IES HOLDINGS, INC.
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2011
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 1-13783
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 | |
| incorporation or organization) | Identification No.) |
4801 Woodway Drive, Suite 200-E, Houston, Texas 77056
(Address of principal executive offices and ZIP code)
(Address of principal executive offices and ZIP code)
Registrant’s telephone number, including area code:
(713) 860-1500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes
þ
No
o
The number of shares outstanding as of May 13, 2011 of the issuer’s common stock was 14,905,597.
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
| Page | ||||||||
|
|
||||||||
|
|
||||||||
| 5 | ||||||||
|
|
||||||||
| 6 | ||||||||
|
|
||||||||
| 8 | ||||||||
|
|
||||||||
| 9 | ||||||||
|
|
||||||||
| 24 | ||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
| 36 | ||||||||
|
|
||||||||
| 37 | ||||||||
|
|
||||||||
| 38 | ||||||||
|
|
||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
Table of Contents
DEFINITIONS
In this quarterly report on Form 10-Q, the words “IES”, the “Company”, “we”, “our”, “ours”, and
“us” refer to Integrated Electrical Services, Inc. and, except as otherwise specified herein, to
our subsidiaries.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes certain statements that may be deemed “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, all of which are based upon various estimates and assumptions that
the Company believes to be reasonable as of the date hereof. These statements involve risks and
uncertainties that could cause our actual results to differ materially from those set forth in such
statements. Such risks and uncertainties include, but are not limited to:
| • |
fluctuations in operating activity due to downturns in levels of construction, seasonality
and differing regional economic conditions;
|
| • |
competition in the construction industry, both from third parties and former employees,
which could result in the loss of one or more customers or lead to lower margins on new
contracts;
|
| • |
a general reduction in the demand for our services;
|
| • |
a change in the mix of our customers, contracts and business;
|
| • |
our ability to successfully manage construction projects;
|
| • |
possibility of errors when estimating revenue and progress to date on
percentage-of-completion contracts;
|
| • |
inaccurate estimates used when entering into fixed-priced contracts;
|
| • |
challenges integrating new types of work or new processes into our divisions;
|
| • |
the cost and availability of qualified labor, especially electricians and construction
supervisors;
|
| • |
accidents resulting from the physical hazards associated with our work and the potential
for vehicle accidents;
|
| • |
success in transferring, renewing and obtaining electrical and construction licenses;
|
| • |
our ability to pass along increases in the cost of commodities used in our business, in
particular, copper, aluminum, steel, fuel and certain plastics;
|
| • |
potential supply chain disruptions due to credit or liquidity problems faced by our
suppliers;
|
| • |
loss of key personnel and effective transition of new management;
|
| • |
warranty losses or other latent defect claims in excess of our existing reserves and
accruals;
|
| • |
warranty losses or other unexpected liabilities stemming from former divisions which we
have sold or closed;
|
| • |
growth in latent defect litigation in states where we provide residential electrical work
for home builders not otherwise covered by insurance;
|
| • |
limitations on the availability of sufficient credit or cash flow to fund our working
capital needs;
|
| • |
difficulty in fulfilling the covenant terms of our credit facilities;
|
| • |
increased cost of surety bonds affecting margins on work and the potential for our surety
providers to refuse bonding or require additional collateral at their discretion;
|
3
Table of Contents
| • |
increases in bad debt expense and days sales outstanding due to liquidity problems faced by
our customers;
|
| • |
changes in the assumptions made regarding future events used to value our stock options and
performance-based stock awards;
|
| • |
the recognition of potential goodwill, fixed asset and other investment impairments;
|
| • |
uncertainties inherent in estimating future operating results, including revenues,
operating income or cash flow;
|
| • |
disagreements with taxing authorities with regard to tax positions we have adopted;
|
| • |
the recognition of tax benefits related to uncertain tax positions;
|
| • |
complications associated with the incorporation of new accounting, control and operating
procedures;
|
| • |
the financial impact of new or proposed accounting regulations;
|
| • |
the ability of our controlling shareholder to take action not aligned with other
shareholders;
|
| • |
the possibility that certain of our net operating losses may be restricted or reduced in a
change in ownership;
|
| • |
credit and capital market conditions, including changes in interest rates that affect the
cost of construction financing and mortgages, and the inability for some of our customers to
retain sufficient financing which could lead to project delays or cancellations; and
|
| • |
the sale or disposition of the shares of our common stock held by our majority shareholder,
which, under certain circumstances, would trigger change of control provisions in contracts
such as employment agreements, supply agreements, and financing and surety arrangements.
|
You should understand that the foregoing, as well as other risk factors discussed in our annual
report on Form 10-K for the year ended September 30, 2010, could cause future outcomes to differ
materially from those experienced previously or from those expressed in this quarterly report and
our aforementioned annual report on Form 10-K. We undertake no obligation to publicly update or
revise information concerning our restructuring efforts, borrowing availability, cash position or
any forward-looking statements to reflect events or circumstances that may arise after the date of
this report. Forward-looking statements are provided in this quarterly report on Form 10-Q pursuant
to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and
should be evaluated in the context of the estimates, assumptions, uncertainties, and risks
described herein.
General information about us can be found at
www.ies-co.com
under “Investor Relations.” Our
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well
as any amendments to those reports, are available free of charge through our website as soon as
reasonably practicable after we file them with, or furnish them to, the Securities and Exchange
Commission. You may also contact our Investor Relations department at 713-860-1500, and they will
provide you with copies of our public reports.
4
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
| March 31, | September 30, | |||||||
| 2011 | 2010 | |||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$ | 36,707 | $ | 32,924 | ||||
|
Accounts receivable:
|
||||||||
|
Trade, net of allowance of $2,389 and $3,360, respectively
|
82,915 | 88,252 | ||||||
|
Retainage
|
18,397 | 17,083 | ||||||
|
Inventories
|
9,454 | 12,682 | ||||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
15,115 | 12,566 | ||||||
|
Prepaid expenses and other current assets
|
5,031 | 5,449 | ||||||
|
|
||||||||
|
|
||||||||
|
Total current assets
|
167,619 | 168,956 | ||||||
|
|
||||||||
|
LONG-TERM RECEIVABLES, net of allowance of $77 and $4,069, respectively
|
315 | 440 | ||||||
|
PROPERTY AND EQUIPMENT, net
|
11,642 | 19,846 | ||||||
|
GOODWILL
|
3,981 | 3,981 | ||||||
|
OTHER NON-CURRENT ASSETS, net
|
8,942 | 11,882 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 192,499 | $ | 205,105 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Current maturities of long-term debt
|
$ | 447 | $ | 808 | ||||
|
Accounts payable and accrued expenses
|
71,049 | 67,799 | ||||||
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
14,212 | 17,109 | ||||||
|
|
||||||||
|
|
||||||||
|
Total current liabilities
|
85,708 | 85,716 | ||||||
|
LONG-TERM DEBT, net of current maturities
|
10,418 | 10,448 | ||||||
|
LONG-TERM DEFERRED TAX LIABILITY
|
1,046 | 1,046 | ||||||
|
OTHER NON-CURRENT LIABILITIES
|
6,177 | 6,314 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities
|
103,349 | 103,524 | ||||||
|
|
||||||||
|
|
||||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued and
outstanding
|
— | — | ||||||
|
Common stock, $0.01 par value, 100,000,000 shares authorized; 15,407,802 and
15,407,802 shares issued and 14,905,597 and 14,773,904 outstanding, respectively
|
154 | 154 | ||||||
|
Treasury stock, at cost, 502,205 and 633,898 shares, respectively
|
(6,861 | ) | (13,677 | ) | ||||
|
Additional paid-in capital
|
165,065 | 171,510 | ||||||
|
Accumulated other comprehensive income
|
— | (88 | ) | |||||
|
Retained deficit
|
(69,208 | ) | (56,318 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Total stockholders’ equity
|
89,150 | 101,581 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 192,499 | $ | 205,105 | ||||
|
|
||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
5
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
| Three Months Ended | Three Months Ended | |||||||
| March 31, 2011 | March 31, 2010 | |||||||
| (Unaudited) | (Unaudited) | |||||||
|
Revenues
|
$ | 118,326 | $ | 107,619 | ||||
|
Cost of services
|
112,969 | 94,031 | ||||||
|
|
||||||||
|
|
||||||||
|
Gross profit
|
5,357 | 13,588 | ||||||
|
Selling, general and administrative expenses
|
13,333 | 25,709 | ||||||
|
(Gain) loss on sale of assets
|
(87 | ) | 13 | |||||
|
Restructuring charges
|
— | 65 | ||||||
|
|
||||||||
|
|
||||||||
|
Loss from operations
|
(7,889 | ) | (12,199 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Interest and other:
|
||||||||
|
Interest expense
|
576 | 1,017 | ||||||
|
Interest income
|
(24 | ) | (59 | ) | ||||
|
Other income, net
|
(8 | ) | (107 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Interest and other expense, net
|
544 | 851 | ||||||
|
|
||||||||
|
|
||||||||
|
Loss from operations before income taxes
|
(8,433 | ) | (13,050 | ) | ||||
|
Provision for income taxes
|
804 | 180 | ||||||
|
|
||||||||
|
|
||||||||
|
Net loss
|
$ | (9,237 | ) | $ | (13,230 | ) | ||
|
|
||||||||
|
|
||||||||
|
Loss per share
|
||||||||
|
Basic
|
$ | (0.64 | ) | $ | (0.92 | ) | ||
|
Diluted
|
$ | (0.64 | ) | $ | (0.92 | ) | ||
|
|
||||||||
|
Shares used in the computation of loss per share (Note 5):
|
||||||||
|
Basic
|
14,481,005 | 14,390,580 | ||||||
|
Diluted
|
14,481,005 | 14,390,580 | ||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.
