and EPS is the corporate guidance range.
- --------------------------------------------------------------------------------
SUMMARY BALANCE SHEET AND RATIOS
- --------------------------------------------------------------------------------
FYE - September 30,
-------------------
Assets 2001 2002 Q3 2003
- ------ ---- ---- -------
Current Assets $453 $438 $449
Total Assets $1,034 $722 $726
Liabilities and Equity
Current Liabilities $216 $194 $186
Total Debt $289 $249 $248
Stockholders' Equity $529 $254 $263
Working Capital % of Revenue* 13.8% 14.4% 15.5%
Capital Expenditures as % Revenue 1.5% 0.8% 0.5%
* Working Capital = Cur. Assets less Cash minus Non-Interest Bearing Cur.
Liabilities.
---------------------
BACKLOG *
---------------------
(Dollars in Millions)
1999 $644
2000 $726
2001 $789
2002 $801
Q3 2003 $747
* Excludes divestitures and is work which the Company has signed contracts for,
but has not yet completed.
- --------------------------------------------------------
IES 12 MONTH STOCK PERFORMANCE
- --------------------------------------------------------
Graphic Omitted
Disclosure Statement
- --------------------------------------------------------------------------------
This report was prepared by Integrated Electrical Services, Inc. ("IES" or the
"Company"). The opinions shared in this document are the beliefs of management
at the time of printing.
This document includes certain statements, including statements relating to the
Company's expectations of future operating results that may be deemed
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition to historical information, this
document contains forward-looking statements made by the management of IES. Such
statements are typically identified by terms expressing future expectation or
goals. These forward-looking statements, although made in good faith, include
assumptions, expectations, predictions, intentions or beliefs about future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in these forward-looking
statements. Factors that might cause such differences include, but are not
limited to, inherent uncertainties relating to estimating future results,
fluctuations in operating results because of down-turns in levels or types of
construction, incorrect estimates used in entering fixed-price contracts,
difficulty in managing operations in existing, geographically-diverse
operations, the high level of competition in the construction industry, the
impact of variations in interest rates, general level of the economy, changes in
the level of competition in the electrical industry, changes in the costs of
labor, changes in the cost or availability of bonds required for certain types
of projects, inability to find sufficient numbers of trained employees,
inability to successfully achieve or maintain planned business objectives,
inaccurate estimates used in percentage of completion calculations, the unknown
effect of U.S. involvement in armed conflict, and seasonal variation in the
ability to perform work. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinion only as the
date hereof. The Company takes no obligation to revise or publicly release the
results of any revision of these forward-looking statements. If any revisions
are made to this document, the revisions will necessarily be delayed from the
occurrence of the event or receipt of the information upon which the revision
will be based. Readers should carefully review the cautionary statement
described in this and other documents filed from time to time with the
Securities and Exchange Commission, including annual reports on Form 10-K.
IES cautions readers that the following important factors as well as others, in
some cases have affected, and in the future could affect, IES' actual results
and could cause IES' results in the future to differ materially from the goals
and expectations expressed herein and in any other forward-looking statements
made by or on behalf of IES.
Maintaining or achieving growth from operations is dependent primarily on
achieving anticipated level of earnings before depreciation, amortization, and
other non-cash charges, controlling expenditures to budgeted levels, collecting
accounts receivable, and maintaining costs at current or lower levels.
In addition to the factors addressed above, financial performance may be
affected by many other important factors including the following: the ability of
IES to attract and retain key personnel; the amount and rate of growth in IES'
general and administrative expenses; the ability of IES to stay within the
limits of the credit ratios set out in its debt covenants; changes in inflation
or other general economic conditions affecting the domestic construction and
electrical contracting industry; unanticipated legal proceedings and
unanticipated outcomes of legal proceedings; changes in accounting policies and
practices required by generally accepted accounting principles, the Securities
and Exchange Commission and other regulatory bodies.
================================================================
This document was produced by Integrated Electrical Services, Inc. and is not an
independent analyst report.
Exhibit 99.2
[LOGO] IES
August 2003 www.ies-co.com
Integrated Electrical Services
(NYSE: IES)
Company & Investment Profile
- --------------------------------------------------------------------------------
Key Investment Points
o IES is the largest provider of electrical contracting services in the
U.S., with approximately 140 locations across the country. Its size,
diverse customer base and breadth of services give the Company significant
advantages in the marketplace and cushion it from economic swings.
o The Company's size also allows it to provide nationwide service to larger
customers.
o In 2004, many sectors where IES has significant strength and tends to have
higher profit margins, such as manufacturing facilities, hotels, office
buildings and retail centers, are expected to have significant
construction growth.
o IES is well-positioned to take advantage of any power grid upgrade work.
7% of IES' current backlog is from power utility work including electrical
infrastructure projects. IES has two subsidiaries dedicated to this type
of work and four others with a focus in this area.
o Management's Back to Basics and One Company. One Plan. initiatives have
maintained backlog, lowered costs and increased cash flow.
o IES generated record cash flow from operations of $53.4 million in 2002
and through June 30, 2003 has generated $36.7 million. A portion of the
cash is being used to pay down debt and execute on a 2 million share
common stock repurchase program, which is 75% complete with approximately
1.5 million shares repurchased at 6/30/03.
o IES' executive incentive plan, while discretionary, is aligned with
shareholder expectations and is structured such that executives may
receive up to a target bonus when IES achieves certain levels of
profitability.
o IES maintains strong corporate governance policies, including split CEO
and Chairman positions and a seven-person board with four outside
directors.
(Amounts in Millions, except per share data)
- ----------------------------------------------------------------
Price (8/15/03) $6.10
52 Wk. High/Low $7.73 - $3.10
Total Shares (as of 7/29/03) 38.8
Equity Market Cap. $237
Average Daily Volume (approximate) 100,000
Cash (as of 6/30/03) $40
Total Debt (as of 6/30/03) $248
Total Enterprise Value (TEV)* $445
Institutional Ownership (as of 6/30/03) 56%
Inside Ownership (as of 6/30/03) 25%
- ----------------------------------------------------------------
2003 EPS Guidance $0.53 - $0.60
2003 P/E Multiple 11.5x - 10.2x
Price / Sales Multiple 0.2x
Price / Book Value Per Share 0.9x
Book Value Per Share $6.78
- ----------------------------------------------------------------
* Total Enterprise Value = Equity Market Cap. + Debt - Cash
- -------------------------------------------------------------------
IES HAS OUTPERFORMED THE S&P 500
- -------------------------------------------------------------------
Jan-01 6.42 1366.01 1.13 1.04
Feb-01 6.04 1239.94 1.06 0.94
Mar-01 5.70 1160.33 1.00 0.88
Apr-01 5.50 1249.46 0.97 0.95
May-01 8.99 1255.82 1.58 0.96
Jun-01 9.75 1224.38 1.71 0.93
Jul-01 8.60 1211.23 1.51 0.92
Aug-01 8.20 1133.58 1.44 0.86
Sep-01 5.40 1040.94 0.95 0.79
Oct-01 3.70 1059.78 0.65 0.81
Nov-01 4.08 1139.45 0.72 0.87
Dec-01 5.12 1148.08 0.90 0.87
Jan-02 4.50 1130.20 0.79 0.86
Feb-02 4.35 1106.73 0.76 0.84
Mar-02 5.00 1147.39 0.88 0.87
Apr-02 5.25 1076.92 0.92 0.82
May-02 5.50 1067.14 0.97 0.81
Jun-02 6.25 989.82 1.10 0.75
Jul-02 5.35 911.62 0.94 0.69
Aug-02 4.94 916.07 0.87 0.70
Sep-02 3.74 815.28 0.66 0.62
Oct-02 3.80 885.76 0.67 0.67
Nov-02 3.90 936.31 0.69 0.71
Dec-02 3.85 879.82 0.68 0.67
Jan-03 4.35 855.70 0.76 0.65
Feb-03 3.84 841.15 0.67 0.64
Mar-03 4.08 874.74 0.72 0.67
Apr-03 5.73 917.52 1.01 0.70
May-02 6.2 925 1.09 0.70
Jun-03 7.25 974.50 1.22 0.74
Jul-03 7.26 990.31 1.13 0.72
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 1
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
INTEGRATED ELECTRICAL SERVICES, INC. - Summary Financial Data
- --------------------------------------------------------------------------------
(Dollars in Millions)
- --------------------------------------------------------------------------------
SUMMARY INCOME STATEMENT
- --------------------------------------------------------------------------------
FYE - September 30,
---------------------------------------
2001 2002 2003E**
---- ---- -------
Revenue $1,693 $1,475 $1,475
Cost of Services 1,385 1,253 -
------ ------- -------------
Gross Profit 308 222 -
SG&A 214 174 -
Restruct. Charge - 6 -
Goodwill Amort. 13 - -
------ ------- -------------
Operating Income 81 42 -
Interest Expense (26) (27) -
Other, net - 1 -
------ ------- -------------
Pretax Income before Accounting Change 55 16 -
Taxes 26 6 -
Cumulative effect of Accounting Change - 283 -
------ ------- -------------
Net Income $ 29 $ (273) -
====== ======= =============
Net Income before Accounting Change $ 29 $ 10 -
Diluted EPS $ 0.70 $ (6.86) $0.53 - $0.60
Accounting Change* - (7.11) -
------ ------- -------------
Operating EPS* $0.70 $0.25 $0.53 - $0.60
Diluted Shares 40.9 39.8 -
* Before cumulative effect of change in accounting principle, net of tax.
** 2003 Company Guidance.
- --------------------------------------------------------------
KEY MARGINS
- --------------------------------------------------------------
FYE - September 30,
2001 2002
---- ----
Gross Margin 18.2% 15.1%
SG&A as % Revenues 12.6% 11.8%
Operating Margin 4.8% 2.8%
Pretax Margin 3.2% 1.1%
Net Margin 1.7% 0.7%
Return on Equity 5.5% 5.1%
Return on Assets 2.8% 2.3%
WACC (Weighted Average Cost of Capital) - Approximately 11%
- --------------------------------------------------------------------------------
2001 2002 2003*
- --------------------------------------------------------------------------------
52 Wk High $10.00 $6.50 $7.73
- --------------------------------------------------------------------------------
52 Wk Low $4.90 $3.07 $3.10
- --------------------------------------------------------------------------------
TEV/Op. Income High 7.9x 7.0x
- --------------------------------------------------------------------------------
TEV/Op. Income Low 3.3x 5.7x
- --------------------------------------------------------------------------------
P/E High 10.5x 13.0x 14.6x-12.9x
- --------------------------------------------------------------------------------
P/E Low 5.2x 6.1x 5.9x-5.2x
- --------------------------------------------------------------------------------
* Share prices in 2003 are YTD and EPS is the corporate guidance range.
- --------------------------------------------------------------------------------
SUMMARY BALANCE SHEET AND RATIOS
- --------------------------------------------------------------------------------
FYE - September 30,
-------------------
Assets 2001 2002 Q3 2003
- ------ ---- ---- -------
Current Assets $453 $438 $449
Total Assets $1,034 $722 $726
Liabilities and Equity
Current Liabilities $216 $194 $186
Total Debt $289 $249 $248
Stockholders' Equity $529 $254 $263
Working Capital % of Revenue* 13.8% 14.4% 15.5%
Capital Expenditures as % Revenue 1.5% 0.8% 0.5%
* Working Capital = Cur. Assets less Cash minus Non-Interest Bearing Cur.
Liabilities.
- ---------------------
BACKLOG *
- ---------------------
(Dollars in Millions)
1999 $644
2000 $726
2001 $789
2002 $801
Q3 2003 $747
* Excludes divestitures and is work which the Company has signed contracts for,
but has not yet completed.
- --------------------------------------------------------
IES 12 MONTH STOCK PERFORMANCE
- --------------------------------------------------------
Date Month High Low Close Volume
---- ----- ---- --- ----- ------
Graphic Omitted
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Table of Contents
- --------------------------------------------------------------------------------
* Indicates an area of Significant update since the May Profile update
Key Investment Points................................... 1
Summary Financial Data.................................. 2*
Summary................................................. 5
Three-Phase Strategic Plan.............................. 7
Recent Financial Results and Guidance................... 15*
Company Overview........................................ 19*
Organizational Systems, Processes and Controls.......... 28
IES Management Team..................................... 32
Corporate Governance.................................... 34
Industry Overview....................................... 35
Outlook and Valuation................................... 42*
Income Statement........................................ 47*
Balance Sheet........................................... 49*
Statement of Cash Flows................................. 50*
Appendix
Construction Accounting Primer.......................... 51
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 3
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Disclosure Statement
--------------------------------------------------------------------------
This report was prepared by Integrated Electrical Services, Inc. ("IES" or
the "Company"). The opinions shared in this document are the beliefs of
management at the time of printing.
This document includes certain statements, including statements relating
to the Company's expectations of future operating results that may be
deemed "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. In addition to historical
information, this document contains forward-looking statements made by the
management of IES. Such statements are typically identified by terms
expressing future expectation or goals. These forward-looking statements,
although made in good faith, include assumptions, expectations,
predictions, intentions or beliefs about future events and are subject to
risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements.
Factors that might cause such differences include, but are not limited to,
inherent uncertainties relating to estimating future results, fluctuations
in operating results because of down-turns in levels or types of
construction, incorrect estimates used in entering fixed-price contracts,
difficulty in managing operations in existing, geographically-diverse
operations, the high level of competition in the construction industry,
the impact of variations in interest rates, general level of the economy,
changes in the level of competition in the electrical industry, changes in
the costs of labor, changes in the cost or availability of bonds required
for certain types of projects, inability to find sufficient numbers of
trained employees, inability to successfully achieve or maintain planned
business objectives, inaccurate estimates used in percentage of completion
calculations, the unknown effect of U.S. involvement in armed conflict,
and seasonal variation in the ability to perform work. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's opinion only as the date hereof. The Company
takes no obligation to revise or publicly release the results of any
revision of these forward-looking statements. If any revisions are made to
this document, the revisions will necessarily be delayed from the
occurrence of the event or receipt of the information upon which the
revision will be based. Readers should carefully review the cautionary
statement described in this and other documents filed from time to time
with the Securities and Exchange Commission, including annual reports on
Form 10-K.
IES cautions readers that the following important factors as well as
others, in some cases have affected, and in the future could affect, IES'
actual results and could cause IES' results in the future to differ
materially from the goals and expectations expressed herein and in any
other forward-looking statements made by or on behalf of IES.
Maintaining or achieving growth from operations is dependent primarily on
achieving anticipated level of earnings before depreciation, amortization,
and other non-cash charges, controlling expenditures to budgeted levels,
collecting accounts receivable, and maintaining costs at current or lower
levels.