6
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
| Six Months Ended | Six Months Ended | |||||||
| March 31, 2011 | March 31, 2010 | |||||||
| (Unaudited) | (Unaudited) | |||||||
|
Revenues
|
$ | 231,975 | $ | 227,867 | ||||
|
Cost of services
|
215,447 | 194,347 | ||||||
|
|
||||||||
|
|
||||||||
|
Gross profit
|
16,528 | 33,520 | ||||||
|
Selling, general and administrative expenses
|
31,354 | 44,976 | ||||||
|
Gain on sale of assets
|
(6,816 | ) | (52 | ) | ||||
|
Asset Impairment
|
3,551 | — | ||||||
|
Restructuring charges
|
— | 763 | ||||||
|
|
||||||||
|
|
||||||||
|
Loss from operations
|
(11,561 | ) | (12,167 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Interest and other:
|
||||||||
|
Interest expense
|
1,175 | 2,085 | ||||||
|
Interest income
|
(49 | ) | (116 | ) | ||||
|
Other income, net
|
(24 | ) | (226 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Interest and other expense, net
|
1,102 | 1,743 | ||||||
|
|
||||||||
|
|
||||||||
|
Loss from operations before income taxes
|
(12,663 | ) | (13,910 | ) | ||||
|
Provision for income taxes
|
227 | 126 | ||||||
|
|
||||||||
|
|
||||||||
|
Net loss
|
$ | (12,890 | ) | $ | (14,036 | ) | ||
|
|
||||||||
|
|
||||||||
|
Loss per share
|
||||||||
|
Basic
|
$ | (0.89 | ) | $ | (0.98 | ) | ||
|
Diluted
|
$ | (0.89 | ) | $ | (0.98 | ) | ||
|
|
||||||||
|
Shares used in the computation of loss per share (Note 5):
|
||||||||
|
Basic
|
14,463,996 | 14,393,328 | ||||||
|
Diluted
|
14,463,996 | 14,393,328 | ||||||
The accompanying notes to condensed consolidated financial statements are an integral part of
these financial statements.
7
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| Six Months Ended | Six Months Ended | |||||||
| March 31, 2011 | March 31, 2010 | |||||||
| (Unaudited) | (Unaudited) | |||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$ | (12,890 | ) | $ | (14,036 | ) | ||
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
||||||||
|
Bad debt expense
|
(466 | ) | 4,984 | |||||
|
Deferred financing cost amortization
|
169 | 148 | ||||||
|
Depreciation and amortization
|
1,980 | 2,795 | ||||||
|
Gain on sale of assets
|
(6,816 | ) | (52 | ) | ||||
|
Asset Impairment
|
3,551 | — | ||||||
|
Non-cash compensation expense
|
436 | 964 | ||||||
|
Equity in (gains) losses of investment
|
96 | — | ||||||
|
Changes in operating assets and liabilities
|
||||||||
|
Accounts receivable
|
389 | 21,951 | ||||||
|
Inventories
|
(1,640 | ) | 699 | |||||
|
Costs and estimated earnings in excess of billings
|
(2,930 | ) | 669 | |||||
|
Prepaid expenses and other current assets
|
57 | 641 | ||||||
|
Other non-current assets
|
2,820 | 229 | ||||||
|
Accounts payable and accrued expenses
|
6,782 | (19,821 | ) | |||||
|
Billings in excess of costs and estimated earnings
|
(2,842 | ) | (7,541 | ) | ||||
|
Other non-current liabilities
|
(140 | ) | (574 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Net cash provided by (used in) operating activities
|
(11,444 | ) | (8,944 | ) | ||||
|
|
||||||||
|
|
||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases of property and equipment
|
(755 | ) | (502 | ) | ||||
|
Proceeds from sales of property and equipment
|
207 | 159 | ||||||
|
Proceeds from sales of facilities
|
16,287 | — | ||||||
|
Distribution from unconsolidated affiliates
|
(57 | ) | 98 | |||||
|
|
||||||||
|
|
||||||||
|
Net cash provided by (used in) investing activities
|
15,682 | (245 | ) | |||||
|
|
||||||||
|
|
||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Borrowings of debt
|
— | 744 | ||||||
|
Repayments of debt
|
(390 | ) | (1,449 | ) | ||||
|
Purchase of treasury stock
|
(65 | ) | (98 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Net cash used in financing activities
|
(455 | ) | (803 | ) | ||||
|
|
||||||||
|
|
||||||||
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
3,783 | (9,992 | ) | |||||
|
CASH AND CASH EQUIVALENTS, beginning of period
|
32,924 | 64,174 | ||||||
|
|
||||||||
|
|
||||||||
|
CASH AND CASH EQUIVALENTS, end of period
|
$ | 36,707 | $ | 54,182 | ||||
|
|
||||||||
|
|
||||||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash paid for interest
|
$ | 1,009 | $ | 2,637 | ||||
|
Cash paid for income taxes
|
$ | 106 | $ | 33 | ||||
The accompanying notes to condensed consolidated financial statements are an integral part of
these financial statements.
8
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BUSINESS
Integrated Electrical Services, Inc., a Delaware corporation, was founded in June 1997 to establish
a leading national provider of electrical and communication services, focusing primarily on the
commercial, industrial, residential, low voltage and service and maintenance markets. We provide a
broad range of services, including designing, building, maintaining and servicing electrical, data
communications and utilities systems for commercial, industrial and residential customers. The
words “IES”, the “Company”, “we”, “our”, and “us” refer to Integrated Electrical Services, Inc.
and, except as otherwise specified herein, to our wholly-owned subsidiaries.
Our electrical contracting services include design of electrical systems within a building or
complex, procurement and installation of wiring and connection to power sources, end-use equipment
and fixtures, as well as contract maintenance. We service commercial, industrial and residential
markets and have a diverse customer base, including: general contractors; property managers and
developers; corporations; government agencies; municipalities; and homeowners. We focus on projects
that require special expertise, such as design-and-build projects that utilize the capabilities of
our in-house experts, or projects which require specific market expertise, such as hospitals or
power generation facilities. We also focus on service, maintenance and certain renovation and
upgrade work, which tends to be either recurring or have lower sensitivity to economic cycles, or
both. We provide services for a variety of projects, including: high-rise residential and office
buildings, power plants, manufacturing facilities, data centers, chemical plants, refineries, wind
farms, solar facilities, municipal infrastructure and health care facilities and residential
developments, including both single-family housing and multi-family apartment complexes. We also
offer low voltage contracting services as a complement to our electrical contracting business. Our
low voltage services include design and installation of structured cabling for corporations,
universities, data centers and switching stations for data communications companies as well as the
installation of fire and security alarm systems. Our utility services consist of overhead and
underground installation and maintenance of electrical and other utilities transmission and
distribution networks, installation and splicing of high-voltage transmission and distribution
lines, substation construction and substation and right-of-way maintenance. Our maintenance
services generally provide recurring revenues that are typically less affected by levels of
construction activity.
CONTROLLING SHAREHOLDER
At March 31, 2011, Tontine Capital Partners, L.P. together with its affiliates (“Tontine”), was the
controlling shareholder of the Company’s common stock. Accordingly, Tontine has the ability to
exercise significant control of our affairs, including the election of directors and any action
requiring the approval of shareholders, including the approval of any potential merger or sale of
all or substantially all assets or divisions of the Company, or the Company itself. In its most
recent Schedule 13D, Tontine stated that it has no current plans to make any material change in the
Company’s business or corporate structure. For a more complete discussion on our relationship with
Tontine, please refer to Note 2, “Controlling Shareholder” to these Condensed Consolidated
Financial Statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These unaudited condensed consolidated financial statements reflect, in the opinion of management,
all adjustments necessary to present fairly the financial position as of, and the results of
operations for, the periods presented. All adjustments are considered to be normal and recurring
unless otherwise described herein. Interim period results are not necessarily indicative of results
of operations or cash flows for the full year. During interim periods, we follow the same
accounting policies disclosed in our annual report on Form 10-K for the year ended September 30,
2010. Please refer to the
Notes to Consolidated Financial Statements
in our annual report on Form
10-K for the year ended September 30, 2010, when reviewing our interim financial results set forth
herein.
RECLASSIFICATIONS
In connection with a change in reportable segments, certain prior period amounts have been
reclassified to conform to the current year presentation of our segments with no effect on net
income (loss) or retained deficit. Specifically, our Communications segment has been separated from
our Commercial & Industrial segment. For additional information, please refer to Note 6, “Operating
Segments” to these Condensed Consolidated Financial Statements.
9
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
SALES OF FACILITIES
Sale of Non-Strategic Manufacturing Facility
On November 30, 2010, a subsidiary of the Company (“Seller”) and Siemens Energy, Inc., a Delaware
corporation, (“Buyer”), executed an Asset Purchase Agreement (the “Agreement”) providing for the
sale of substantially all the assets and assumption of certain liabilities of a non-strategic
manufacturing facility engaged in manufacturing and selling fabricated metal buildings housing
electrical equipment such as switchgears, motor starters and control systems. In addition, another
subsidiary of the Company which is also a party to the Agreement, sold certain real property where
the fabrication facilities are located.
Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited
to, cash and cash equivalents, rights to names which include “IES”, business records relating to
pre-closing matters, which are required by law to be retained by Seller, performed contracts and
fulfilled purchase orders, insurance policies, non-assignable permits, licenses and software and
tax refunds relating to periods ending prior to the closing. Buyer also assumed liabilities and
obligations of Seller relating to certain customer contracts, vendor contracts and financing leases
as well as accounts and trade payables arising in the ordinary course of business other than
inter-company accounts payable.
The purchase price of $10,690 was adjusted to reflect variances between Historical Working Capital
and Closing Working Capital (each as defined in the Agreement). Finally, the Agreement contains
representations and warranties by Seller and Buyer as well as covenants by Seller, termination
provisions and indemnifications by Seller and Buyer. The transaction was completed on December 10,
2010 at which time we recognized a gain of $6,763.
Sale of Non-Core Electrical Distribution Facility
On February 28, 2011, Key Electrical Supply, Inc, a wholly owned subsidiary of the Company
(“Seller”) and Elliot Electric Supply, Inc, a Texas corporation, (“Buyer”), executed an Asset
Purchase Agreement (the “Agreement”) providing for the sale of substantially all the assets and
assumption of certain liabilities of a non-core electrical distribution facility engaged in
distributing wiring, lighting, electrical distribution, power control and generators for
residential and commercial applications.
Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited
to, cash and cash equivalents, certain receivables, rights to the Key Electrical Supply, Inc name,
business records relating to pre-closing matters, which are required by law to be retained by
Seller, insurance policies, licenses and software and tax refunds relating to periods ending prior
to the closing. Buyer also assumed liabilities and obligations of Seller relating to certain
vendor contracts and financing notes and leases as well as accounts and trade payables arising in
the ordinary course of business other than inter-company accounts payable.
The purchase price of $6,200 was adjusted to reflect variances between Historical Working Capital
and Closing Working Capital (each as defined in the Agreement). Buyer and Seller are currently in
the process of negotiating other elements of Historical Working Capital. Finally, the Agreement
contains representations and warranties by Seller and Buyer as well as covenants by Seller,
termination provisions and indemnifications by Seller and Buyer. As of March 31, 2011, we
recognized a gain of $50.
LONG-TERM RECEIVABLES
In March 2009, in connection with a construction project entering bankruptcy, we transferred $3,992
of trade accounts receivable to long-term receivables and initiated breach of contract and
mechanics’ lien foreclosure actions against the project’s general contractor and owner,
respectively. At the same time, we reserved the costs in excess of billings of $278 associated
with this receivable. In March 2010, we reserved the remaining balance. In February 2011, we
entered into a $2,850 settlement in connection with the breach
of contract and mechanics’ lien foreclosure actions. The $2,850 recovery was recorded in the
accompanying consolidated statements of operations as a component of selling, general and
administrative expenses. For additional information, please refer to Note 11, “Commitments and
Contingencies —
Legal Matters
” to these Condensed Consolidated Financial Statements.
10
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments consist of cash and cash equivalents, accounts receivable, notes
receivable, investments, accounts payable, a line of credit, notes payable issued to finance
insurance policies, and a $10,000 senior subordinated loan agreement (the “Tontine Term Loan”). We
believe that the carrying value of financial instruments, with the exception of the Tontine Term
Loan and our cost method investment in EnerTech Capital Partners II L.P. (“EnerTech”), in the
accompanying consolidated balance sheets, approximates their fair value due to their short-term
nature.
We estimate that the fair value of the Tontine Term Loan is $10,835 based on comparable debt
instruments at March 31, 2011. For additional information, please refer to Note 4, “Debt and
Liquidity
— The Tontine Capital Partners Term Loan
” to these Condensed Consolidated Financial
Statements.
We estimate that the fair value of our investment in EnerTech is $1,661 at March 31, 2011. For
additional information, please refer to Note 8, “Securities and Equity Investments —
Investment in
EnerTech Capital Partners II L.P.
” to these Condensed Consolidated Financial Statements.
ASSET IMPAIRMENT
During the first quarter of our 2011 fiscal year, the Company recorded a pretax non-cash asset
impairment charge of $3,551 related to internally-developed capitalized software. The Company
ceased use of the software in December, 2010. As a result, the software has a fair value of zero.
The charge of $3,551 was recorded separately in the accompanying consolidated statements of
operations as a component of loss from operations.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities, disclosures of contingent
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Estimates
are primarily used in our revenue recognition of construction in progress, fair value assumptions
in analyzing goodwill, investments, intangible assets and long-lived asset impairments and
adjustments, allowance for doubtful accounts receivable, stock-based compensation, reserves for
legal matters, assumptions regarding estimated costs to exit certain divisions, realizability of
deferred tax assets, and self-insured claims liabilities and related reserves.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Results of operations from our Residential construction segment are more seasonal, depending on
weather trends, with typically higher revenues generated during spring and summer and lower
revenues during fall and winter. The Communications and Commercial & Industrial segments of our
business are less subject to seasonal trends, as work in these segments generally is performed
inside structures protected from the weather. Our service and maintenance business is generally not
affected by seasonality. In addition, the construction industry has historically been highly
cyclical. Our volume of business may be adversely affected by declines in construction projects
resulting from adverse regional or national economic conditions. Quarterly results may also be
materially affected by the timing of new construction projects. Accordingly, operating results for
any fiscal period are not necessarily indicative of results that may be achieved for any subsequent
fiscal period.