In addition to the factors addressed above, financial performance may be
affected by many other important factors including the following: the
ability of IES to attract and retain key personnel; the amount and rate of
growth in IES' general and administrative expenses; the ability of IES to
stay within the limits of the credit ratios set out in its debt covenants;
changes in inflation or other general economic conditions affecting the
domestic construction and electrical contracting industry; unanticipated
legal proceedings and unanticipated outcomes of legal proceedings; changes
in accounting policies and practices required by generally accepted
accounting principles, the Securities and Exchange Commission and other
regulatory bodies.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 4
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Summary
--------------------------------------------------------------------------
Integrated Electrical Services ("IES" or the "Company") is the largest
provider of electrical contracting services in the United States. The
Company provides a broad range of services which include designing,
building, maintaining and servicing electrical systems and data
communication systems for commercial, industrial and residential
customers. The Company is headquartered in Houston, Texas.
Since the Company's inception in 1997, IES has developed a national
footprint of approximately 140 locations currently serving the continental
48 states with concentration in the Sunbelt. At the time of its IPO in
January 1998, the Company had run-rate revenues of approximately $313
million. Since that time, IES has grown rapidly through acquisitions and
internal growth. From 1997 to 2002, revenues increased at a compounded
annual growth rate of approximately 47%. Included in that growth was
approximately 8% organic or "same store sales" growth compared to an
industry growth rate of 5%, according to F.W. Dodge, during the same
period.
Exhibit 1
IES Has a Nationwide Presence
IES is highly diversified with operations in 140 locations across the U.S.
[Graphic Omitted]
IES' business includes providing system design, installation, maintenance
and service to general contractors, developers and companies of all sizes.
IES has two business segments, Commercial/Industrial and Residential. In
2002, 81% of revenues were from Commercial/Industrial and 19% of revenues
were from Residential. IES' service and maintenance work is done within
the Commercial/Industrial segment and accounted for 10% of IES'
Commercial/Industrial revenues.
Shortly after being named CEO in October 2001, H. Roddy Allen led the
implementation of a three-phase strategic plan to strengthen the Company
during the recent reduction in construction spending, further integrate
the Company and focus on future growth. The first phase of the strategy,
Back to Basics, is largely in place and is an ongoing process. Phase II,
One Company. One Plan. is underway, and focuses on the integration of the
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 5
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Company. Phase III, Continued Growth, will seek to grow the Company via
internal and acquisition-driven growth.
As part of Phase III, IES will consider compelling acquisition
opportunities. In February 2003, IES acquired substantially all the assets
of Encompass Electrical Technologies - Rocky Mountains, Inc. (formerly
known as Riviera Electric), a provider of electrical contracting services
based in Denver, Colorado, with locations throughout the state of
Colorado. The assets acquired by IES generated revenues of $84 million for
the calendar year ended December 31, 2002. The purchase price was $2.7
million net of cash acquired.
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 6
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Three-Phase Strategic Plan
--------------------------------------------------------------------------
The strategic plan is a multi-year three-phase plan with Phase I actions
to build backlog, control costs, and generate strong cash flow; Phase II
actions to integrate IES' subsidiaries; and finally Phase III to focus on
continued growth. The three phases of the plan are detailed in Exhibit 2
below:
Exhibit 2
A Well-Defined and Successful Strategy
- -------------------------------------------------------------------------------------------------------
Phase I Phase II Phase III
- -------------------------------------------------------------------------------------------------------
Back to Basics One Company. One Plan. Continued Growth
- Build Backlog - Regional Structure - Organic Growth
- Control Costs - Financial Reporting and - Greenfield Growth
- Focus on Cash Flow Planning - Strategic Acquisitions
- Employees - Continue Back to Basics
- Safety - Continue One Company. One
- Procurement Plan.
- Customers
- Continue Back to Basics
------ Reengineer Balance Sheet ------
Status: In Place and Ongoing Status: 3/4 Complete Status: Early Stages
PHASE I - BACK TO BASICS
Results to date of Phase I have been strong, as demonstrated by the
Company's results in fiscal 2002, when cash flow from operations reached
record levels and profitability improved consistently throughout the year.
In addition through the third quarter of 2003, IES has improved operating
income margins over last year by 30 basis points from 3.4% to 3.7%.
Exhibit 3
Improved Performance
IES has improved EPS by 10% relative to 2002 year-to-date performance while
projected 2003 construction spending is down 2%
- --------------------------------------------------------------------------------
Year to Date
--------------------
(Dollars in Millions) 3Q 2002 3Q 2003
- --------------------------------------------------------------------------------
Revenues $1,106.5 $1,067.1
Operating Income before one-time Charges in 2002 37.4 39.6
GAAP Operating Income 31.8 39.6
- --------------------------------------------------------------------------------
Diluted EPS Prior to Charges in 2002 $0.28 $0.32
- --------------------------------------------------------------------------------
Restructuring Charges in 2002 ($0.09)
Diluted EPS before Accounting Principle Change $0.19 $0.32
Gross Margin 15.4% 14.4%
- --------------------------------------------------------------------------------
Operating Income Margin before one-time Charges in 2002 3.4% 3.7%
- --------------------------------------------------------------------------------
GAAP Operating Income Margin 2.9% 3.7%
- --------------------------------------------------------------------------------
Cash flow from Operations $47.3 $36.7
- --------------------------------------------------------------------------------
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 7
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Electrical Services, Inc. and is not an independent analyst report.
As the impact of the implementation of Back to Basics was realized
throughout fiscal 2002, the Company showed steady and significant
improvement in key profitability metrics. Operating income margins more
than doubled over the four-quarter period while EPS prior to one-time
charges increased from $0.02 per share in the first quarter to $0.22 in
the fourth quarter.
IES has continued to show improvement in 2003. Through the third quarter
of 2003, IES has generated $0.32 of EPS, a 10% improvement relative to
2002 even though overall construction spending in 2003 is projected to
decline 2% relative to 2002.
IES has focused on doing business more efficiently in order to improve
profitability in this tighter construction market. Examples include: the
national procurement program which has strengthened IES' relationship with
vendors and reduced its overall cost to procure goods; the focus on
serving customers on a more national basis, increasing the number of
nationally based projects which tend to be higher margin; and further
employee training, especially at the project manager level, to insure
consistent project management procedures and proficiency levels across
IES.
Build Backlog
Building backlog is a primary element of Back to Basics to insure access
to future project work. IES was able to increase its backlog in 2002 in a
market where commercial and industrial construction spending was down 18%,
according to statistics from F.W. Dodge. The primary components of backlog
are commercial and industrial projects including institutional work, since
most service work (except for long-term service contracts) and most
single-family residential projects are not included in backlog due to the
short-term nature of the projects. The Company's strong backlog
performance serves to highlight the advantages of its size and diverse
customer base and helps it navigate through difficult economic periods.
Exhibit 4 on the following page demonstrates how IES has maintained its
backlog through the end of 2002. The Company divested three non-core
businesses in 2002, and the backlog associated with these divestitures was
removed in each year.
At the end of the third quarter of 2003 IES had backlog of $747 million,
which is down from 2002 levels. The Company just recently removed $16.5
million of work from backlog as a result of the financial difficulty of
one of its healthcare customers and IES is hopeful that work will return
to backlog over the coming quarters. In addition, IES has less larger
project work than at this time last year, which means overall, the
duration of this backlog is slightly shorter.
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 8
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 4
Record Backlog in Fiscal 2002 Despite Weak Construction Spending
In 2002 IES' Backlog increased by $12 million, while the commercial and
industrial construction market was down 18%.
- -------------------------
BACKLOG *
- -------------------------
1999 $644.0
2000 $726.0
2001 $789.0
2002 $801.0
Q3 2003 $747.0
- -------------------------
* Prior years have been restated to exclude divestitures. Backlog includes
project work which the Company has a signed contract for, but is not yet
completed.
Control Costs
Reigning in costs is a key element of the Back to Basics strategy.
Throughout 2002 and in 2003, particular effort was focused on reducing
selling, general and administrative ("SG&A") costs. By the fourth quarter
of 2002, significant progress had been made; that quarter's SG&A was only
$41.1 million versus $57.3 million a year earlier. This was a 28%
reduction, as summarized in Exhibit 5. IES continues to lower costs in
2003. Through the third quarter of 2003, SG&A costs were down another 14%
relative to 2002.
Exhibit 5
Significantly Lower SG&A Costs
IES reduced SG&A expenses by 28% in fiscal 2002 and continues to reduce costs.
- ------------------------------------------------------------------------
(Dollars in Millions) 4Q 2001 4Q 2002
- ------------------------------------------------------------------------
Corporate SG&A decreased 59% $11.0 $4.5
Field SG&A decreased 21% 46.3 36.6
----- -----
Overall SG&A decreased 28% $57.3 $41.1
- ------------------------------------------------------------------------
Focus on Cash Flow
Management has been successful in improving free cash flow generation
(cash flow from operations less capital expenditures). Cash flow from
operations increased from $8.6 million in 2001 to $53.4 million in 2002.
Meanwhile IES was able to reduce capital expenditures from $25.8 million
in 2001 to $11.9 million in 2002. IES' 2002 free cash flow was an all-time
high of $41.5 million, a positive swing of $58.7 million from fiscal
2001's cash flow use of ($17.2) million. IES' guidance for free cash flow
generation in 2003 is between $30 million and $40 million and through the
first nine months of fiscal 2003, IES has already generated free cash flow
of $29.4 million. IES presents free cash
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 9
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
flow because management believes it is a good measure of operating
performance and cash available for shareholders. Exhibit 6 illustrates the
free cash flow generation over the past four years and the 2003 projected
free cash flow.
Exhibit 6
Record Levels of Free Cash Flow in Fiscal 2002
- -----------------
FREE CASH FLOW*
- -----------------
1999 $-19.9
2000 $14.8
2001 $-17.2
2002 $41.5
2003P $30-$40
- -----------------
* Cash Flow from Operations less Capital Expenditures.
In addition to the large reduction in SG&A expenses, better management of
working capital helped increase cash generation. Days Sales Outstanding
("DSO") in accounts receivable, a measure of capital tied up in financing
receivables, was 80 days in the first quarter of 2002. Renewed focus on
collecting receivables reduced this figure by 7 days to 73 days by fiscal
year end. At the end of the third quarter of 2003, DSOs were 75 days.
The table below illustrates how IES' move from a significant growth phase
into an integrated company is positively impacting its capital structure:
Exhibit 7
Cash Flow Trends Illustrate Integration
IES improved its free cash flow generation by $58.7 million in fiscal 2002.
- --------------------------------------------------------------------------------
(Dollars in Millions) 1999 2000 2001 2002
- --------------------------------------------------------------------------------
Cash Flow from Operations ($7.0) $43.2 $8.6 $53.4
Capital Expenditures (12.9) (28.4) (25.8) (11.9)
------- ------ ------ -----
Free Cash Flow ($19.9) $14.8 ($17.2) $41.5
Acquisition Expenditures (106.5) (33.2) (0.2) -
Divestiture Proceeds - - - 7.5
------- ------ ------ -----
Cash Flow after Acq/Divest ($126.4) ($18.4) ($17.4) $49.0
Decrease (Increase) in Debt ($137.5) ($16.0) ($44.0) $39.1
- --------------------------------------------------------------------------------
As shown in the table, negative cash flow from operations and a high level
of spending characterized 1999. IES was focused on acquisition growth and
spent over $100 million in cash to acquire some 40 electrical contractors
with about $415 million in annualized revenues. In 2000, IES slowed its
aggressive acquisition growth goals and began to focus on integration.
Acquisition spending fell to $33 million in cash for 2000 and ceased in
2001. In 2002, with Back to Basics implemented, acquisition spending
eliminated and capital expenditures reduced, free cash flow increased
sharply. IES also streamlined its
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 10
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Electrical Services, Inc. and is not an independent analyst report.
business by divesting non-core and/or under performing operations, raising
another $7.5 million in cash.
IES expects to generate between $30 million and $40 million of free cash flow in
fiscal 2003.
IES continues to work diligently to maximize cash flow generation. In
addition to focusing on an efficient base business and controlling capital
expenditures, IES is proactive in reviewing and implementing tax planning
opportunities. As a result of effective tax planning, IES expects to
reduce cash taxes paid in 2003 and 2004 and expects this to improve the
Company's free cash flow and contributes to IES' expectation to generate
between $30 million and $40 million in free cash flow.
FINANCIAL REENGINEERING
Across all three phases of IES' strategic plan, IES is reengineering the
Company's capital structure. IES is utilizing its free cash flow to set a
solid foundation for the future. The Company reduced debt by $39.1 million
in fiscal 2002, and in August of 2002, it began a two million share common
stock repurchase program. Through June 30, 2003 IES has repurchased
approximately 1.5 million shares under the program, further confirmation
of management's belief that IES is on the right track and positioned to
generate significant free cash flow and further increase shareholder
value. The Company plans to continue to retire debt over the next two to
three years if and when the price of IES' debt is attractive, and plans to
reduce total debt levels to under $200 million from its $249 million level
today. IES' net debt (debt less cash) is already down to $208 million.
Credit facility extended to May 2006.
On May 27th, 2003, IES extended its $150 million credit facility led by JP
Morgan for an additional two years from May 2004 to May 2006. At the time
of the extension, IES reduced the size of its facility from $150 million
to $125 million in keeping with the Company's more conservative capital
structure. There is an accordion feature in the facility such that IES can
increase the facility to $150 million. At the time of the extension, the
covenant requirements for IES' Debt to EBITDA ratio were changed from
3.50x in June 2003 to 3.75x, from 3.25x to 3.75x in September, down to
3.50x in December and down to 3.25x in June 2004 and thereafter. The EBIT
to Interest coverage ratio was changed from 2.50x in June to 2.00x and up
to 2.25x in September and then up to 2.50x in March 2004 and thereafter.
In addition, the provisions of the extension limit the amount of
outstanding debt and capital stock that can be repurchased to the lesser
of $70 million or $30 million plus 50% of cumulative net income if there
is no outstanding balance on the facility. If there is an outstanding
balance on the facility it is the lesser of $50 million or $30 million
plus 50% of cumulative net income. Additionally, capital stock purchases
are limited to $20 million in aggregate.
IES has not drawn on the facility since April 2002 and, as of June 30,
2003, IES had $40.3 million in cash on its balance sheet. Current cash
levels combined with the lack of current financing needs allowed IES to
reduce its facility to $125 million. Reducing the facility saved IES
approximately $160,000 at the time of the extension and will save the
Company approximately $160,000 each year through 2006 in annual commitment
fees for the undrawn portion of the facility.
PHASE II - ONE COMPANY. ONE PLAN.
With Back to Basics in place and its benefits ongoing, management moved to
Phase II of its strategic plan, One Company. One Plan. The primary goal of
One Company. One Plan. is to achieve a higher level of integration among
the operating units. Even with the divestiture of under-performing
subsidiaries and the combination of some subsidiaries, IES can further
streamline the organization and recognize significant value from increased
integration. The focus of Phase II is instituting a regional structure,
implementing a unified financial planning and reporting system, unifying
employee programs and
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 11
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Electrical Services, Inc. and is not an independent analyst report.
incentives, further improving the Company's safety record, generating
savings through a centralized procurement program and servicing customers
on a more national basis. Results indicate the program is as successful as
Back to Basics.