SUBSEQUENT EVENTS
We have reviewed subsequent events through the date of filing.
2. CONTROLLING SHAREHOLDER
On April 30, 2010, we prepaid $15,000 of the original $25,000 principal outstanding on the Tontine
Term Loan; accordingly $10,000 remains outstanding under the Tontine Term Loan.
11
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
On February 11, 2011, Tontine, filed an amended Schedule 13D. Although Tontine has not indicated
any plans to alter its ownership level, should Tontine reconsider its investment plans and sell its
controlling interest in the Company, a change in ownership would occur. A change in ownership, as
defined by Internal Revenue Code Section 382, could reduce the availability of net operating losses
for federal and state income tax purposes. Furthermore, a change in control would trigger the
change of control provisions in a number of our material agreements, including our Revolving Credit
Facility (as defined below), bonding agreements with our sureties and employment contracts with
certain officers and employees of the Company.
3. STRATEGIC ACTIONS
2011 Restructuring Plan
During the second quarter of our 2011 fiscal year, the Company has determined that certain
geographic areas of our Commercial & Industrial operations will be either sold or closed during the
next six to twelve months (the “2011 Restructuring Plan”). This is one part of management’s
overall plan to return the Company to profitability. The operations directly affected by this
decision are in several locations throughout the country, including Iowa, Florida and Nevada.
These locations were selected due to current business prospects and the extended time frame needed
to return these operations to a profitable position. Currently we are in the initial stages of
the plan, and we expect that costs could range from $4,500 to $5,500 in aggregate. Costs
associated with this action would include equipment and facility lease termination expenses,
consulting expenses and severance costs for employees. Should the Company be successful in the
sale of these facilities, these costs could be reduced. For the three and six months ended March
31, 2011; these facilities had combined revenues and net losses as follows:
| Three Months Ended | Three Months Ended | |||||||
| March 31, 2011 | March 31, 2010 | |||||||
|
|
||||||||
|
Revenues
|
$ | 10,807 | $ | 8,840 | ||||
|
|
||||||||
|
Net operating losses
|
$ | (2,173 | ) | $ | (4,276 | ) | ||
| Six Months Ended | Six Months Ended | |||||||
| March 31, 2011 | March 31, 2010 | |||||||
|
|
||||||||
|
Revenues
|
$ | 21,618 | $ | 22,009 | ||||
|
|
||||||||
|
Net operating losses
|
$ | (3,305 | ) | $ | (5,204 | ) | ||
2009 Restructuring Plan
In the first three months of our 2009 fiscal year, we began a restructuring program (the “2009
Restructuring Plan”) that was designed to consolidate operations within our three segments at that
time. Our plan was to streamline local project and support operations, which were managed through
regional operating centers, and to capitalize on the investments we had made in the previous year
to further leverage our resources. In addition, as a result of the continuing significant effects
of the recession, during the third quarter of fiscal year 2009, we implemented a more expansive
cost reduction program, by further reducing administrative personnel, primarily in the corporate
office, and consolidating our Commercial and Industrial administrative functions into one shared
service center. The 2009 Restructuring Plan was completed in our 2010 fiscal year.
During the three months ended March 31, 2011 and 2010, respectively, we incurred pre-tax
restructuring charges, including severance benefits and facility consolidations and closings, of $0
and $65 associated with the 2009 Restructuring Plan. Costs incurred related to our Communications
segment were $0 and $0 for the three months ended March 31, 2011 and 2010, respectively. Costs
incurred related to our Residential segment were $0 and $0 for the three months ended March 31,
2011 and 2010, respectively. Costs incurred related to our Commercial & Industrial segment were $0
a reduction of $2 for the three months ended March 31, 2011 and 2010, respectively. Costs related
to our Corporate office were $0 and $67 for the three months ended March 31, 2011 and 2010,
respectively.
12
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
During the six months ended March 31, 2011 and 2010, respectively, we incurred pre-tax
restructuring charges, including severance benefits and facility consolidations and closings, of $0
and $763 associated with the 2009 Restructuring Plan. Costs incurred related to our Communications
segment were $0 and $16 for the six months ended March 31, 2011 and 2010, respectively. Costs
incurred related to our Residential segment were $0 and $0 for the six months ended March 31, 2011
and 2010, respectively. Costs incurred related to our Commercial & Industrial segment were $0 and
$698 for the six months ended March 31, 2011 and 2010, respectively. Costs related to our Corporate
office were $0 and $49 for the six months ended March 31, 2011 and 2010, respectively.
4. DEBT AND LIQUIDITY
Debt consists of the following:
| March 31, | September 30, | |||||||
| 2011 | 2010 | |||||||
|
|
||||||||
|
Tontine Term Loan, due May 15, 2013, bearing interest at 11.00%
|
$ | 10,000 | $ | 10,000 | ||||
|
Insurance Financing Agreements
|
263 | 653 | ||||||
|
Capital leases
|
602 | 603 | ||||||
|
|
||||||||
|
|
||||||||
|
Total debt
|
10,865 | 11,256 | ||||||
|
|
||||||||
|
Less — Short-term debt and current maturities of long-term debt
|
(447 | ) | (808 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Total long-term debt
|
$ | 10,418 | $ | 10,448 | ||||
|
|
||||||||
Future payments on debt at March 31, 2011 are as follows:
| Capital Leases | Term Debt | Total | ||||||||||
|
|
||||||||||||
|
2011
|
$ | 184 | $ | 263 | $ | 447 | ||||||
|
2012
|
318 | — | 318 | |||||||||
|
2013
|
318 | 10,000 | 10,318 | |||||||||
|
2014
|
26 | — | 26 | |||||||||
|
2015
|
— | — | — | |||||||||
|
Thereafter
|
— | — | — | |||||||||
|
Less: Imputed Interest
|
(244 | ) | — | (244 | ) | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total
|
$ | 602 | $ | 10,263 | $ | 10,865 | ||||||
|
|
||||||||||||
For the three months ended March 31, 2011 and 2010, we incurred interest expense of $576 and
$1,017, respectively. For the six months ended March 31, 2011 and 2010, we incurred interest
expense of $1,176 and $2,085, respectively.
The Revolving Credit Facility
On May 12, 2006, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”),
for a revolving credit facility (the “Revolving Credit Facility”) with Bank of America, N.A. and
certain other lenders. On April 30, 2010, we renegotiated
the terms of, and entered into an amendment to, the Loan and Security Agreement without incurring
termination charges. Under the terms of the amended Revolving Credit Facility, the size of the
facility remains at $60,000 and the maturity date has been extended to May 12, 2012. In connection
with the amendment, we incurred an amendment fee of $225 and legal fees of $53, which are being
amortized over 24 months.
13
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
The Revolving Credit Facility is guaranteed by our subsidiaries and secured by first priority liens
on substantially all of our subsidiaries’ existing and future acquired assets, exclusive of
collateral provided to our surety providers. The Revolving Credit Facility contains customary
affirmative, negative and financial covenants. The Revolving Credit Facility also restricts us from
paying cash dividends and places limitations on our ability to repurchase our common stock.