Regional Structure
The number of reporting entities continues to be consolidated to create a more
unified and effective structure.
IES has implemented a regional structure with six Regional Operating
Officers reporting directly to the Chief Operating Officer, Rick China and
the Chief Executive Officer, H. Roddy Allen. The regional structure helps
IES to better manage its business. For 2003, corporate planning was done
on a regional basis and incentive plan goals are based on regional
targets. This has already created a stronger team environment within each
region; the subsidiaries are more frequently sharing customers and jointly
executing projects. In an effort to further reduce costs, improve
management oversight and streamline operations, IES continues to
consolidate reporting entities.
Exhibit 8
Regional Reporting Structure
[Graphic Omitted]
Financial Reporting and Planning System
The financial planning and reporting system, Forefront, has been
implemented at 80% of the Company's subsidiaries and the West Region is
100% converted to Forefront. This system allows IES direct access to
detailed subsidiary financials at any time and gives each subsidiary
enhanced project management tools. The system has already helped IES to
shorten the monthly financial closing process by two to three days.
Employees
IES has established a common healthcare plan throughout the Company. In
addition, IES has an executive bonus plan focused on overall corporate
performance, as well as regional performance for all executive management
and subsidiary leaders. IES' executive incentive plan, while
discretionary, is structured so that executives and subsidiary leaders may
receive up to a target bonus compensation when IES achieves certain levels
of profitability.
Training is a focus of IES' employee initiative. As an example, the
Company is in the process of training project managers with the assistance
of FMA, a firm that specializes in construction industry consulting. This
program will insure consistent project management procedures and
proficiency levels across IES.
Safety
IES' focus on safety is generating continuously improving performance.
Recordable accidents, a key safety measure, have dropped from 9.72 per 100
employees in fiscal 2000
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 12
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Electrical Services, Inc. and is not an independent analyst report.
to 3.64 per 100 employees in the first nine months of 2003, as shown in
Exhibit 8 below. The industry average is approximately eight recordable
accidents per 100 employees according to the Bureau of Labor Statistics,
so IES has improved to less than half the industry average. In addition to
protecting its workers, this should lead to lower insurance costs in the
future.
Exhibit 9
Safety Initiative Producing Tangible Results
IES' recordable accidents are less than half the industry average.
- --------------------
RECORDABLE ACCIDENTS
- --------------------
2000 9.72
2001 6.41
2002 4.65
2003 YTD 3.64
- --------------------
Source: Company records.
Procurement
The national procurement initiative is generating positive results. At the
end of fiscal 2001, IES began forging relationships and alliances with
manufacturers, service providers and distributors. The relationships have
created more consolidated purchasing on the part of IES and the benefits
include improved pricing, volume-based rebates, increased service
commitments, funding of IES company-wide in-house procurement tools and
partial sponsorship of Company events. As part of this initiative, IES
implemented a system that allows the Company to track the majority of the
goods and services purchased. In 2001, IES could only track 30% of its
procurement spending. Today that percentage is over 70% and IES' goal is
to reach over 90% by the end of 2003. In 2002, IES earned $2.1 million in
volume based incentives and, as a result of this initiative, has reduced
the direct cost of goods and services purchased. IES expects the benefits
from the program to reach $2.5 million in fiscal 2003.
Customers
IES is committed to managing relationships with nation-wide customers and
providing services to larger customers across the country. IES maintains a
customer database so projects across all subsidiaries are tracked and the
data is available in one centralized location. This database is
particularly important due to IES' unique triangular relationship with its
customers. IES typically works for a general contractor; however, the
ultimate customer is the end user, such as Walgreen's or 3M. It is key for
IES to maintain and foster relationships with both of these groups and it
has become a particular focus of the Company. IES' national customer focus
is also making progress. The Company has commenced work on two new
projects with national scope; one for the U.S. government and the other
for a
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 13
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Electrical Services, Inc. and is not an independent analyst report.
large public corporation. IES believes these projects will provide
additional opportunities for the Company in the future.
PHASE III - CONTINUED GROWTH
Phase III will be implemented as market conditions begin to improve.
However, IES will consider compelling growth opportunities as they present
themselves, as was the case with Riviera Electric in Colorado. With the
implementation of Phases I and II, the foundation for effective,
profitable growth is in place. The Company is more streamlined and
efficient and is functioning more as a unified organization than a
federation of different entities.
The Company's acquisition and expansion plans will be strategically
focused and will occur at a manageable pace, with strategic fit and
acquisition quality being the drivers of the process.
Colorado is expected to grow three times as fast as the overall U.S.
construction market.
In the case of Riviera, the state of Colorado is projected to have
9% compound annual growth in construction spending over the next three
years, which is over three times the projected U.S. construction growth
level. Previously, IES did not have a strong presence in Colorado. IES'
backlog for work to be completed in the state of Colorado was $7.7 million
prior to the acquisition. Riviera had backlog of $23 million in December
of 2002 and at the beginning of calendar 2002, (prior to the bankruptcy
filing of the previous owner, Encompass Services), Riviera had backlog of
approximately $48 million. IES believes over time it will be able to build
backlog since Riviera had not added significant projects since July 2002
as a result of Encompass' financial difficulties.
Riviera has locations in Denver, Colorado Springs, Loveland, Eagle, and
Aspen, Colorado and provides electrical contracting services to the
commercial, industrial, service and retrofit markets.
In calendar 2002, Riviera had strong financial performance, with revenues
of $84 million, and pro forma EBITDA of $7.6 million. Riviera has
historically generated gross margins between 19.5% and 21.5% and has been
able to keep SG&A as a percentage of revenues between 10.5% and 11.0% for
an operating income margin of 8.5% to 10.5%. Given the current condition
of Riviera and the depressed backlog levels as a result of the stress
Encompass' financial difficulties created, it is unlikely that Riviera
will be able to generate comparable returns in 2003. However, IES expects
that the transaction will be accretive to earnings in fiscal 2003 and the
acquisition will return to its prior performance over time. IES filed a
Form 8-K with the SEC on May 12, 2003 which includes the audited financial
statements for Riviera Electric.
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 14
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Electrical Services, Inc. and is not an independent analyst report.
Recent Financial Results and Guidance
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The Third Quarter
IES reported earnings of $0.14 per share, at the bottom of the guidance range
for the third quarter of 2003.
The Company posted earnings for the fiscal third quarter ended June 30,
2003 of $0.14 per share versus $0.19 per share a year ago. Results for the
quarter were at the bottom of previously issued guidance of $0.14 to $0.20
per share. Revenues were $375.3 million compared to revenues of $374.8
million for the third quarter a year ago.
Two thousand and three is playing out to be another difficult year for the
construction industry. IES' performance this year is an accomplishment
given that commercial and industrial construction spending was down 18% in
2002 and was originally projected to increase by 12% in 2003 according to
F.W. Dodge, the government's source for construction spending. According
to data through June 2003, F.W. Dodge has revised its projection for 2003
commercial and industrial construction spending to a 4% decline on top of
the decline in 2002.
Highlights of the third quarter included:
o SG&A as a percentage of revenue fell 40 basis points to 10.2% from
10.6% one year ago
o $175 million of new larger project work was added to backlog
o Free cash flow generation was $16.1 million. Free cash flow is cash
flow from operations less capital expenditures and management
believes it is a good measure of operating performance and cash
available for shareholders
o Through June 30, IES has repurchased approximately 1.5 million
shares under its stock repurchase program announced in August 2002
$175 million of new larger project work was added to backlog in Q3 2003 compared
to $130 million in Q3 2002.
IES added $175 million of new larger project work, which is defined as
projects greater than $300,000, to backlog during the third quarter
compared to $187 million added during the second fiscal quarter of 2003
and $130 million added in the third fiscal quarter of 2002. Backlog is
currently $747 million compared to $798 million at the end of the second
quarter and $771 million at the end of the third quarter of 2002. IES
removed $16.5 million of healthcare projects from its backlog due to
financial difficulties of one of its customers. IES is hopeful those
projects will be returned to backlog in the coming quarters. Excluding the
removal of those projects, IES' backlog is down less than one percent from
where it was in the third quarter of 2002.
Review of New Projects in the third quarter:
o $57 million of new work at institutions including schools
o $21 million of new work at hospitals and healthcare centers
o $18 million of new work on apartment buildings
o $15 million of new work at retail centers
o $14 million of new work on utility projects and highway projects
o $14 million of new office building work
o $12 million of new work on hotels and condominiums
o $7 million of new work on manufacturing facilities
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 15
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Electrical Services, Inc. and is not an independent analyst report.
The Second Quarter
IES reported earnings of $0.09 per share, within the guidance range for the
second quarter of 2003.
The Company posted earnings for the fiscal second quarter ended March 31,
2003 of $0.09 per share versus $0.08 per share a year ago. The $0.08 a
year ago is prior to a restructuring charge of $0.03. Results for the
quarter were within the previously issued guidance of $0.08 to $0.12 per
share. Revenues were $343.1 million versus $356.5 million a year ago. This
was a 3.7% decline reflecting $12.2 million of lost revenues on divested
or closed subsidiaries that were included in revenues for the second
quarter last year, but not during the second quarter this year, and
unfavorable weather conditions in the northeast and the south.
Highlights of the second quarter included:
o SG&A as a percentage of revenue fell 130 basis points to 10.9% of
revenues from 12.2% one year ago
o $187 million of new larger project work was added to backlog
o Free cash flow generation was $12.6 million. Free cash flow is cash
flow from operations less capital expenditures and management
believes it is a good measure of cash available for shareholders
o Through March 31, IES has repurchased 1.1 million shares under its
stock repurchase program announced August 2002
IES added $187 million of new larger project work, which is defined as
projects greater than $300,000, to backlog during the second quarter
compared to $155 million added during our first fiscal quarter of 2003 and
$108 million added in our second fiscal quarter of 2002. Backlog at the
end of the second quarter of 2003 was $798 million compared to $766
million at the end of the first fiscal quarter of 2003 and $783 million at
the end of the second fiscal quarter of 2002.
Review of New Projects in the second quarter:
$187 million of new larger project work was added to backlog in Q2 2003.
o $28 million of manufacturing and heavy industrial projects
o $22 million of high-rise hotel and condominium and mid-rise
apartment projects
o $21 million of work at retail centers
o $21 million of work at schools and community centers
o $20 million of work at office buildings
o $13 million of new healthcare projects
o $8 million of wastewater treatment facility work
The $28 million increase in manufacturing and heavy industrial projects is
a significant increase to that category from 7% of total backlog in the
first quarter of fiscal 2003 to 9% of backlog in the second quarter. In
addition the $20 million increase in office building projects increases
that category from 5% of total backlog in the first quarter of fiscal 2003
to 7% of total backlog in the second quarter.
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 16
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Electrical Services, Inc. and is not an independent analyst report.
The First Quarter
IES reported earnings of $0.10 per share, at the top of the guidance range for
the first quarter of 2003.
The Company posted earnings for the fiscal first quarter ended December
31, 2002 of $0.10 per share versus $0.02 per share a year ago. The $0.02 a
year ago is prior to a charge for adoption of SFAS 142 and a restructuring
charge. Results for the quarter were at the top of the previously issued
guidance of $0.06-$0.10 per share. Revenues came in at $348.6 million
versus $375.2 million a year ago. This was a 7% decline reflecting
divestitures of non-core assets in the fourth quarter of 2002, a
significant slow down in telecommunications work versus a year ago and
continued weakness in the commercial and industrial construction market.
See Exhibit 10 below for a detailed breakdown of the decrease in revenues
versus the first quarter of 2001. IES continued to have record performance
from its residential division, as the residential construction market
remains quite robust. IES' residential revenues were $76.9 million for the
first quarter of 2003 versus $67.1 million for the period one year ago
which is a 14.6% increase.
Exhibit 10
Q1 2003 versus Q1 2002 Changes in Revenues
- -----------------------------------------------------------------
(Dollars in Millions) Change in Revenues
- -----------------------------------------------------------------
Divestitures ($14)
Telecommunications ($10)
Commercial/Industrial ($12)
Residential/Other $8
- -----------------------------------------------------------------
Highlights of the first quarter included:
o SG&A as a percentage of revenue fell over 200 basis points to 11.1%
of revenues from 13.3% one year ago.
o $155 million of new larger project work was added to backlog.
o Operating margin increased 170 basis points to 3.7%.
o Free cash flow was positive at $0.7 million in a quarter that
normally uses cash. Free cash flow is cash flow from operations less
capital expenditures and management believes it is a good measure of
cash available for shareholders.
Backlog for the quarter was down to $776 million versus a record $801
million in the fourth fiscal quarter of 2002. This is a typical seasonal
decline. The decline in SG&A expense and the generation of free cash flow
continues to demonstrate the success of the Company's Back to Basics
program. SG&A expense for the quarter was $38.6 million versus $49.8
million a year ago, a decrease of 22.5%.
Review of New Projects in the first quarter:
$155 million of new larger project work was added to backlog in Q1 2003.
o $33 million of high-rise hotel, condominium and mid-rise apartment
projects
o $24 million of new healthcare projects
o $20 million of wastewater and water treatment facility work
o $19 million of work at retail centers
o $17 million of work at school and community centers
o $11 million of manufacturing and heavy industrial projects
o $7 million of work at office buildings
The $20 million increase in wastewater and water treatment facilities is
significant and increased that category from 2% of backlog to 4% of
backlog.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 17
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Fiscal Q4 2003 and Full-Year 2003 Financial Guidance
IES has almost achieved the low end of its full year free cash flow guidance in
the first three quarters with $29.4 million in free cash flow.
For the fourth fiscal quarter, management expects to earn between $0.21
and $0.28 per share. Guidance for the full year fiscal 2003 is unchanged
at $0.53 to $0.60 per share with free cash flow (cash flow from operations
less capital expenditures) of $30 to $40 million.
Exhibit 11
Quarterly EPS Trends Year-to-Date
- ------------------------------------------------------------
2001 2002* 2003
- ------------------------------------------------------------
Q1 - Dec $0.17 $0.02 $0.10 A
Q2 - Mar $0.20 $0.08 $0.09 A
Q3 - Jun $0.26 $0.19 $0.14 A
Q4 - Sep $0.08 $0.22 $0.21-$0.28 E
----- ----- -------------
Full Year $0.70 $0.50 $0.53 - $0.60 E
- ------------------------------------------------------------
* Excludes all one-time charges and charges related to
a cumulative effect of change in accounting principle.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 18
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Company Overview
--------------------------------------------------------------------------
Founded in 1997 to consolidate the electrical contracting business, IES
quickly grew to become the largest provider of electrical services in the
industry with revenues of approximately $1.5 billion. IES provides a broad
range of electrical services including designing, building and maintaining
both low and high voltage electrical systems for commercial, industrial,
municipal, utility, and residential customers.
Exhibit 12
IES' Geographic Diversity
- ------------------------------------------
GEOGRAPHIC DIVERSITY OF BACKLOG - 06/30/03
- ------------------------------------------
Southeast 33%
South 28%
Northwest 4%
Northeast 8%
Mid Atlantic 15%
Midwest 4%
Southwest 8%
- ------------------------------------------
IES' national presence mitigates the region specific economic slowdowns.
IES' presence in the southwest and in Florida has been particularly
beneficial through this most recent construction decline because these
areas were less impacted than some of the other regions of the U.S. Since
1997, much of the Company's revenues have been derived from the fast
growing Sunbelt states. These states stand to benefit from expected
favorable population movement over the next decade.
In the past six months, IES has seen a shift in the amount of its backlog
coming from the Southwest, Mid Atlantic and Northeast. This may be an
indication that these regions are beginning to show signs of improvement
as well as an increase in IES' competitive position in these regions.
A diverse revenue mix- The Company services a wide variety of customers
which also cushions it from sector declines. The impact of a slowdown in a
particular industry tends to be muted when compared to its smaller, more
geographically concentrated competitors. Additionally, IES' expertise in a
variety of industries allows it to be flexible and to share
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 19
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
its expertise across regions. For instance, with the recent increase in
healthcare construction spending, one of the Company's subsidiaries, whose
specialty is healthcare facilities construction, is training and aiding
other IES subsidiaries so the Company is able to perform complex
healthcare projects across the U.S.
Electrical utility work is a component of IES' overall service offering.
IES does a significant amount of power, power line and "electrical grid"
work. The Company has two subsidiaries dedicated solely to that type of
work and another three that have a specific focus in that area. In the
first nine months of fiscal 2003, 6% of IES' revenues were from power
utility work. Although current construction spending estimates according
to F.W. Dodge indicate that spending in this sector will be down in 2003
and 2004, recent events may encourage heightened spending levels in this
area. IES is uniquely positioned to perform additional work in this area
and has the ability to ramp-up its operations for the power utility sector
quickly. In 2001 IES performed $138 million of work for power utility
projects. Note in Exhibit 13 below that the utility component includes
both power and water utility projects.
IES does see a shift in the make-up of its backlog from time to time. For
instance in the second quarter, the Company saw a significant increase in
the amount of work from manufacturing facilities and office buildings. In
the most recent quarter, IES increased its institutional backlog with $57
million of new work in that market and saw less new work in many other
areas such as manufacturing facilities, hotels and condos and utility
work. This is demonstrated by the 4% increase in institutional backlog
since the end of the second quarter.
Exhibit 13
IES' Diversity of Clients Has Served it Well in a Tough Economic
Environment
- -----------------------------------------------------
CURRENT MIX OF BACKLOG - 6/30/03
- -----------------------------------------------------
Institutions 17.3%
Hotels/Condos 11.4%
Health Care 11.4%
Utilities 11.0%
Apartments 8.0%
Airports 7.0%
Office Buildings 6.8%
Retail 6.0%
Heavy Industry/Manufacturing 5.1%
Other Commercial 4.8%
Highway 3.8%
Communications 2.9%
Distribution 2.0%
Government 1.3%
Service 0.06%
- -----------------------------------------------------
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 20
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Nationwide presence- The Company's nationwide presence and name
recognition helps it to compete for larger, national contracts with
customers that operate throughout the U.S. This represents a growing
market and IES has made significant progress in pursuing these sizable
accounts. A few of IES' current national customers include Wal-Mart,
Marriott, Nordstrom, Intel, Starbucks, Ryland Homes and Pulte Homes. Given
its size, IES still maintains customer diversity because no single
customer accounts for more than 10% of total revenues.
Additionally, IES believes its size and national service offering uniquely
positions it as the only single source non-union electrical contracting
service provider able to execute projects on a national basis. IES is able
to take on very large, and complex projects often with a national scope
that would strain the capabilities and resources of most of its
competitors.
Strong growth opportunities- The Sunbelt focus, as well as market share
gains, and customer satisfaction have helped IES grow organically about 3%
faster than the construction industry as a whole over the last several
years. Over 50% of business is from repeat customers. Currently, almost
70% of the Company's revenues come from Sunbelt states. According to F.W.
Dodge, in 2003 Sunbelt states are projected to have positive growth versus
a 2% decline across the entire U.S.
Access to Resources - Access to resources is a key to success, especially
in this difficult environment. Many of IES' competitors have reduced
access to both bonding capacity and capital, which is constraining their
ability to effectively compete and bid on many jobs. As a result of size
and track record, IES has adequate capacity. This, in conjunction with
IES' access to a $125 million credit facility, provides a significant
competitive advantage over most of its local competitors. IES is able to
bid on larger projects that require bonding and working capital.
Many customers require subcontractors to post performance and payment
bonds issued by a surety. Those bonds guarantee the customer that the
service provider will perform under the terms of a contract and pay
subcontractors and vendors. In the event that a contractor or
subcontractor fails to perform under a contract or pay subcontractors and
vendors, the customer may demand the surety to pay or perform under the
bond.
The Company has had a relationship with the same surety since IES'
inception. Recently, the Company has initiated discussions to include a
second or co-surety, thus increasing the amount of surety credit. IES'
relationship with its sureties is such that it will indemnify them for any
expenses they incur in connection with any of the bonds they issue on IES'
behalf. In a market where bonding has become an issue for many of IES'
competitors, the Company is fortunate to be in such a strong position as
it relates to bonding capacity. To date, IES has not incurred significant
expenses to indemnify its sureties for expenses they incurred on IES'
behalf. As of June 30, 2003, the expected cost to complete projects
covered by surety bonds was approximately $241 million.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 21
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Proprietary Systems and Processes - IES has proprietary systems and
processes which help the Company bid on projects, manage projects once
they have been awarded and maintain and track customer information. In
addition, IES has developed and perfected techniques and processes for
installation on a variety of different projects including its
prefabrication process that have been implemented throughout the
organization. Through the consolidation of over 85 entities, IES has taken
the best practices and leveraged those systems and processes across the
entire organization for best in class practices.
Utilization of Prefabrication Processes - IES' size and 100% merit shop
environment has allowed the firm to quickly implement best practices
across the Company as it relates to prefabrication. IES has invested in
and utilizes prefabrication facilities to pre-assemble electrical
components that can later be installed on site. This is safer, more cost
effective and more efficient for IES and the customer. IES has
prefabrication centers strategically located to service the U.S. for
larger scale projects.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 22
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Operations Overview
IES has two principal operating segments (1) Commercial/Industrial and (2)
Residential. For the year ended September 30, 2002, the
Commercial/Industrial segment accounted for approximately 81% of revenues
and Residential made up the remainder. Exhibit 14 below illustrates IES'
revenue by type of work over the past 3 years and shows the fall-off of
communications work as the communications infrastructure was overbuilt.
Note that the Commercial/Industrial segment data for segment reporting
purposes contains both the communications and the service and maintenance
business segments, which had previously been reported separately.
Residential revenues increased 11%, while Commercial/Industrial revenues
declined in 2002 as a result of the 18% decrease in commercial and
industrial construction spending in the overall market. Power utility work
is down in 2002 and 2003 as a result of the decrease in construction
spending in that market.
Exhibit 14
Historical Revenues by Type
- --------------------------------------------------------------------------------
REVENUE BY TYPE
- --------------------------------------------------------------------------------
2000 2001 2002 9 Months 2003
---- ---- ---- -------------
Commercial and
Industrial $1,049 $1,048 $948 $679
Residential $251 $257 $282 $204
Service and Maint. $132 $135 $113 $74
Power Utility $122 $138 $111 $64
Communications $119 $114 $21 $46
- --------------------------------------------------------------------------------
Segment data for the last three fiscal years is detailed on the following
page in Exhibit 15.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 23
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 15
Operating Segment Data
- ------------------------------------------------------------------------------------------------
(Dollars in Millions) % Chg. % Chg. YTD-June
2000 2001 2001/2000 2002 2002/2001 2003
- ------------------------------------------------------------------------------------------------
Revenues
Commercial and Industrial $1,421.4 $1,435.8 1.0% $1,193.4 -16.9% $862.0
Residential 250.9 257.4 2.6% 282.0 9.6% 205.0
Gross Profit
Commercial and Industrial $244.8 $249.1 1.8% $159.9 -35.8% $109.9
Residential 55.0 58.5 6.4% 61.7 5.5% 44.0
Operating Income
Commercial and Industrial $89.8 $99.9 11.2% $36.5 -63.5% $34.6
Residential 29.9 26.1 -12.7% 34.6 32.6% 19.0
Gross Profit Margin
Commercial and Industrial 17.2% 17.3% 0.7% 13.4% -22.8% 12.7%
Residential 21.9% 22.7% 3.7% 21.9% -3.7% 21.4%
Operating Income Margin
Commercial and Industrial 6.3% 7.0% 10.1% 3.1% -56.0% 4.0%
Residential 11.9% 10.1% -14.9% 12.3% 21.0% 9.3%
- -----------------------------------------------------------------------------------------------
The Commercial/Industrial margins over the 2001-2002 period experienced
substantial decline as a result of the slowing in the economy and
construction spending. Over that time period, higher margin projects in
backlog were replaced with lower margin jobs as the bidding environment
became more competitive and the number of new projects declined.
While over 70% of IES' work is from new construction, declines in
construction spending typically lead to increases in renovation and
service work because businesses and individuals modify or renovate the old
instead of building new facilitates. That trend is demonstrated in the
increase in IES' revenues from renovation work from 19% in 2001 to 22% in
2002. However, that trend appears to be changing and in the first nine
months of fiscal 2003 with new construction actually increasing to 74% of
total revenues and only 18% of revenue is from renovation and 8% from
service and maintenance. This may be an indication of an overall focus on
conserving capital and delaying even service and maintenance spending. If
that is the case, at some point there could be a shift out of necessity to
maintain existing infrastructure. See Exhibit 16 on the next page.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 24
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 16
New Construction is a Greater Component of IES' 2003 Revenue
Renovation work increased in 2002 as a result of a reduction in new
construction.
- ---------------------------------------------------------------------
REVENUES BY TYPE OF CONSTRUCTION
- ---------------------------------------------------------------------
2001 2002 9 Months 2003
New Construction 72% 69% 74%
Renovation 19% 22% 18%
Service and Maintenance 9% 9% 8%
- --------------------------------------------------------------------
Commercial/Industrial
IES' Commercial/Industrial business provides design and installation of
electrical systems (both low and high voltage) as well as providing
ongoing service and maintenance. Commercial projects include: high-rise
structures such as hotels, apartment buildings, condominiums and office
building; retail stores and centers; hospitals and healthcare facilities;
schools and community centers including stadiums and arenas; and projects
specifically related to low voltage installations including
communications. Industrial projects include: manufacturing and heavy
industrial facilities; distribution centers; utility and power generation,
including substations and power line installation; high-technology
centers; water and wastewater treatment facilities; government and
military installations; airports; and highway projects. Below is a list of
IES' top general contractor customers in the Commercial/Industrial market
and the top end customers sorted alphabetically. IES typically works for a
general contractor although in some cases the Company does work directly
for the end user. IES is awarded work as a result of both of these
relationships and the Company is focused on fostering relationships and
maintaining customer satisfaction with the end customer as well as the
general contractor.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 25
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 17
Top Commercial/Industrial Customers
- ---------------------------------------------------------------
End Customers General Contractors
- ---------------------------------------------------------------
3M AMEC
Blue Cross / Blue Shield Austin Industries
Four Season's Hotels Beck Group
Gaylord Entertainment Bovis Lend Lease
Hilton Hotel Corporation Brasfield & Gorrie
Home Depot Centex Construction Group
Honda Flour Corporation
Hyatt Corporation Hannover Company
Intel Hensel Phelps Construction
Kohl's Hubbard Construction Group
Marriott International J.E. Dunn Group
Midlothian Energy Kraft Construction
Nissan Lemoine Company
Omni Hotel Manhattan Construction
Publix MB Kahn Construction
Ritz Carlton Hotel Company Robins & Morton
Six Continents Skanska USA Building Inc.
Target Turner Corporation
Walgreen's Weitz Group LLC
Wal-Mart Whiting Turner Construction
- ---------------------------------------------------------------
After IES completes the work on these projects the Company is in the best
position to provide ongoing service and maintenance. It is common for IES
to take on long-term service contracts with end customers.
Residential
IES is the largest residential electrical contractor in the country. IES'
residential segment is composed of three different types of projects:
single family homes, often tract homes with entire subdivisions built at
one time; high-end single family custom homes, which are often quite large
and typically include the latest trends in security and technology; and
multifamily low rise apartments, condominiums and town homes. IES works
for some of the largest single family and multifamily developers in the
country. See Exhibit 18 for IES' top customers by residential project type
sorted alphabetically.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 26
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 18
Top Residential Customers
- ------------------------------------------------------------------------------
Single Family Multifamily
- ------------------------------------------------------------------------------
Ashton Woods Homes Apartment Builders LTD
Beazer Homes Bovis Construction
First Texas (Broyd, Inc.) Camden Development
Gateway Homes (Champion Enterprises) Donohoe Construction
Gehan Homes Dwayne Henson and Associates
Grand Homes Fairfield Development
Kaufman & Broad Gibralter Construction Company
Kimball Hill Homes Global Construction Company
Lennar Homes Greystar Development
Mansions Custom Homes JPI Construction
Newmark Homes Lowder Construction Company
Perry Homes Morgan Group
Plantation Homes (McGuyer Home Builders) The Norsourth Corp.
Pulte Homes Peachtree Residential
Royce Homes Picerne
Ryland Homes Postwood Builders (Long Lake)
Torrey Homes (D. R. Horton) Pride Builders
Trendmaker Homes (Weyerhaeuser) Spanos Construction
Weekley Homes TCR Bissonnet Construction
Whitco Construction Company
- ------------------------------------------------------------------------------
Residential construction in 2002 and 2003 has been particularly robust. Record
low interest rates are driving demand for new homes, creating record levels of
residential construction spending.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 27
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Organizational Systems, Processes and Controls
- --------------------------------------------------------------------------------
Overview
IES has in place an integrated system of internal controls, including management
of operations, information systems and financial activities. These controls
complement the regional operating structure established under the Company's One
Company. One Plan. strategy and are designed to provide a framework of
procedures, monitoring systems and certifications that enable the Company to
ensure compliance with company policies as well as applicable rules and laws.
Although IES management believes an effective structure is in place to manage
the business, there are inherent risks in the contracting industry especially as
it pertains to fixed bid contracts that sometimes experience fade in
profitability over the life of the contract. Although the structure and controls
are in place to minimize this and other risks, there is no guarantee that IES
will not experience financial difficulties as a result of these risks. See the
disclosure statement on page 4 for additional risk factors.
Management structure
IES' Executive Committee, comprised of the Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Chief Technology and Procurement
Officer, Senior Vice President of Operations and Senior Vice President of Human
Resources, monitors the Company's operations and its progress on the three-phase
strategy.