Borrowings under the Revolving Credit Facility may not exceed a “borrowing base” that is determined
monthly by our lenders based on available collateral, primarily certain accounts receivables and
inventories. Under the terms of the Revolving Credit Facility, in effect as of March 31, 2011,
interest for loans and letter of credit fees is based on our Total Liquidity, which is calculated
for any given period as the sum of the average daily availability for such period plus the average
daily unrestricted cash on hand for such period as follows:
| Annual Interest Rate for | ||||
| Total Liquidity | Annual Interest Rate for Loans | Letters of Credit | ||
|
|
||||
|
Greater than or equal to $60,000
|
LIBOR plus 3.00% or Base Rate plus 1.00% | 3.00% plus 0.25% fronting fee | ||
|
Greater than $40,000 and less than $60,000
|
LIBOR plus 3.25% or Base Rate plus 1.25% | 3.25% plus 0.25% fronting fee | ||
|
Less than or equal to $40,000
|
LIBOR plus 3.50% or Base Rate plus 1.50% | 3.50% plus 0.25% fronting fee |
At March 31, 2011, we had $10,075 available to us under the Revolving Credit Facility, based on a
borrowing base of $23,325, $13,250 in outstanding letters of credit, and no outstanding borrowings.
As of March 31, 2011, we were subject to the financial covenant under the Revolving Credit Facility
requiring that we maintain a fixed charge coverage ratio of not less than 1.0:1.0 at any time that
our aggregate amount of unrestricted cash on hand plus availability is less than $25,000 and,
thereafter, until such time as our aggregate amount of unrestricted cash on hand plus availability
has been at least $25,000 for a period of 60 consecutive days. As of March 31, 2011, our Total
Liquidity was in excess of $25,000 for the previous 60 days. Had our Total Liquidity been less than
$25,000 for the previous 60 days at March 31, 2011, we would not have met the 1.0:1.0 fixed charge
coverage ratio test.
At March 31, 2011, our Total Liquidity was $46,782. For the six months ended March 31, 2011, we
paid no interest for loans under the Revolving Credit Facility and a weighted average interest
rate, including fronting fees, of 3.50% for letters of credit. In addition, we are charged monthly
in arrears (1) an unused commitment fee of 0.50%, and (2) certain other fees and charges as
specified in the Loan and Security Agreement, as amended. Finally, the Revolving Credit Facility
would have been subject to termination charges of 0.25% of the total borrowing capacity if such
termination occurred on or before May 12, 2011 and $50 anytime thereafter.
In the event that we are not able to meet the financial covenant of our amended Revolving Credit
Facility in the future and are unsuccessful in obtaining a waiver from our lenders, the Company
expects to have adequate cash on hand to fully collateralize our outstanding letters of credit and
to provide sufficient cash for ongoing operations.
The Tontine Term Loan
On December 12, 2007, we entered into the Tontine Term Loan, a $25,000 senior subordinated loan
agreement, with Tontine. The Tontine Term Loan bears interest at 11.0% per annum and is due on May
15, 2013. Interest is payable quarterly in cash or in-kind at our option. Any interest paid in-kind
will bear interest at 11.0% in addition to the loan principal. On April 30, 2010, we prepaid
$15,000 of principal on the Tontine Term Loan. On May 1, 2010, Tontine assigned the Tontine Term
Loan to TCP Overseas Master Fund II, L.P. (“TCP 2”), an affiliate of Tontine. Although the Tontine
Term Loan may be repaid at any time prior to the maturity date at par, plus accrued interest
without penalty, our Revolving Credit Facility currently prohibits any further repayments. The
Tontine Term Loan is subordinated to our existing Revolving Credit Facility with Bank of America,
N.A. The Tontine Term Loan is an
unsecured obligation of the Company and its subsidiary borrowers. The Tontine Term Loan contains no
financial covenants or restrictions on dividends or distributions to stockholders.
14
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
5. EARNINGS PER SHARE
Our restricted shares granted under the 2006 Equity Incentive Plan participate in any dividends
declared on our common stock. Accordingly, the restricted shares are considered participating
securities under the two-class method, which is an earnings allocation formula that determines
earnings for each class of common stock and participating securities according to dividends
declared or accumulated and participation rights in undistributed earnings. Under the two-class
method, net income is reduced by the amount of dividends declared in the current period for each
class of stock and by the contractual amounts of dividends that must be paid for the current
period. The remaining earnings are then allocated to common stock and participating securities to
the extent that each security may share in earnings as if all of the earnings for the period had
been distributed. Diluted earnings per share is calculated using the treasury stock and “if
converted” methods for potential common stock. Basic earnings per share is calculated as income
(loss) available to common stockholders, divided by the weighted average number of common shares
outstanding during the period. If the effect is dilutive, participating securities are included in
the computation of basic earnings per share. Our participating securities do not have a contractual
obligation to share in the losses in any given period. As a result, these participating securities
will not be allocated any losses in the periods of net losses, but will be allocated income in the
periods of net income using the two-class method.
The tables that follow reconcile the components of the basic and diluted earnings per share for the
three and six months ended March 31, 2011 and 2010:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Numerator:
|
||||||||
|
|
||||||||
|
Net loss attributable to common shareholders
|
$ | (9,237 | ) | $ | (13,230 | ) | ||
|
Net income attributable to restricted shareholders
|
— | — | ||||||
|
|
||||||||
|
|
||||||||
|
Net loss
|
$ | (9,237 | ) | $ | (13,230 | ) | ||
|
|
||||||||
|
|
||||||||
|
Denominator:
|
||||||||
|
Weighted average common shares outstanding — basic
|
14,481,005 | 14,390,580 | ||||||
|
Effect of dilutive stock options and non-vested restricted stock
|
— | — | ||||||
|
|
||||||||
|
|
||||||||
|
Weighted average common and common equivalent shares outstanding — diluted
|
14,481,005 | 14,390,580 | ||||||
|
|
||||||||
|
|
||||||||
|
Loss per share
|
||||||||
|
Basic
|
$ | (0.64 | ) | $ | (0.92 | ) | ||
|
Diluted
|
$ | (0.64 | ) | $ | (0.92 | ) | ||
15
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
| Six Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
|
Numerator:
|
||||||||
|
|
||||||||
|
Net loss attributable to common shareholders
|
$ | (12,890 | ) | $ | (14,036 | ) | ||
|
Net income attributable to restricted shareholders
|
— | — | ||||||
|
|
||||||||
|
|
||||||||
|
Net loss
|
$ | (12,890 | ) | $ | (14,036 | ) | ||
|
|
||||||||
|
|
||||||||
|
Denominator:
|
||||||||
|
Weighted average common shares outstanding — basic
|
14,463,996 | 14,393,328 | ||||||
|
Effect of dilutive stock options and non-vested restricted stock
|
— | — | ||||||
|
|
||||||||
|
|
||||||||
|
Weighted average common and common equivalent shares outstanding — diluted
|
14,463,996 | 14,393,328 | ||||||
|
|
||||||||
|
|
||||||||
|
Loss per share
|
||||||||
|
Basic
|
$ | (0.89 | ) | $ | (0.98 | ) | ||
|
Diluted
|
$ | (0.89 | ) | $ | (0.98 | ) | ||
6. OPERATING SEGMENTS
In 2010, our Communications segment was separated from our Commercial & Industrial segment to form
a new operating segment. The decision to report Communications as a separate segment was made as
the Company changed its internal reporting structure and the communications business gained greater
significance as a percentage of consolidated revenues, gross profit and operating income.
Moreover, the Communications segment is a separate and specific part of future strategic growth
plans of the Company. We now manage and measure performance of our business in three distinct
operating segments: Communications, Residential and Commercial & Industrial. These segments are
reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results
for the purposes of allocating resources and assessing performance. The Company’s CODM is its Chief
Executive Officer. Prior period disclosures have been adjusted to reflect the change in reportable
segments.
The Communications segment consists of low voltage installation, design, planning and maintenance
for commercial and industrial industries.
The Residential segment consists of electrical installation, replacement and renovation services in
single-family, condominium, townhouse and low-rise multifamily housing units.
The Commercial & Industrial segment provides electrical design, installation, renovation,
engineering and maintenance and replacement services in facilities such as office buildings,
high-rise apartments and condominiums, theaters, restaurants, hotels, hospitals and critical-care
facilities, school districts, light manufacturing and processing facilities, military
installations, airports, outside plants, network enterprises, switch network customers,
manufacturing and distribution centers, water treatment facilities, refineries, petrochemical and
power plants, and alternative energy facilities.
We also have a Corporate office that provides general and administrative as well as support
services to our three operating segments.
The significant accounting policies of the segments are the same as those described in the summary
of significant accounting policies, set forth in Note 2 to our Consolidated Financial Statements
included in our annual report on Form 10-K for the year ended September 30, 2010. We allocate
certain corporate selling, general and administrative costs across our segments to more accurately
reflect the costs associated with operating each segment. Transactions between segments are
eliminated in consolidation.
16
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Segment information for continuing operations for the three and six months ended March 31, 2011 and
2010 is as follows:
| Three Months Ended March 31, 2011 | ||||||||||||||||||||
| Commercial & | ||||||||||||||||||||
| Communications | Residential | Industrial | Corporate | Total | ||||||||||||||||
|
Revenues
|
$ | 23,368 | $ | 26,366 | $ | 68,592 | $ | — | $ | 118,326 | ||||||||||
|
Cost of services
|
20,920 | 22,788 | 69,261 | — | 112,969 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
2,448 | 3,578 | (669 | ) | — | 5,357 | ||||||||||||||
|
Selling, general and administrative
|
2,293 | 4,509 | 3,832 | 2,699 | 13,333 | |||||||||||||||
|
Loss (gain) on sale of assets
|
— | (48 | ) | (7 | ) | (32 | ) | (87 | ) | |||||||||||
|
Asset Impairment
|
— | — | — | — | — | |||||||||||||||
|
Restructuring charge
|
— | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from operations
|
$ | 155 | $ | (883 | ) | $ | (4,494 | ) | $ | (2,667 | ) | $ | (7,889 | ) | ||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Other data:
|
||||||||||||||||||||
|
Depreciation and amortization expense
|
$ | 22 | $ | 84 | $ | 158 | $ | 579 | $ | 843 | ||||||||||
|
Capital expenditures
|
$ | — | $ | 47 | $ | 164 | $ | 153 | $ | 364 | ||||||||||
|
Total assets
|
$ | 25,368 | $ | 21,878 | $ | 81,443 | $ | 63,810 | $ | 192,499 | ||||||||||
| Three Months Ended March 31, 2010 | ||||||||||||||||||||
| Commercial & | ||||||||||||||||||||
| Communications | Residential | Industrial | Corporate | Total | ||||||||||||||||
|
Revenues
|
$ | 16,402 | $ | 28,068 | $ | 63,149 | $ | — | $ | 107,619 | ||||||||||
|
Cost of services
|
13,011 | 21,814 | 59,206 | — | 94,031 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
3,391 | 6,254 | 3,943 | — | 13,588 | |||||||||||||||
|
Selling, general and administrative
|
1,819 | 6,526 | 12,863 | 4,501 | 25,709 | |||||||||||||||
|
Loss (gain) on sale of assets
|
— | (2 | ) | 15 | — | 13 | ||||||||||||||
|
Restructuring charge
|
— | — | (2 | ) | 67 | 65 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from operations
|
$ | 1,572 | $ | (270 | ) | $ | (8,933 | ) | $ | (4,568 | ) | $ | (12,199 | ) | ||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Other data:
|
||||||||||||||||||||
|
Depreciation and amortization expense
|
$ | 65 | $ | 255 | $ | 430 | $ | 668 | $ | 1,418 | ||||||||||
|
Capital expenditures
|
$ | 31 | $ | 64 | $ | 142 | $ | 189 | $ | 426 | ||||||||||
|
Total assets
|
$ | 15,794 | $ | 32,886 | $ | 85,518 | $ | 92,406 | $ | 226,604 | ||||||||||
17
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
| Six Months Ended March 31, 2011 | ||||||||||||||||||||
| Commercial & | ||||||||||||||||||||
| Communications | Residential | Industrial | Corporate | Total | ||||||||||||||||
|
Revenues
|
$ | 43,290 | $ | 52,410 | $ | 136,275 | $ | — | $ | 231,975 | ||||||||||
|
Cost of services
|
37,630 | 44,249 | 133,568 | — | 215,447 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
5,660 | 8,161 | 2,707 | — | 16,528 | |||||||||||||||
|
Selling, general and administrative
|
4,614 | 9,286 | 11,404 | 6,050 | 31,354 | |||||||||||||||
|
Loss (gain) on sale of assets
|
— | (70 | ) | (6,833 | ) | 87 | (6,816 | ) | ||||||||||||
|
Asset Impairment
|
— | — | — | 3,551 | 3,551 | |||||||||||||||
|
Restructuring charge
|
— | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from operations
|
$ | 1,046 | $ | (1,055 | ) | $ | (1,864 | ) | $ | (9,688 | ) | $ | (11,561 | ) | ||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Other data:
|
||||||||||||||||||||
|
Depreciation and amortization expense
|
$ | 48 | $ | 183 | $ | 393 | $ | 1,356 | $ | 1,980 | ||||||||||
|
Capital expenditures
|
$ | — | $ | 74 | $ | 390 | $ | 291 | $ | 755 | ||||||||||
| Six Months Ended March 31, 2010 | ||||||||||||||||||||
| Commercial & | ||||||||||||||||||||
| Communications | Residential | Industrial | Corporate | Total | ||||||||||||||||
|
Revenues
|
$ | 35,054 | $ | 57,060 | $ | 135,753 | $ | — | $ | 227,867 | ||||||||||
|
Cost of services
|
28,306 | 43,957 | 122,084 | — | 194,347 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
6,748 | 13,103 | 13,669 | — | 33,520 | |||||||||||||||
|
Selling, general and administrative
|
3,705 | 12,549 | 20,820 | 7,902 | 44,976 | |||||||||||||||
|
Loss (gain) on sale of assets
|
— | (3 | ) | (49 | ) | — | (52 | ) | ||||||||||||
|
Restructuring charge
|
16 | — | 698 | 49 | 763 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Income (loss) from operations
|
$ | 3,027 | $ | 557 | $ | (7,800 | ) | $ | (7,951 | ) | $ | (12,167 | ) | |||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Other data:
|
||||||||||||||||||||
|
Depreciation and amortization expense
|
$ | 117 | $ | 397 | $ | 737 | $ | 1,544 | $ | 2,795 | ||||||||||
|
Capital expenditures
|
$ | 31 | $ | 76 | $ | 174 | $ | 221 | $ | 502 | ||||||||||
We have no operations or long-lived assets outside of the United States.
7. STOCKHOLDERS’ EQUITY
The 2006 Equity Incentive Plan (as amended, the “2006 Plan”) became effective on May 12, 2006. The
2006 Plan provides for grants of both stock options and common stock, including restricted stock
and performance-based restricted stock. We have approximately 1.3 million shares of common stock
authorized for issuance under the 2006 Plan.
Treasury Stock
On December 12, 2007, our Board of Directors authorized the repurchase of up to one million shares
of our common stock. This share repurchase program was authorized through December 2009. As of the
program’s termination on December 31, 2009, we repurchased 886,360 shares of common stock at an
average cost of $16.24 per share.
18
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
During the six months ended March 31, 2011, we repurchased 18,846 shares of common stock from our
employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock
issued under the 2006 Plan, 204,000 shares of restricted stock were issued from treasury stock to
employees and 63,077 unvested shares of restricted stock were forfeited by former employees and
returned to treasury stock. Additionally, 9,616 phantom stock units granted to members of the
Board of Directors vested, triggering an issuance of 9,616 unrestricted shares from treasury.
During the six months ended March 31, 2010, we repurchased 14,492 shares of common stock from our
employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock
issued under the 2006 Plan, and 17,300 unvested shares of restricted stock were forfeited by former
employees and returned to treasury stock.
Restricted Stock
We granted 204,000 shares of restricted stock to employees during the six months ended March 31,
2011, of which 1,098 have vested and 21,902 have been forfeited as of March 31, 2011. These
restricted shares, which were granted at a prices ranging from $3.49 to $3.51 per share, will vest
on September 28, 2012 and December 16, 2012.