The Executive Committee is supplemented by a regional operating structure
consisting of six geographically based regions. The regions are led by Regional
Operating Officers ("ROOs") that report directly to the Company's Chief
Operating Officer and Chief Executive Officer. Each ROO is supported by a
Regional Controller ("RC"), who is responsible for monitoring the financial
aspects of operations at each of the subsidiaries within the region. Together
the ROO and RC maintain control and consistent application of policies and
procedures throughout the Company. Together they provide a control environment
to address financial operating results and issues, as well as upcoming events,
opportunities or concerns, and carry out company initiatives.
At the end of each quarter, the regions host a series of "Home and Away"
meetings. The CEO, COO, CFO, Regional Operating Officers and the Presidents of
the subsidiaries attend these Home & Away meetings. Every other quarter, regions
conduct these meetings at or near their "home" locations and on opposite
quarters attend an "away" meeting at the home office in Houston. These meetings
facilitate face-to-face sharing of results, events, opportunities and concerns
and allow for sharing of best practices and cross-selling among the
subsidiaries.
Information Systems
All of the Company's locations are joined on a common Wide Area Network ("WAN").
This platform enables the Company to access and monitor the computer servers at
each subsidiary location and facilitates efficient communication across the
Company. Stringent controls are in place limiting access to the data stored on
each location's server.
The Company is approximately 80% complete in the implementation of a fully
integrated Enterprise Resource Planning ("ERP") system known as Forefront. The
Company expects that this implementation will be substantially complete by
December 2003. This system,
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 28
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
while allowing real time access to subsidiary and project data, facilitates the
implementation of common and consistent financial controls throughout the
Company.
The Company's ERP system is complemented by consolidation software known as
Financial Manager's Workbench. The implementation of this software is
substantially complete and is already used for contract analysis and budgeting.
Timely access to data - The Company monitors the performance of each of its
subsidiaries monthly and compiles an internal report that discusses each
subsidiary's operations compared to key operating metrics. Included in these
metrics is a comparison to budgeted results, prior results, change in gross
margin and operating income percentages, change in headcount, accounts
receivable and performance measures such as days sales outstanding. The Company
also maintains an evolving contract status report for work in progress ("WIP
report") that details the financial data for every significant contract in
progress throughout the Company. This WIP report contains the updated contract
prices, cost estimates, percentage completion calculations, and calculations for
the variance between revenues and billings on a job-by-job basis.
The Company utilizes the Financial Manager's Workbench, a complement to IES' ERP
system, to conduct detailed analyses on the WIP report data and other operating
metrics and presents financial reports, including a "Rack and Stack" report that
lays out each subsidiary compared to its IES peers. The management team uses
these reports to conduct financial review meetings, semi-monthly Regional
Operating Officer meetings and the quarterly Home and Away meetings.
Real-time response - As the Company monitors the performance of each subsidiary,
certain metrics may indicate a potential for problems at a particular location.
These indices include a decline in operating results or a turnover in subsidiary
management. In this event, the subsidiary is placed "at watch." The subsidiary
is monitored closely and, if management deems necessary, the subsidiary is
placed "at risk." The "at risk" program involves bi-weekly operational and
financial meetings with the subsidiary management, regional management and
certain members of IES management, including the Company's Chief Operating
Officer. The subsidiary's operations are closely monitored and the corporate
office must approve any new work that is bid.
Certifications
The information obtained from these meetings and reports provides the Company
with a strong platform to support its financial certification process. Section
302 of the Sarbanes-Oxley Act of 2002 ("SOX") requires the Company's Chief
Executive Officer and Chief Financial Officer to certify the accuracy of the
quarterly and annual financial statements of the Company. The purpose of the
control environment and financial monitoring is to provide the Company's
management with information that enables them to accurately and reliably make
that certification. In this vein, each subsidiary president and controller
provides a certification to IES management, and each Regional Operating Officer
and Regional Controller provides a similar certification to management. These
internal certifications include the scope, definitions and expectations outlined
in the Sarbanes-Oxley certifications. The certification process includes a
detailed positive affirmation as to the knowledge of the accuracy of presented
operational results, fraud, theft and controls in place. Each certification is
signed and reviewed each fiscal quarter, then presented to IES management to aid
in the certification process required by SOX. These certifications are not a new
control in response to the SOX. In fact, the Company has required quarterly
certifications for many years and annual certifications since the inception of
the firm.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 29
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Under section 404 of the SOX, the Company's Chief Executive Officer and Chief
Financial Officer will be required to assess the effectiveness and reliability
of the Company's internal control environment. To comply with this regulation,
the Company established a five-phased approach to defining, documenting and
testing its internal control framework. The five phases include defining the
Company's system of internal controls, establishing a core working group to
implement the project, assessing the current state of its internal controls,
filling any gaps in the framework with industry best practices, and testing the
controls to ensure they are effectively working. The Company is currently
completing phase three of the plan, which involves assessing the current
internal control environment. To achieve this, the Company utilized a
comprehensive documentation template, which the ROO's and RC's completed for
each operating subsidiary. The Company is currently evaluating the data
submitted in these documentation templates to determine what control gaps, if
any, may exist. The Company will then proceed with phase four of the plan, which
involves correcting any control gaps, documenting the workflow processes and
establishing segregation of duties checklists.
Internal audit program
IES utilizes all of its corporate resources to monitor the Company's operations.
The Company has in place an internal audit program that requires each subsidiary
to undergo an internal audit at least once every three years. In addition to
these routine audits, internal audits may occur as a "surprise" event or if the
subsidiary is placed in the "at risk" program. The internal audit reports are
distributed to the subsidiary's management, the executive committee and to the
Company's Audit Committee of the Board of Directors. Audit findings are
addressed and a revisit is performed six months after the initial internal audit
to ensure compliance.
Ethics hotline
IES has established a confidential toll-free hotline for the purpose of
reporting known or suspected events of theft, fraud or other financial abuse.
The hotline is monitored by a third party and reported to the Company. Reported
incidents are communicated to the proper management to investigate. The reported
incidents, results of investigations and corrective actions taken are
communicated to the Company's Audit Committee.
Operational policies and procedures
IES has established and published operating guidelines in accordance with
Generally Accepted Accounting Principles and applicable laws, as well as the
Company's best practices. These guidelines encompass all aspects of operational
and financial reporting, from the estimating and bidding process to the
financial reporting process. The controls over the estimating and bidding
procedures allow each location to select the projects for bid, but increasing
levels of approval from Regional and Executive management are required based on
the size and type of job before the bid can be finalized and submitted.
Subsidiaries are limited by the size of job they may undertake based on their
backlog and ability to manage additional growth. Subsidiaries are further
restricted from undertaking non-standard work or work outside of their technical
expertise. This level of management oversight and approval extends through the
term of the contract once it is awarded, and is covered in the operational
meetings held throughout the Company.
Financial policies and procedures
Financial controls are established and published in a manual provided to
regional management. These financial controls include accounting policies in
accordance with
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 30
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Generally Accepted Accounting Principles that address revenue recognition,
credit and cash management, financial accounting standards and business
responsibilities. Adherence to these policies is verified by assertions made by
each location's management, regional management, internal audit and by control
checks performed at the Company's corporate headquarters. Financial controls
also include requirements for processing data, storing records and segregating
of duties. Monthly operating results are transmitted via a standardized model
that utilizes automatic data checks to ensure the accuracy and reliability of
the data presented. These checks ensure high integrity in the internal reports
used by management.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 31
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
The IES Management Team
- --------------------------------------------------------------------------------
IES is fortunate to have a wealth of talent as a result of acquiring over 80
companies, many of them leading operators in their regions. Currently, 8 of the
13 officers have previously served as presidents of acquired subsidiaries.
H. "Roddy" Allen, P.E.- became Chief Executive Officer and President of IES in
October 2001. Mr. Allen originally was President of H.R. Allen, which was
acquired by IES in 1998. Since joining IES, Mr. Allen has held the following
positions:
o 2001 to present: Chief Executive Officer and President
o 2001-2001: Chief Operating Officer
o 2000-2001: Senior Vice President of Eastern Operations
o 1998-2000: Regional Operating Officer, President of H.R. Allen
Richard L. China- became Chief Operating Officer in October 2001. Prior to
serving in the COO capacity, Mr. China was President of IES Communications and
also served as a Regional Operating Officer. Mr. China joined IES in 1999
through the acquisition of Primo Electric Company, where he served as President.
William W. Reynolds- has been the Chief Financial Officer and Executive Vice
President since June 2000. Mr. Reynolds joined IES after serving as Vice
President and Treasurer of Peoples Energy Corporation from 1998 to 2000. From
1997 to 1998, Mr. Reynolds was Vice President and Project Finance Corporate
Officer for MCN Energy Group, Inc. Prior to that, he spent seventeen years with
BP Amoco in a variety of positions both internationally and domestically.
Britton Rice- has served as the Chief Technology and Procurement Officer and
Senior Vice President of IES since 2000. Mr. Rice also serves as the President
of Britt Rice Electric, L.P., an IES subsidiary. Mr. Rice joined IES in 1999
through the acquisition of Britt Rice Electric, where he was the founder and
President.
Margery M. Harris- serves as Senior Vice President of Human Resources. She
joined the company in 2000 from Santa Fe Snyder Corporation, where she served as
Vice President of Human Resources. Prior to that, Ms. Harris was a lead
consultant with Hewitt Associates, a total compensation consulting firm.
Robert Stalvey- serves as Senior Vice President of Operations and acting
Regional Operating Officer of Region 6. He previously served as Vice President
of Special Projects. In 1976, he became co-owner of Ace Electric, one of the
original 16 IES subsidiaries.
Curt L. Warnock- has served as Vice President, Law of IES since October 2002 and
prior to that as Assistant General Counsel to the Company. Previously, Mr.
Warnock spent twenty years with two other publicly traded Fortune 1000 companies
in various legal positions.
David A. Miller- has been Vice President and Chief Accounting Officer of IES
since October 2002. Between January 1998 and October 2002 he served as Financial
Reporting Manager, Assistant Controller, Controller and Chief Accounting Officer
of IES. Before joining IES, Mr. Miller held various positions in public
accounting and private industry. Mr. Miller is a Certified Public Accountant.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 32
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Daniel Petro- has been the Senior Regional Operating Officer of Region I since
2002. Prior to that Mr. Petro was the President of the Eastern Region. Mr. Petro
was the President and founder of Amber Electric from 1979 to 1998, when Amber
Electric was acquired by IES. Prior to this he was an Electrical Instructor for
Orange County Schools.
Thomas Stalvey- became Regional Operating Officer of Region II in 2000. In 1975,
Mr. Stalvey founded and served as President of Ace Electric. In 1998, Ace
Electric was acquired by IES. Mr. Stalvey taught Electric Technology for
Valdosta Technical College from 1970 to 1972 and was Residential Construction
Manager for Wilkes Construction Company from 1971 to 1975.
Richard Humphrey- has been Regional Operating Officer of Region III since 2001.
He was the President of Arc Electric from 1972 to 2000. Arc Electric was
acquired by IES in 1998.
Ernest P. Breaux, Jr.- is the Regional Operating Officer of Region IV. He was a
project engineer /estimator for Ernest P. Breaux Electrical from 1968 to 1974,
Vice President from 1974 to 1983 and President & CEO from 1983 to 2001. Ernest
P. Breaux Electrical was purchased by IES in 2001.
Miles Dickinson- became the Regional Operating Officer of Region V in 2002. Mr.
Dickinson was President of Delco Electric from 1979 to 2001. Delco Electric was
acquired by IES in 1999. Mr. Dickinson was an estimator and project manager for
McGuire Electric from 1974 to 1977 and served as Vice President of McGuire
Electric from 1977 to 1978.
Ric Yeadon- became the Regional Operating Officer of Region VI in July of 2003.
Mr. Yeadon began his career in sales with Graybar Electric. In 1974, he joined
Valley Electric as Project Manager and was promoted in 1980 to Vice-President
and Director. SASCO acquired Valley Electric in 1984 and he was promoted to
President and later Regional CEO for the company's northern division.
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 33
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Corporate Governance
- --------------------------------------------------------------------------------
Since IES' initial public offering ("IPO") in 1998, the Company has divided the
duties of Chairman of the Board and Chief Executive Officer between two
individuals. As a governance policy, this prevents a concentration of control
with one person. Since the IPO, Byron Snyder has served as Chairman; and since
late 2001, H. Roddy Allen has served as Chief Executive Officer.
The IES board has significant representation from independent directors. The
Board of Directors consists of 7 directors of which four are independent
directors. The inside board members include H. Roddy Allen, the President and
Chief Executive Officer, Rick China, the Chief Operating Officer and Byron
Snyder, the Chairman of the Board and founder of IES. This stands in contrast to
the original board in 1998, consisting of 11 members, many of whom were among
the sixteen owners of the founding companies.
The Board has four committees: Audit, Compensation, Nominating/Governance and
Executive. The Audit, Compensation, and Nominating/Governance committees are
entirely composed of independent directors.
During fiscal 2002, IES implemented an evaluation process in which those
reporting directly to the CEO and the Board of Directors review the CEO
anonymously and rate him on key business and management strengths. These ratings
are reviewed by the board and serve as an early warning system for any potential
problems that might arise.
IES also maintains a growing internal audit function, an important consideration
for a Company that has grown through acquisition and has numerous subsidiaries
across the country. Currently every subsidiary (about 53, given that some of the
acquisitions have been merged with other subsidiaries) undergoes an internal
audit at least once every three years with approximately 20 internal audits
performed each year.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 34
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Industry Overview
- --------------------------------------------------------------------------------
The electrical and low voltage contracting industry is highly fragmented, with
over 70,000 electrical contractors operating across the United States in 2001.
Most are small, private "mom and pop" operations. Three quarters of these
companies have less than 10 employees, according to the U.S. Department of
Commerce. Only a little over 1% have more than 100 employees and just a handful,
like IES, have thousands of workers and the advantages of significant scale. IES
has approximately 13,500 employees. Below is a table that shows the breakdown of
the size of electrical contractors based on number of employees. It clearly
demonstrates the significant fragmentation of the industry. Interestingly some
of IES' largest competitors in each individual local market are companies with
20 to 100 employees.
Exhibit 19
Electrical Contractors Segmented by Number of Employees
- -----------------------------------------
# of Percent of Electrical
Employees Contractors
- -----------------------------------------
1 to 4 57.0%
5 to 9 19.4%
10 to 19 12.3%
20 to 49 7.7%
50 to 99 2.2%
100 or more 1.4%
-----
100.0%
- -----------------------------------------
Source: Electrical Contractor Magazine
At the end of 2001, the electrical contracting market was estimated at $95
billion. As the largest electrical contractor with $1.5 billion in revenues, IES
still only represents 1.6% of the overall market. However, within commercial and
industrial electrical contracting which includes institutional and non-building
construction, IES has approximately 4%-5% of the market (see Exhibit 20 below).