During the six months ended March 31, 2011 and 2010, we recognized $421 and $885, respectively, in
compensation expense related to all restricted stock awards. As of March 31, 2011, the unamortized
compensation cost related to outstanding unvested restricted stock was $1,032. We expect to
recognize $323 related to these awards during the remaining six months of our 2011 fiscal year, and
$709 thereafter.
All the restricted shares granted under the 2006 Plan participate in dividends, if any, issued to
common shareholders.
Stock Options
Our determination of the fair value of share-based payment awards on the date of grant using a
binomial option-pricing model is affected by our stock price as well as assumptions regarding a
number of highly complex and subjective variables. These variables
include, but are not limited to, our expected stock price volatility over the term of the awards,
the risk-free rate of return, and actual and projected employee stock option exercise behaviors.
During the six months ended March 31, 2011 and 2010, we granted no stock options.
During the six months ended March 31, 2011 and 2010, we recognized $17 and $80, respectively, in
compensation expense related to previously granted stock options.
The following table summarizes activity regarding our stock option and incentive compensation
plans:
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
|
Outstanding, September 30, 2010
|
158,500 | $ | 18.66 | |||||
|
Options granted
|
— | — | ||||||
|
Exercised
|
— | — | ||||||
|
Expired
|
— | — | ||||||
|
Forfeited
|
— | — | ||||||
|
|
||||||||
|
|
||||||||
|
Outstanding, March 31, 2011
|
158,500 | $ | 18.66 | |||||
|
|
||||||||
|
|
||||||||
|
Exercisable, March 31, 2011
|
156,833 | $ | 18.64 | |||||
|
|
||||||||
19
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
The following table summarizes all options outstanding and exercisable at March 31, 2011:
| Remaining | ||||||||||||||||||||
| Outstanding as of | Contractual Life | Weighted-Average | Exercisable as of | Weighted-Average | ||||||||||||||||
| Range of Exercise Prices | March 31, 2011 | in Years | Exercise Price | March 31, 2011 | Exercise Price | |||||||||||||||
|
$12.31 – $18.79
|
123,500 | 5.62 | $ | 17.02 | 123,500 | $ | 17.02 | |||||||||||||
|
$20.75
– $25.08
|
35,000 | 6.23 | 24.46 | 33,333 | 24.65 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
|
158,500 | 5.75 | $ | 18.66 | 156,833 | $ | 18.64 | |||||||||||||
|
|
||||||||||||||||||||
Upon exercise of stock options, it is our policy to first issue shares from treasury stock,
then to issue new shares. Unexercised options expire between July 2016 and January 2018.
8. SECURITIES AND EQUITY INVESTMENTS
Investment in EnerTech Capital Partners II L.P.
Our investment in EnerTech was approximately 2% of the overall ownership in EnerTech at March 31,
2011 and September 30, 2010. As such, we accounted for this investment using the cost method of
accounting.
EnerTech’s investment portfolio periodically results in unrealized losses reflecting a possible,
other-than temporary impairment of our investment. If facts arise that lead us to determine that
any unrealized losses are not temporary, we would write-down our investment in EnerTech through a
charge to other expense in the period of such determination. The carrying value of our investment
in EnerTech at March 31, 2011 and September 30, 2010 was $1,985 and $2,005, respectively, and is
currently recorded as a component of Other Non-Current Assets in our Consolidated Balance Sheets.
The following table presents the reconciliation of the carrying value and unrealized gains (losses)
to the fair value of the investment in EnerTech as of March 31, 2011 and September 30, 2010:
| March 31, | September 30, | |||||||
| 2011 | 2010 | |||||||
|
|
||||||||
|
Carrying value
|
$ | 1,985 | $ | 2,005 | ||||
|
Unrealized gains (losses)
|
(324 | ) | (179 | ) | ||||
|
|
||||||||
|
Fair value
|
$ | 1,661 | $ | 1,826 | ||||
On December 31, 2010, EnerTech’s general partner, with the consent of the fund’s investors,
extended the fund for an additional year through December 31, 2011. The fund will terminate on this
date unless extended by the fund’s valuation committee. The fund may be extended for another
one-year period through December 31, 2012 with the consent of the fund’s valuation committee.
Arbinet Corporation
On May 15, 2006, we received a distribution from our investment in EnerTech of 32,967 shares in
Arbinet Corporation (“Arbinet”), formerly Arbinet-thexchange Inc. The investment is an
available-for-sale marketable security and is currently recorded as a component of Other
Non-Current Assets in our Consolidated Balance Sheets. Unrealized gains and losses are recorded to
other comprehensive income. On June 11, 2010, Arbinet consummated a 1-for-4 reverse common stock
split. As a result of this transaction, we held 8,241 shares of Arbinet common stock.
On November 22, 2010, we sold our shares of Arbinet common stock for $57, net of commissions and
other fees. As a result of this sale, we recognized a $96 loss in Other Expense in our
Consolidated Statements of Operation, which was previously recorded as an unrealized loss included
in other comprehensive income.
20
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
The amount of unrealized holding losses included in other comprehensive income at March 31, 2011
and September 30, 2010 is $0 and $88, respectively. Both the carrying and market value of the
investment at March 31, 2011 and September 30, 2010 were $0 and $60, respectively.
9. EMPLOYEE BENEFIT PLANS
Executive Savings Plan
Under the Executive Deferred Compensation Plan adopted on July 1, 2004 (the “Executive Savings
Plan”), certain employees are permitted to defer a portion (up to 75%) of their base salary and/or
bonus for a Plan Year. The Compensation Committee of the Board of Directors may, in its sole
discretion, credit one or more participants with an employer deferral (contribution) in such amount
as the Committee may choose (“Employer Contribution”). The Employer Contribution, if any, may be a
fixed dollar amount, a fixed percentage of the participant’s compensation, base salary, or bonus,
or a “matching” amount with respect to all or part of the participant’s elective deferrals for such
plan year, and/or any combination of the foregoing as the Committee may choose.
On February 13, 2009, we suspended Company matching cash contributions to employee’s contributions
due to the significant impact the economic recession has had on the Company’s financial
performance. As such, there have been no contributions by us to the Executive Savings Plan for the
three and six months ended March 31, 2011 and 2010.
10. FAIR VALUE MEASUREMENTS
Fair value is considered the price to sell an asset, or transfer a liability, between market
participants on the measurement date. Fair value measurements assume that the asset or liability is
(1) exchanged in an orderly manner, (2) the exchange is in the principal market for that asset or
liability, and (3) the market participants are independent, knowledgeable, able and willing to
transact an exchange.
Fair value accounting and reporting establishes a framework for measuring fair value by creating a
hierarchy for observable independent market inputs and unobservable market assumptions and expands
disclosures about fair value measurements. Considerable judgment is required to interpret the
market data used to develop fair value estimates. As such, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current exchange. The use of
different market assumptions and/or estimation methods could have a material effect on the
estimated fair value.
Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011,
are summarized in the following table
by the type of inputs applicable to the fair value measurements:
| Significant | Significant | |||||||||||||||
| Other Observable | Unobservable | |||||||||||||||
| Total | Quoted Prices | Inputs | Inputs | |||||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
|
Money market accounts
|
$ | 17,877 | $ | 17,877 | $ | — | $ | — | ||||||||
|
Executive Savings Plan assets
|
634 | 634 | — | — | ||||||||||||
|
Executive Savings Plan liabilities
|
(715 | ) | (715 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 17,796 | $ | 17,796 | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
Below is a description of the inputs used to value the assets summarized in the preceding table:
Level 1
— Inputs represent unadjusted quoted prices for identical assets exchanged in
active markets.
Level 2
— Inputs include directly or indirectly observable inputs other than Level 1
inputs such as quoted prices for similar assets exchanged in active or inactive markets; quoted
prices for identical assets exchanged in inactive markets; and other inputs that are considered in
fair value determinations of the assets.
Level 3
— Inputs include unobservable inputs used in the measurement of assets. Management
is required to use its own assumptions regarding unobservable inputs because there is little, if
any, market activity in the assets or related observable inputs that can be corroborated at the
measurement date.