Exhibit 20
Annual Electrical Contractor Revenues are Approaching $100 Billion
IES has less than a 2% share of the total electrical market, but has a 4%-5%
share of the commercial and industrial market for electrical contracting.
- --------------------------------------------------------------------------------
Electrical Contractor Sales
- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001
53 59.3 64.3 72.0 76.5 89.5 95.0
- --------------------------------------------------------------------------------
Source: Electrical Contractor Magazine
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 35
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Virtually all construction and renovation work in the U.S. requires electrical
contracting services. Electrical and low voltage work usually runs between
8%-12% of the cost of a commercial or industrial project and 5%-10% of the cost
of a residential project. This percentage is substantially higher in high-end
residential home building and projects such as manufacturing facilities or
technology centers. Growth in the electrical contracting market has accelerated
in recent years due to:
o Complexity as a result of the increase in computer, security and
communications systems in the workplace. Computers, printers and on-line
access are a part of virtually every workstation, increasing the
electrical and low voltage demands placed on a given system. New
telecommunications systems have also increased the burden, as well as
networking of local and wide area computer systems.
o The pace of electrical renovation of existing structures has increased,
primarily as a result of more advanced computer and communications
systems.
o There has been an increased focus on cost savings through energy
management systems.
o New electrical codes have been established for power efficiency and
safety.
o National energy standards have been revised stressing energy-efficient
lighting fixtures and other equipment.
o As the workplace has become more complex and more dependent on technology,
there has been an increased demand for backup power systems.
o Increased security requirements have also increased demand and
sophistication of security systems.
o Demand has increased for preventive maintenance to minimize disruption of
power.
The electrical contracting industry had a difficult year in 2002 due to the
reduction in commercial and industrial construction spending. Commercial and
industrial construction, which accounts for about 80% of revenues for IES, was
down 18% according to figures from F.W. Dodge. The strong demand in the late
1990's and in early 2000 increased the supply of providers, which made the
decreases in 2002 and 2003 particularly difficult due to the excess supply of
electrical service providers. However, the growth drivers for the industry
detailed above are long-term in nature and will continue to generate demand for
electrical contracting services throughout the next several decades.
Residential construction, driven by record low mortgage rates, drove spending on
single family housing construction up 15% in 2002 according to F.W. Dodge and is
projected to be up another 3% in 2003. The low rates are so appealing that many
people who would typically be apartment dwellers are becoming first-time
homeowners instead. This is causing the single family home and condominium
market to remain quite strong in 2003.
Specialty Contractors
IES is currently the only "pure play" publicly traded electrical contractor in
operation. Specialty contractor competitors provide other services besides
electrical contracting such as mechanical contracting and building maintenance
as well as other services. Below is an overview of some of the publicly traded
specialty contractors. The only specialty
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NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 36
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
contractors listed below that IES typically competes directly against are EMCOR
and Quanta Services. However, EMCOR's primarily union affiliation tends to keep
their focus in the northern cities and areas with a high level of union
affiliation where IES has less of a presence and Quanta Services primarily
services the power utility sector and this type of work is less than 10% of IES'
revenues while it represents over 50% of Quanta's revenues.
Information below is from public filings of each company and is included here as
a summary. Further information on these companies may be obtained through those
filings.
EMCOR- operates internationally with locations in the United States, Canada,
Europe, the Middle East and Far East and South Africa. Through over 75 operating
companies, EMCOR employs 28,000 workers and generated almost $4 billion in
revenues in 2002. The company divides its business into three segments; (1)
mechanical construction (2) electrical construction and (3) facilities
management. Facilities services make up about 17% of revenues and the rest are
approximately equally divided between electrical and mechanical work. EMCOR's
work tends to be concentrated in larger cities due to its union affiliation.
This has allowed the company to win public transportation work to buffer it
during the economic slowdown.
Quanta Services- Quanta is a leading provider of specialized contracting
services, with a focus on the electric power, telecommunications, broadband
cable and gas pipeline industries. The company provides a range of services,
including the design, installation, maintenance and repair of many types of
network infrastructure. Quanta has offices in 40 states, and operations in all
50 states, as well as Canada. Revenues in 2002 were approximately $1.75 billion
with 53% from electric and gas utility, 16% from telecom, 12% from cable
television and 19% from other.
Comfort Systems- The company focuses almost exclusively on the heating,
ventilation and air conditioning market (known as HVAC) and is a leading
provider of these services, and had 2002 revenues of $820 million. In 2002, the
company sold 19 union affiliated subsidiaries representing about $650 million in
revenues to EMCOR. Comfort Systems now has 84 locations in 57 cities throughout
the US.
Dycom- is headquartered in Palm Beach Gardens, Florida and is one of the larger
telecommunications services companies. The company has 28 operating
subsidiaries. Dycom currently serves over 100 different customers in 48 states,
with approximately 5,700 employees, based out of more than 200 locations
throughout the United States. Revenues for fiscal year 2002 exceeded $600
million. In 2002, Dycom acquired Arguss, a provider of infrastructure services
to cable and telecommunications companies, for about $85 million, expanding its
geographical footprint within its existing customer base. Exhibit 21 is a chart
that illustrates how IES' revenues and focus differs from some of its closer
publicly traded peers. Notice that IES' is the only publicly-traded pure play
electrical contractor in the group. In addition, IES is the only publicly-traded
completely merit shop electrical contractor, giving it significantly more
flexibility to utilize prefabrication and pre-assembly on projects, which saves
money and time.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 37
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 21
IES versus its Closest Peers
- --------------------------------------------------------------------------------
Revenues(1)
--------------------------- MRR (2) as Unionized
EC MC FS Other % of Revenue Workforce
- --------------------------------------------------------------------------------
IES 100% - - - 31% -
Comfort Systems 3% 90% - 7% 48% -
EMCOR (3) 29% 44% 17% 10% 40% 75%
Quanta Services 53% - - 47% 40% 39%
- --------------------------------------------------------------------------------
(1) EC= Electrical Contracting, MC= Mechanical Contracting, FS= Facilities
Services
(2) MRR = Maintenance, Repair and Renovation
(3) Not pro forma for the recnet acquisition of a facilities services business.
Competitors
Typically, IES bids against a larger national competitor like EMCOR or one of
the larger private players such as Rosendin or Fisk on national projects or
large regional projects such as an airport. In addition to publicly traded
peers, IES competes against private regional players that range from $40 million
to over $300 million in revenues, as well as smaller local competitors the can
range anywhere from $2 million to $30 million in revenues. There are 10 private
electrical contractors with revenues between $200 million and $600 million. Of
those players, approximately seven are companies IES competes against and, even
then, it is only occasionally and in selected markets. There are another 100 or
so companies in the $40 million to $200 million range and of those companies IES
competes against approximately 40 in local and regional markets as well as in
certain segments such as utilities or multifamily residential.
On larger single site projects, IES is likely to bid against large regional or
local players with access to bonding and capital such as Fisk (owned by Tyco),
Red Simpson or Infrasource, to name a few. However, on smaller projects that
make up the greatest percentage of IES' revenues, the Company's largest
competitors are often smaller private electrical contractors that have anywhere
from $2 million to $40 million in revenue. These smaller players are actually
the organizations IES bids against most frequently in each local market.
To provide more insight into the competitive landscape, the next few pages
contain a review of the larger private electrical contractors over $200 million,
as well larger players that IES competes against. Included in the description
are the areas where IES competes against these companies. Surprisingly, as can
be seen from the data, many of the larger regional players rarely compete with
IES for work. This is most likely the result of the geographic markets served.
Larger Private Electrical Contractors and Major IES Competitors
MYR Group is the largest private electrical contractor, with 2001 revenues of
about $627 million and subsidiaries in 19 states. The company is headquartered
in Illinois and provides a complete range of power line and electrical services
for electric utilities, telecommunications providers, commercial and industrial
facilities and government
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 38
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
agencies across the US. The company was founded in 1891 and has a unionized
workforce. IES occasionally competes with MYR Group in the Midwest.
Cupertino Electric, Inc. is headquartered in Sunnyvale, CA and had 2001 revenues
of $509 million, making it the 6th ranked electrical contractor in the country
according to ENR Magazine. Cupertino was founded in 1954 and is a provider of
electrical infrastructure for technology companies and energy systems, including
distributed generation for data centers and other high tech facilities. The
company is unionized and competes with IES occasionally in northern Nevada.
SASCO is headquartered in Cerritos, CA and generated 2001 revenues of $450
million with over 1,800 employees. The company has eight offices on the West
Coast extending from Southern California to the Northwest. SASCO's top market
segments include commercial, health care, semiconductor, industrial, data and
special systems. SASCO has a unionized workforce and IES rarely competes in this
company's markets.
Massachusetts Electric Construction Company was founded in 1928 and is
headquartered in Boston, MA. In 2001, revenues were $377 million, making it the
7th ranked electrical contractor in the country according to ENR Magazine. The
company specializes in mass transit, railroads, high technology, production
facilities and electric power generation. The company employs over 1,800
electricians and is licensed to work in 29 states. The company is unionized and
is not a major competitor to IES due to our market focus.
Rosendin Electric, Inc. was founded in 1919. Rosendin now has over 1500
employees and branch offices in: San Francisco and Los Angeles, CA; Mesa, AZ;
Rio Rancho, NM; Hillsboro, OR. Sales in 2001 were approximately $365 million. In
2000, the employees completed their buyout of the family-owned business to
become the largest employee-owned electrical contractor. The Company is
unionized. IES competes with Rosendin in Arizona and New Mexico, especially on
larger projects.
Fisk Corp. was founded in 1913 and in November 2000 Tyco acquired it. Fisk is
headquartered in Houston, TX with offices in Dallas, Las Vegas, Miami, New
Orleans and San Antonio. Fisk offers voice, data and electrical services to
large national and global accounts. Fisk designs, installs and maintains a
variety of electrical and data systems including large complex projects. The
company is unionized. IES competes with Fisk in several markets including
Florida and Texas.
Xcelecom is headquartered in Hamden, CT and provides specialty contracting
services and voice-data-video integrated solutions to customers in the Eastern
United States from Boston to Florida. The company has annual revenue topping
$300 million and operations stretching over ten states and sixteen locations.
Xcelecom is owned by UIL Holding Corp and is unionized. IES does not typically
compete in the same local markets.
Unity International Group has headquarters in New York and London and has been
in business for over 50 years. Revenues in 2001 totaled about $248 million. The
company provides integrated structured cabling, electrical and information
technology consulting services to clients worldwide. Services include the
design, installation and maintenance of telecommunications, life safety and
security systems, audio-visual and mechanical systems. Unity is union and is not
a significant competitor to IES because it does not typically service the same
geographic area as IES.
Sachs Electric Company is based in St. Louis, MO and generated 2001 revenues of
approximately $232 million. The company was founded in 1925. It now operates on
a national scale with over 1,400 employees. Key markets include power and
industrial,
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 39
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
telecommunications, technology and commercial (design and build). Sachs is a
union contractor and IES rarely competes in this market.
Infrasource (formerly Exelon) had 2001 revenues of $230 million and is
headquartered in Pennsylvania. The company provides electrical contracting
services and specializes in electrical utility services, industrial services,
metering, underground work and telecommunications. The company is a union
contractor and IES competes with them on power and utility projects across the
south.
Morrow-Meadows Corp. is headquartered in Walnut, CA and generated revenues in
2001 of about $201 million. The company was founded approximately 40 years ago
and is now a full service electrical contractor. The company is active in
datacom and design engineering. Morrow-Meadows is union and IES competes with
them in southern CA.
Red Simpson Inc. had 2001 revenues of approximately $194 million and is
headquartered in Alexandria, LA. The company provides power line services in the
southern US. The company's major focuses are transmission, overhead and
underground distribution substations and fiber optics. Red Simpson is a
non-union contractor and is a competitor to IES in the utility markets in Texas,
Louisiana, Alabama, Oklahoma and Florida.
Bergelectric Corp. was founded in 1946 and is headquartered in Los Angeles, CA.
The company provides a full range of electrical contracting services throughout
the Western United States and Mexico. In addition to its headquarters, the
company maintains branch offices in San Diego, Las Vegas, Portland, Denver and
Orlando. In 2001, the company posted revenues of $186 million. The company is
non-union and competes with IES in southern CA.
Consolidated Electrical Services (CES) is headquartered in Boston, MA and
generates annual revenues of about $160 million. Founded in 1976, CES has
offices in Boston, Hartford, Charleston, Charlotte, Denver and Raleigh and over
1,000 employees. A full service electrical contractor, CES specializes in voice
and data engineering, voice and network cabling, computer power systems, fire
alarm systems, energy management and security systems. The company is unionized
and competes with IES in Massachusetts.
Wayne J. Griffin Electric, Inc. is headquartered in Holliston, MA and has
operations in New England, Alabama, Georgia, and North Carolina. Revenues in
2001 were $112 million. The company was founded in 1978 and offers services in
several markets, including industrial and high technology buildings,
correctional facilities, office buildings and hotels, healthcare facilities,
schools and universities, clean rooms, biotech facilities and others. Griffin is
a non-union company and competes with IES in New England and along the southeast
coast.
ANECO Electrical Construction is headquartered in Clearwater, FL and has 2001
revenues of $112 million. The company provides electrical and telecommunications
services to the commercial, entertainment, industrial, medical, government and
institutional building markets in the southeastern US. The company is non-union
and is a competitor to IES primarily in Florida.
Inglett & Stubbs had 2001 revenues of $110 million. The company was founded in
1955 and is headquartered in Mableton, GA. The company's historical focus has
been metropolitan Atlanta and Georgia for commercial, industrial, and
institutional projects. In recent years expertise on high-end technically
difficult projects has led to Inglett & Stubbs providing services on a national
basis. In addition to the company's low and medium voltage electrical expertise,
it offers mechanical, building automation, environmental control system
services, water treatment, custodial, building security, landscaping, and
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 40
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
minor general construction services. The company is non-union and competes with
IES in Georgia.
Commonwealth Electric is headquartered in Lincoln, Nebraska with locations in:
Omaha, NE; Des Moines, IA; and Phoenix and Tucson, AZ. Revenues are estimated to
be approximately $100 million. The company's specialties include service
projects, power plants, industrial, commercial and institutional work. The
company is unionized and competes with IES primarily in Arizona.
Miller Electric Co. generated $83 million in revenues in 2001. The company has
about 800 employees and has offices in Jacksonville, Miami and Gainesville, FL
and Florence, SC. Top markets include commercial, industrial, hospitals,
government, highways and bridges. Miller is a union contractor and competes with
IES in Florida and on the southeast coast.
Ludvik Electric Co. is a Denver-based Engineering and Construction firm founded
in 1980. The company has performed work throughout the Western United States and
Hawaii, with 2001 revenues of $83 million. Projects include government,
infrastructure, commercial, industrial, health care, pharmaceutical, food and
beverage, and defense enterprises. The Company is non-union and competes with
IES in Colorado.
Patrick Power Corporation is headquartered in Ft. Lauderdale, FL and has 2001
revenues of approximately $70 million. Specialties include general power and
lighting, power generation, medium and high voltage systems, telecommunications
systems, fire alarm systems and lighting protection systems. The company is
non-union and competes with IES in Florida.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 41
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Outlook and Valuation
- --------------------------------------------------------------------------------
After years of economic expansion, the economy stumbled in 2002 and has
continued to remain fairly weak in 2003. The events of September 11th
demonstrated that unpredictable events can have a significant impact on the
economy.
Market Outlook
Below is an analysis of F.W. Dodge's expectations for 2003 through 2005, as well
as some analysis on profitability trends through cycles in the construction
industry. This analysis should help investors to develop projections for IES'
performance over the next few years. Although 2003 is expected to remain soft,
2004 and 2005 are projected to be somewhat stronger. It is important to note
that throughout 2003, F.W. Dodge's forecasts have become increasingly more
conservative for overall construction as well as almost all areas of
construction except residential.
Data as of December 2002 projected overall construction would be down 2% in 2003
and up 5% in 2004. Currently that outlook is for the overall market to be up
only 2% in 2004 versus the original estimate of 5%. The downward revision is
more pronounced in non-residential construction spending as well as non-building
construction because the impact on overall construction spending is softened by
the increased forecasts for residential construction spending. See Exhibit 22 on
the following page for an analysis of revisions in F.W. Dodge's estimates by
sector.
Commercial and industrial spending has been down significantly in 2002 and 2003,
18% and 4% respectively, according to F. W. Dodge. However there is a recovery
projected in 2004 and 2005. Even though that recovery is not as robust as
originally indicated by F.W. Dodge in December of 2002, it is still significant.
See Exhibit 23 for a review of markets that are expected to have particular
strength in 2004 where IES has expertise and a history of earning higher
profits. These markets include office buildings, retail centers, hotels and
manufacturing facilities. One area that F.W. Dodge has become increasingly more
bullish on is hotel construction for the remainder of 2003.
Residential construction spending is expected to remain quite strong with a 3%
increase in 2003 and a 1% increase in 2004, after record growth in 2002.
There are several factors impacting construction this year. With declining
incomes and tax dollars, states and the federal government have seen projected
budget surpluses quickly turn to deficits and public works and institutional
building projects are expected to slow this year. As for commercial and
industrial, the weak employment market seems to be damping demand for new
projects. Additionally, while interest rates remain low, there has been some
recent movement upward which may effect residential construction, although so
far there has been no indication of that impact.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 42
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 22
Recent Changes in the U.S. Construction Market Outlook
- --------------------------------------------------------------------------------
Market Growth
-------------------------------------
2002A 2003E 2004E 2005E
- --------------------------------------------------------------------------------
June 2003 Outlook (Current Outlook)
Non-Residential Building Construction -9% -4% 5% 10%
Residential Building Construction 13% 3% 1% -1%
Non-Building Construction -7% -11% 0% 6%
December 2002 Outlook
Non-Residential Building Construction 0% 7% 12%
Residential Building Construction -1% 5% -1%
Non-Building Construction -6% 0% 3%
- --------------------------------------------------------------------------------
Source: F.W. Dodge December 2002 and June 2003 Construction Marketing
Forecasting.
Exhibit 23
Construction Growth by Market Ranked by IES' Q2 2003 Gross Margin
Many of IES' more profitable markets are projected to have significant growth in
2004.
- --------------------------------------------------------------------------------
F.W. Dodge - Proj.
Company Data - 2003 YTD Q3 Const. Spending by Mkt.(1)
-------------------------- --------------------------
Gross Margin Rank % of
within Segments Revenue 2002 2003 2004
- --------------------------------------------------------------------------------
Commercial
Office Buildings 1 6.0% -25% -6% 10%
Retail 2 6.4% -5% 1% 6%
Communications 3 4.5% Data Not Available
Institutions 4 9.4% -3% -2% 0%
Other Commercial 5 4.1% -7% -10% 6%
Hotels and Condos 6 9.3% -21% 13% 14%
Health Care 7 9.6% 12% -9% 2%
Industrial
Highway 1 2.1% -1% -7% 0%
Government 2 0.9% -3% -10% 3%
Power and Utility(2) 3 5.9% -48% -41% -23%
Distribution 4 1.1% -18% -12% 17%
Manufacturing 5 9.8% -35% -1% 19%
Airport 6 2.7% -3% -5% 7%
Water 7 1.8% 12% -13% 1%
Residential
Single family 1 13.3% 15% 3% 0%
Multifamily 2 5.9% 3% 3% 8%
Shading = Significant growth markets in '04
- --------------------------------------------------------------------------------
(1) Source is June 2003 F.W. Dodge report and IES company data.
(2) Market data includes electrical services provided for communications
infrastructure which is why this market is in such a state of decline.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 43
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Comparison of Historical Profitability Performance versus Construction Spending
The industry is highly cyclical and driven to a large extent by construction
expenditures. Growth in construction expenditures can vary widely from year to
year and this will have a flow-through impact on profitability of electrical,
mechanical and other contractors. Below is an analysis of 30 years of
construction expenditures compared to the EBITDA margins of Fluor Corp. (Fluor
has a long history of data and serves as a good proxy for the industry). IES
believes the analysis demonstrates that in periods of growth, overall
profitability and profit margins expand, and when construction spending
contracts, profit margins contract as well. Construction spending, the primary
business driver for IES and its competitors, is highly variable and can
significantly impact profitability.
Exhibit 24
Comparison of Historical Company Performance and Construction Spending
Profit margins for construction firms expand and contract as construction
spending increases and decreases.
- --------------------------------------------------------------------------------
CONSTRUCTION SPENDING GROWTH(*) VS. FLOUR'S EBITDA MARGIN FROM 1971 - 1972
- --------------------------------------------------------------------------------
Yr/Yr Change
FLR EBITDA Margin in Total Construction Spending
1971
1972 7.8% 14%
1973 11.0% 9%
1974 10.6% -7%
1975 10.0% -1%
1976 9.7% 21%
1977 9.6% 28%
1978 6.8% 14%
1979 6.4% 6%
1980 5.7% -11%
1981 7.2% 4%
1982 8.3% 0%
1983 8.9% 24%
1984 6.1% 10%
1985 nmf 10%
1986 0.9% 6%
1987 0.9% 4%
1988 3.2% 1%
1989 3.9% 3%
1990 3.7% -9%
1991 4.1% -6%
1992 5.3% 9%
1993 4.5% 8%
1994 4.9% 9%
1995 5.3% 3%
1996 5.4% 8%
1997 3.6% 9%
1998 5.0% 12%
1999 5.3% 10%
2000 4.5% 6%
2001 2.9% 5%
2002 3.3% 1%
- --------------------------------------------------------------------------------
Source: US Historical Fluor Corp. records and F.W. Dodge Construction Industry
Data.
Exhibit 25 below illustrates IES and its peers' gross profit margin and
operating income margin over the past four years. With the exception of EMCOR,
which generates over 20% of its revenues from facilities maintenance, which is
not tied to construction, the profit margins have contracted as commercial and
industrial construction spending has declined.
Exhibit 25
Profit Margins have declined as Commercial and Industrial Construction Spending
has Declined
[TABLE NOT SUPPLIED]
Based on historical analysis and assuming F.W. Dodge forecasts are correct, it
is possible that IES could see a 150 to 300 basis point improvement in operating
income margin over the course of 2004 and 2005.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 44
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
IES' Weighted Average Cost of Capital ("WACC")
IES believes its cost of capital, based on a WACC analysis, is approximately
11%. WACC is the combination of IES' cost of debt, which is approximately 6%
after tax, and its cost of equity, which is between 15.5% and 16.5%. The
calculation is based on using the average beta for the specialty contracting
industry adjusted for the appropriate capital structure, a risk free rate of
4.5%, which is the recent 10-year government bond rate, and a target debt to
capital ratio for IES of between 35% and 45%. The WACC analysis also includes a
3.1% size premium for cost of equity given that IES is a small cap stock.
IES relative to its Peers
IES is the largest electrical contractor, however there are a number of
companies in similar market segments that are good proxies for valuation. IES'
publicly traded peers include EMCOR, Comfort Systems, Quanta Services and Dycom.
An analysis of select engineering and construction firms including Fluor, Shaw
Group and Jacobs Engineering has also been included because, although these
firms have a slightly different business model, they operate in the same markets
as IES and face a similar market environment.
Exhibit 26
IES Peer Analysis
- ------------------------------------------------------------------------------------------
EPS Price/Earnings
Fiscal 8/15/03 --------------- ------------------
Company Symbol Year Price 2002 2003E 2002 2003E
- ------------------------------------------------------------------------------------------
Specialty Contractors
EMCOR EME Dec $42.79 $4.07 $2.98 10.5x 14.4x
Comfort Sys. FIX Dec 3.40 0.14 NA 24.3 NA
Dycom DY Jul 17.94 0.53 0.30 33.8 59.8
Quanta PWR Dec 6.90 0.35 0.10 19.7 69.0
- ------------------------------------------------------------------------------------------
Median 22.0x 59.8x
Mean 22.1x 47.7x
- ------------------------------------------------------------------------------------------
Engineering/Construction
Shaw Group SGR Aug $8.26 $2.26 $1.26 3.7x 6.6x
Fluor FLR Dec 35.88 2.13 2.18 16.8 16.5
Jacobs JEC Sep 46.00 1.98 2.28 23.2 20.2
- ------------------------------------------------------------------------------------------
Median 16.8x 16.5x
Mean 14.6x 14.4x
- ------------------------------------------------------------------------------------------
IES(1) IES Sep $6.10 $0.50 $0.53-$0.60 12.2x 11.5x-10.2x
- ------------------------------------------------------------------------------------------
Source: First Call and various equity analyst reports.
(1) 2002 financial data for IES is before one-time charges of $15.2 million
($9.9 million after tax) and excludes the impact of SFAS 142.
(2) Shaw Group was not a member of the peer group included in IES' proxy
statement.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 45
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 27
IES Peer Analysis
- --------------------------------------------------------------------------------------------
Op. Income EBITDA TEV/Op. Inc. TEV/EBITDA Consensus
Company Symbol 2003E 2003E 2003E 2003E Growth Rate
- --------------------------------------------------------------------------------------------
Specialty Contractors
EMCOR EME $81 $104 9.5x 7.4x 15%
Comfort Sys. FIX NA NA NA NA 12%
Dycom DY 22 60 34.1 12.3 13%
Quanta PWR 53 118 20.7 9.4 14%
- --------------------------------------------------------------------------------------------
Median 20.7x 9.4x 14%
Mean 21.5x 9.7x 14%
- --------------------------------------------------------------------------------------------
14%
Engineering/Construction
Shaw Group SGR $70 $82 9.9x 8.5x 13%
Fluor FLR 255 332 9.6 7.4 12%
Jacobs JEC 193 233 13.1 10.8 15%
- --------------------------------------------------------------------------------------------
Median 9.9x 8.5x 13%
Mean 10.9x 8.9x 13%
- --------------------------------------------------------------------------------------------
IES(1) IES 13%
- --------------------------------------------------------------------------------------------
Source: First Call, Value Line, various equity analysts reports. Consensus
growth rates are from First Call.
(1) 2002 financial data is before one-time charges of $15.2 million ($9.9
million after tax) and excludes the impact of adopting SFAS 142.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 46
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Income Statement
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) FYE - September 30, FYE - Sep.
---------------------- ----------
2000 2001 12/01A 3/02A 6/02A 9/02A 2002
Revenues $1,672,288 $1,693,213 $375,179 $356,481 $374,819 $368,951 $1,475,430
- ------------------------------------------------------------------------------------------------------------------------------
Cost of services (including depreciation) 1,372,537 1,385,589 317,950 301,780 316,328 317,786 1,253,844
Gross profit 299,751 307,624 57,229 54,701 58,491 51,165 221,586
--------- --------- --------- ------- ------- ------- ---------
Selling, general and administrative expenses 221,519 214,073 49,773 43,392 39,918 41,101 174,184
Restructuring charges* - - 4,000 1,556 - - 5,556
Goodwill amortization 13,211 12,983 - - - - -
--------- --------- --------- ------- ------- ------- ---------
Income from operations 65,021 80,568 3,456 9,753 18,573 10,064 41,846
Other income (expense):
Interest expense (23,230) (26,053) (6,785) (6,644) (6,337) (6,936) (26,702)
Other, net 1,008 (134) (107) (237) (23) 1,331 964
--------- --------- --------- ------- ------- ------- ---------
Interest and other, net (22,222) (26,187) (6,892) (6,881) (6,360) (5,605) (25,738)
--------- --------- --------- ------- ------- ------- ---------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 42,799 54,381 (3,436) 2,872 12,213 4,459 16,108
Provision (benefit) for income taxes 21,643 25,671 (1,623) 806 4,736 2,256 6,175
--------- --------- --------- ------- ------- ------- ---------
Net income (loss) before cumulative effect of
change in accounting principle 21,156 28,710 (1,813) 2,066 7,477 2,203 9,933
--------- --------- --------- ------- ------- ------- ---------
Cumulative effect of change in
accounting principle - - 283,284 - - - 283,284
--------- --------- --------- ------- ------- ------- ---------
Net income (loss) $21,156 $28,710 ($285,097) $2,066 $7,477 $2,203 ($273,351)
========= ========= ========= ======= ======= ======= =========
Diluted earnings (loss) per share before
cumulative effect of change in
accounting principle $0.52 $0.70 ($0.04) $0.05 $0.19 $0.06 $0.25
========= ========= ========= ======= ======= ======= =========
Cumulative effect of change in
accounting principle $0.00 $0.00 ($7.13) $0.00 $0.00 $0.00 ($7.11)
========= ========= ========= ======= ======= ======= =========
Diluted earnings (loss) per share $0.52 $0.70 ($7.17) $0.05 $0.19 $0.06 ($6.86)
========= ========= ========= ======= ======= ======= =========
Diluted shares used in the computation
of earnings (loss) per share 40,410 40,900 39,759 40,002 40,073 39,908 39,848
Key Margins
Gross Margin 17.9% 18.2% 15.3% 15.3% 15.6% 13.9% 15.0%
SG&A Margin 13.2% 12.6% 13.3% 12.2% 10.6% 11.1% 11.8%
Operating Margin 3.9% 4.8% 0.9% 2.7% 5.0% 2.7% 2.8%
Interest Expense 1.4% 1.5% 1.8% 1.9% 1.7% 1.9% 1.8%
Pretax Margin 2.6% 3.2% -0.9% 0.8% 3.3% 1.2% 1.1%
Tax Rate 50.6% 47.2% 47.2% 28.1% 38.8% 50.6% 38.3%
Net Income Margin 1.3% 1.7% -0.5% 0.6% 2.0% 0.6% 0.7%
- -------------------------------------------------------------------------------------------------------------------------------
Source: Integrated Electrical Services SEC documents.
* Restructuring charges are associated with reorganizing the business and are
primarily costs associated with reductions in staff.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 47
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Income Statement
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in Thousands) Quarter Ended - Fiscal 2003
12/02A 3/03A 6/03A
- --------------------------------------------------------------------------------
Revenues $348,577 $343,135 $375,339
Cost of services (including depreciation) 297,221 294,030 321,930
-------- -------- --------
Gross profit 51,356 49,105 53,409
Selling, general and administrative expenses 38,619 37,460 38,193
-------- -------- --------
Income from operations 12,737 11,645 15,216
Other income (expense):
Interest expense (6,456) (6,343) (6,397)
Other, net (90) 175 (19)
-------- -------- --------
Interest and other, net (6,546) (6,168) (6,416)
-------- -------- --------
Income before income taes 6,191 5,477 8,800
Provision for income taxes 2,384 2,108 3,389
-------- -------- --------
Net income (loss) $3,807 $3,369 $5,411
======== ======== ========
Diluted earnings per share $0.10 $0.09 $0.14
======== ======== ========
Diluted shares used in the computation
of earnings per share 39,472 39,372 39,162
Key Margins
Gross Margin 14.7% 14.3% 14.2%
SG&A Margin 11.1% 10.9% 10.2%
Operating Margin 3.7% 3.4% 4.1%
Interest Expense 1.9% 1.8% 1.7%
Pretax Margin 1.8% 1.6% 2.3%
Tax Rate 38.5% 38.5% 38.5%
Net Income Margin 1.1% 1.0% 1.4%
- --------------------------------------------------------------------------------
Source: Integrated Electrical Services SEC documents.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 48
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Balance Sheet
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) September 30, December 31, March 31, June 30,
2001 2002 2002 2003 2003
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $3,475 $32,779 $19,062 $26,130 $40,342
Accounts Receivable:
Trade, net of allowance 275,922 237,310 228,310 236,502 245,192
Retainage 64,933 62,482 61,844 67,193 68,090
Related party 222 153 144 148 121
Cost and estimated earnings in excess of billings on
uncompleted contracts 62,249 46,314 46,007 45,435 42,793
Inventories 21,855 23,651 22,677 21,475 20,334
Prepaid expenses and other current assets 23,858 35,041 35,066 34,562 31,859
---------- -------- -------- -------- --------
Total current assets 452,514 437,730 413,110 431,445 448,731
Property and equipment, net 70,343 61,577 58,899 57,746 55,517
Goodwill, net 482,654 198,220 198,005 198,005 198,005
Other noncurrent assets, net 27,992 24,112 23,683 24,296 23,746
---------- -------- -------- -------- --------
Total assets $1,033,503 $721,639 $693,697 $711,492 $725,999
========== ======== ======== ======== ========
Liabilities and Stockholder's Equity
Current Liabilities
Short-term debt and current maturities
of long-term debt $679 $570 $467 $372 $307
Accounts payable and accrued expenses 164,272 141,398 115,505 126,677 140,419
Income taxes payable 700 - 167 362 185
Billings in excess of costs and estimated earnings on
uncompleted projects 50,234 51,548 45,383 49,014 44,756
---------- -------- -------- -------- --------
Total current liabilities 215,885 193,516 161,522 176,425 185,667
Long-term bank debt 12,000 - - - -
Other long-term debt 872 504 381 305 235
Senior subordinated notes, net 273,210 247,935 247,932 247,930 247,929
Other noncurrent liabilities 2,892 25,252 26,651 28,037 29,225
---------- -------- -------- -------- --------
Total liabilities 504,859 467,207 436,486 452,697 463,056
Stockholders' Equity:
Preferred stock, $0.1 par value - - - - -
Common stock, $0.01 par value 383 385 385 385 385
Restricted voting common Stock, $0.01 par value 26 26 26 26 26
Additional paid in capital 428,697 428,427 428,420 427,679 427,690
Treasury stock, at cost (9,181) (9,774) (10,795) (11,839) (13,113)
Retained earnings (deficit) 108,719 (164,632) (160,825) (157,456) (152,045)
---------- -------- -------- -------- --------
Total shareholders' equity 528,644 254,432 257,211 258,795 262,943
---------- -------- -------- -------- --------
Total liabilities and stockholders' equity $1,033,503 $721,639 $693,697 $711,492 $725,999
========== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------
Source: Integrated Electrical Services SEC documents.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 49
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Statement of Cash Flows
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended September 30, Quarter Ended Dec. 31,
------------------------------- ----------------------
2000 2001 2002 2001 2002
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $21,156 $28,710 ($273,351) ($285,097) $3,807
------- ------- --------- --------- ------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cummulative effect of change in
accounting principle - - 283,284 283,284 -
Allowance for doubtful accounts 1,768 912 4,324 705 379
Deferred income taxes (177) (4,938) 6,175 - -
Depreciation and amortization 32,656 30,345 18,633 4,227 3,650
(Gain) loss on sale of property and equipment (145) (287) 1,547 (71) 59
Non-cash compensation charge 5,378 568 1,422 1,422 -
Gain on divestitures - - (2,145) - (26)
Changes in operating assets and liabilities
Increase (decrease) in:
Accounts receivable, net (82,917) 26,163 30,943 6,637 8,401
Inventories (2,900) (4,979) (2,770) (5,622) 873
Costs and estimated earnings in excess of
billings on uncompleted contracts (11,489) (10,785) 14,524 11,745 105
Prepaid expenses an other current assets (1,096) (15,640) (9,824) 3,541 (27)
Other noncurrent assets (4,329) 2,840 3,199 (1,144) 429
Increase (decrease) in:
Accounts payable and accrued expenses 72,763 (37,831) (37,739) (31,537) (10,075)
Billings in excess of costs and estimated
earnings on uncompleted contracts 15,131 (6,414) 3,709 6,904 (6,101)
Other current liabilities (2,880) (250) 172 (452) 167
Other noncurrent liabilities 295 220 11,264 1,219 1,612
--------- --------- --------- --------- ------
Net cash provided by (used in) operating
activities $43,214 $8,634 $53,367 ($4,239) $3,253
--------- --------- --------- --------- ------
Cash Flows from Investing Activities
Proceeds from sale of property and equipment 2,742 1,467 895 170 1,056
Additions of property and equipment (28,381) (25,801) (11,895) (3,942) (2,529)
Purchase of businesses, net of cash acquired (33,225) (233) - - -
Sale of businesses - - 7,549 - 1,084
Investments in securities (1,670) (5,599) (300) - -
Additions to note receivable from affiliate - (1,250) (583) (583) -
--------- --------- --------- --------- ------
Net cash used in investing activities ($60,534) ($31,416) ($4,334) ($4,355) ($389)
-------- -------- --------- --------- ------
Cash Flows from Financing Activities
Borrowings 63,434 231,744 74,613 44,291 5
Repayments of debt (48,278) (192,811) (97,941) (36,721) (15,835)
Proceeds from sale of interest rate swaps - - 4,040 - -
Purchase of treasury stock - (10,376) (984) - (769)
Payments for debt issuance costs - (5,358) - - -
Proceeds from issuance of stock - 1,038 - 1,712 18
Proceeds from issuance of stock to employees - 980 - - -
Proceeds from exercise of stock options 3 270 543 4 -
--------- --------- --------- --------- ------
Net cash provided by (used in) financing
activities $15,159 $25,487 ($19,729) $9,286 ($16,581)
--------- --------- --------- --------- ------
Net increase (decrease) in cash and cash
equivalents (2,161) 2,705 29,304 692 (13,717)
Cash and equivalents, beginning of period 2,931 770 3,475 3,475 32,779
--------- --------- --------- --------- ------
Cash and equivalents, end of period $770 $3,475 $32,779 $4,167 $19,062
======== ======== ========= ========= ======
Supplemental disclosure of cash flow information
Cash paid for:
Interest $23,151 $23,793 $23,117 $475 $277
Income taxes 24,832 30,667 5,091 3,383 -
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Quarter Ended Mar. 31, Quarter Ended June 30,
------------------------ ------------------------
2002 2003 2002 2003
- ------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) ($283,031) $7,176 ($275,554) $12,587
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cummulative effect of change in
accounting principle 283,284 - 283,284 -
Allowance for doubtful accounts 1,264 661 2,385 1,046
Deferred income taxes - - - -
Depreciation and amortization 8,574 7,341 12,707 10,931
(Gain) loss on sale of property and equipment (133) (30) (157) 204
Non-cash compensation charge 1,422 - 1,422 -
Gain on divestitures - (26) - (26)
Changes in operating assets and liabilities
Increase (decrease) in:
Accounts receivable, net 36,128 10,101 40,736 156
Inventories (5,802) 2,075 (5,713) 3,216
Costs and estimated earnings in excess of
billings on uncompleted contracts 10,439 1,297 14,266 3,939
Prepaid expenses an other current assets 4,517 672 9,083 3,375
Other noncurrent assets 2,971 423 2,659 1,652
Increase (decrease) in:
Accounts payable and accrued expenses (51,108) (8,277) (40,254) 5,509
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,602 (5,982) 7,006 (10,240)
Other current liabilities (465) 362 (539) 185
Other noncurrent liabilities (1,849) 2,998 (4,058) 4,186
--------- -------- --------- --------
Net cash provided by (used in) operating
activities $9,813 $18,791 $47,273 $36,720
--------- -------- --------- --------
Cash Flows from Investing Activities
Proceeds from sale of property and equipment 411 1,540 867 1,787
Additions of property and equipment (5,991) (5,462) (7,545) (7,304)
Purchase of businesses, net of cash acquired - (2,723) - (2,723)
Sale of businesses - 1,084 - 1,084
Investments in securities (300) (500) (300) (500)
Additions to note receivable from affiliate (583) - (583) -
--------- -------- --------- --------
Net cash used in investing activities ($6,463) ($6,061) ($7,561) ($7,656)
--------- -------- --------- --------
Cash Flows from Financing Activities
Borrowings 74,383 27 74,558 37
Repayments of debt (80,046) (16,030) (86,331) (16,176)
Proceeds from sale of interest rate swaps 1,530 - 1,530 -
Purchase of treasury stock - (3,376) (523) (6,795)
Payments for debt issuance costs - - - (679)
Proceeds from issuance of stock - - - -
Proceeds from issuance of stock to employees - - -
Proceeds from exercise of stock options 17 - 534 2,112
--------- -------- --------- --------
Net cash provided by (used in) financing
activities ($4,116) ($19,379) ($10,232) ($21,501)
--------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents (766) (6,649) 29,480 7,563
Cash and equivalents, beginning of period 3,475 32,779 3,475 32,779
--------- -------- --------- --------
Cash and equivalents, end of period $2,709 $26,130 $32,955 $40,342
========= ======== ========= ========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $13,366 $12,061 $13,757 $12,321
Income taxes 4,202 - 4,861 599
- ------------------------------------------------------------------------------------------------------
Source: Integrated Electrical Services SEC documents.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 50
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Appendix I - Construction Accounting Primer
- --------------------------------------------------------------------------------
As an electrical contractor, IES uses construction accounting conventions as
prescribed under GAAP accounting. The primary issue surrounding construction
accounting is recognition of revenue from longer-term construction contracts.
With longer-term fixed-price contracts, contractors generally use the percentage
of completion method of accounting. This method requires companies to estimate
the percentage of a project that it has completed work on. There are several
acceptable methods for determining percentage of completion such as: the ratio
of costs incurred to date to the total expected costs at completion, the ratio
of labor hours or dollars incurred to date to the total expected labor hours or
dollars at completion, or any other rationale and systematic method. IES uses
the ratio of costs incurred to date to the total expected costs at completion to
estimate percentage of completion. Generally, if 40% of a project's cost has
been incurred over a 6 month period then the company should recognize 40% of the
revenues and 40% of the profits related to the project. The primary issue in
percentage of completion accounting is the use of estimates for total costs at
completion. If estimates change during a project, the impact of the change in
profitability is recognized in the period in which the estimate is changed. The
following example illustrates how changes in estimates can impact the
profitability across periods.
Example:
o Fixed price contract to be completed over 2 accounting periods.
o Total contract amount equals $1 million.
o Cost of project to contractor is $850,000 for a 15% margin at completion.
Company Estimates are Correct Throughout Project
- --------------------------------------------------------------------------------
Period 1 Period 2 Total
- --------------------------------------------------------------------------------
Revenue $500,000 $500,000 $1,000,000
Cost of Goods Sold 425,000 425,000 850,000
-------- -------- ----------
Gross Profit $75,000 $75,000 $150,000
Gross Margin 15.0% 15.0% 15.0%
The Project is Completed at a Higher Profit Than Originally Estimated
- --------------------------------------------------------------------------------
Period 1 Period 2 Total
- --------------------------------------------------------------------------------
Revenue $500,000 $500,000 $1,000,000
Cost of Goods Sold 425,000 400,000 825,000
-------- -------- ----------
Gross Profit $75,000 $100,000 $175,000
Gross Margin 15.0% 20.0% 17.5%
- --------------------------------------------------------------------------------
In the second example above, the original profit estimates are significantly
understated. In period two, the profitability on the project rises as profits
"catch up" to reflect a 17.5% margin over the life of the contract. For
companies with long projects that last for 2 to 3 years, the risk of under- or
overstating revenues and profitability for several quarters exists, but for
companies with an average project life of 2 to 3 months, this risk is
substantially reduced. The average project life at IES is only 6 to 8 months so
any inaccuracies in estimates are corrected fairly quickly. Additionally,
because of IES' size and large number of projects, under- and overestimates
across the Company will tend to offset each other.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 51
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Under percentage of completion accounting, contract revenue is based on costs
incurred while customer billings may be impacted by other factors such as:
achieving certain milestones, acceptance of completed work by the customer or
some other schedule. Because of this discrepancy, contract revenue recognized is
usually different from the amount billed as the project progresses. When revenue
recognized exceeds customer billings the excess is reported as a current asset
referred to as "costs and estimated earnings in excess of billings on
uncompleted contracts". Sometimes it may be referred to as "underbillings" or
"unbilled receivables" although these are not GAAP terms.
Conversely, when customer billings exceed contract revenue recognized, the
excess is reported as a current liability referred to as "billings in excess of
costs and estimated earnings on uncompleted contracts". Sometimes it may be
referred to as "overbillings" although this is not a GAAP term. When calculating
days sales outstanding underbillings should be added to accounts receivable and
overbillings should be subtracted from accounts receivable.
The other balance sheet term that sometimes causes confusion is retainage. It is
a current asset on the balance sheet that is a subcategory of accounts
receivable. Often some portion of payment is held at the completion of a
contract for some period of time almost like a warranty. The amount of retainage
on a project is determined upfront when the terms of the contract are negotiated
and is typically 5% to 10% of the overall revenue on the project.
================================================================
NYSE: IES (C)2003 Integrated Electrical Services, Inc. Page 52
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