21
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES
From time to time we are a party to various claims, lawsuits and other legal proceedings that arise
in the ordinary course of business. We maintain various insurance coverages to minimize the
financial risk associated with these proceedings. None of these proceedings, separately or in the
aggregate, are expected to have a material adverse effect on our financial position, results of
operations or cash flows. With respect to all such proceedings, we record reserves when it is
probable that a liability has been incurred and the amount of loss can be reasonably estimated. We
expense routine legal costs related to these proceedings as they are incurred.
The following is a discussion of certain of our significant legal matters:
Centerpoint Project
We were a co-plaintiff in a breach of contract and mechanics’ lien foreclosure action in Maricopa
County, Arizona superior court. The defendants were Centerpoint Construction, LLC and Tempe Land
Company, LLC, the general contractor and owner, respectively, of a condominium and retail
development project in Tempe, Arizona. In December 2008, Tempe Land Company, LLC filed for Chapter
11 bankruptcy reorganization in the U.S. Bankruptcy Court in Phoenix, Arizona. The principal amount
of our claim was approximately $3,992, exclusive of interest, attorneys’ fees and costs. In March
2009, we transferred $3,992 of trade accounts receivable to long-term receivable. At the same time,
we reserved the costs in excess of billings of $278 associated with this receivable.
In April 2010, the project property was sold at foreclosure to the project lender. In the sale, the
project lender acquired the project property subject only to superior encumbrances. The priority of
the mechanics’ lien claims over the project lender’s deeds of trust was to be determined at trial,
which was anticipated to occur in April 2011.
As a result of the April 2010 foreclosure sale and the uncertainties associated with the outcome of
the lawsuit, we determined that there was a reasonable possibility, but not a probability, of
collection of our claim. As a result, we wrote-off the remaining $3,714 long-term receivable.
In February 2011, we entered into a $2,850 settlement in connection with the breach of contract and
mechanics’ lien foreclosure actions. The $2,850 recovery was recorded in the accompanying
consolidated statements of operations as a component of loss from operations.
Ward Transformer Site
One of our subsidiaries has been identified as one of more than 200 potentially responsible parties
(PRPs) with respect to the clean-up of an electric transformer resale and reconditioning facility,
known as the Ward Transformer Site, located in Raleigh, North Carolina. The facility built,
repaired, reconditioned and sold electric transformers from approximately 1964 to 2005. We did not
own or operate the facility but a subsidiary that we acquired in July 1999 is believed to have sent
transformers to the facility during the 1990’s. During the course of its operation, the facility
was contaminated by Polychlorinated Biphenyls (PCBs), which also have been found to have migrated
off the site.
Four PRPs have commenced clean-up of on-site contaminated soils under an Emergency Removal Action
pursuant to a settlement agreement and Administrative Order on Consent entered into between the
four PRPs and the U.S. Environmental Protection Agency (EPA) in September 2005. We are not a party
to that settlement agreement or Order on Consent. In April 2009, two of these PRPs, Carolina Power
and Light Company and Consolidation Coal Company, filed suit against us and most of the other PRPs
in the U.S. District Court for the Eastern District of North Carolina (Western Division) to
contribute to the cost of the clean-up. In addition to the on-site clean-up, the EPA has selected
approximately 50 PRPs to which it sent a Special Notice Letter in late 2008 to organize the
clean-up of soils off site and address contamination of groundwater and other miscellaneous
off-site issues. We were not a recipient of that letter.
22
Table of Contents
Based on our investigation to date, there is evidence to support our defense that our subsidiary
contributed no PCB contamination to the site. In addition, we have tendered a demand for
indemnification to the former owner of our subsidiary that may have transacted business with the
facility and are exploring the existence and applicability of insurance policies that could
mitigate potential exposure. As of March 31, 2011 and September 30, 2010, we have not recorded a
reserve for this matter, as we believe the likelihood of our responsibility for damages is not
probable and a potential range of exposure is not estimable.
Risk Management
We are subject to large deductibles on our property and casualty insurance policies. As a result,
many of our claims are effectively self-insured. Many claims against our insurance are in the form
of litigation. At March 31, 2011, we had $6,117 accrued for self-insurance liabilities, including
$1,144 for general liability coverage losses. We are also subject to construction defect
liabilities, primarily within our Residential segment. We believe the likely range of our potential
liability for construction defects is from $250 to $750. As of March 31, 2011, we had reserved $350
for these claims.
Some of our insurance carriers require us to post letters of credit as a means of guaranteeing
performance under our policies. If an insurance carrier has reasonable cause to effect payment
under a letter of credit, we would be required to reimburse the lenders under our Revolving Credit
Facility for such letter of credit. At March 31, 2011, $12,620 of our outstanding letters of credit
were used to collateralize our high deductible insurance programs.
Surety
Many customers, particularly in connection with new construction, require us to post performance
and payment bonds issued by a surety. Those bonds provide a guarantee to the customer that we will
perform under the terms of our contract and that we will pay our subcontractors and vendors. If we
fail to perform under the terms of our contract or to pay subcontractors and vendors, the customer
may demand that the surety make payments or provide services under the bond. We must reimburse the
sureties for any expenses or outlays they incur on our behalf. To date, we have not been required
to make any reimbursements to our sureties for bond-related costs.
As is common in the surety industry, sureties issue bonds on a project-by-project basis and can
decline to issue bonds at any time. We believe that our relationships with our sureties will allow
us to provide surety bonds as they are required. However, current market conditions, as well as
changes in our sureties’ assessment of our operating and financial risk, could cause our sureties
to decline to issue bonds for our work. If our sureties decline to issue bonds for our work, our
alternatives would include posting other forms of collateral for project performance, such as
letters of credit or cash, seeking bonding capacity from other sureties, or engaging in more
projects that do not require surety bonds. In addition, if we are awarded a project for which a
surety bond is required but we are unable to obtain a surety bond, the result can be a claim for
damages by the customer for the costs of replacing us with another contractor.
As of March 31, 2011, we utilized cash and accumulated interest thereon (as included in Other
Non-Current Assets in our Consolidated Balance Sheet) of $3,985 to collateralize our obligations to
our former sureties. On March 14, 2011, a former surety released $2,600 of cash back to the
Company. As of March 31, 2011, the estimated cost to complete our bonded projects was approximately
$122,221. We evaluate our bonding requirements on a regular basis, including the terms offered by
our sureties. On May 7, 2010, we entered into agreements with two primary sureties. We do not have
any cash or letters of credit held as collateral by these sureties. We believe the bonding
capacity presently provided by these sureties are adequate for our current operations and will be
adequate for our operations for the foreseeable future.
Other Commitments and Contingencies
Between October 2004 and September 2005, we sold all or substantially all of the assets of certain
of our wholly-owned subsidiaries. These sales were made to facilitate the business needs and
purposes of the organization as a whole. Since we were a consolidator of electrical contracting
businesses, often the best candidate to purchase these assets was a previous owner of the assets
who usually was still associated with the subsidiary, often as an officer of that subsidiary, or
otherwise. To facilitate the desired timing, the sales were made with more than ordinary reliance
on the representations of the purchaser who was, in those cases, often the person most familiar
with the business sold. As these sales were assets sales, rather than stock sales, we may be
required to fulfill obligations that were assigned or sold to others, if the purchaser is unwilling
or unable to perform the transferred liabilities. If this were to occur, we would seek
reimbursement from the purchasers. These potential liabilities will continue to diminish over time.
As of March 31, 2011, all projects transferred have been completed. To date, we have not been
required to perform on any projects sold under this divestiture program.
From time to time, we may enter into firm purchase commitments for materials such as copper or
aluminum wire which we expect to use in the ordinary course of business. These commitments are
typically for terms less than one year and require us to buy minimum quantities of materials at
specific intervals at a fixed price over the term. As of March 31, 2011, we had no such open
purchase commitments.
23
Table of Contents
| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
You should read the following discussion of our financial condition and results of operations in
conjunction with our audited consolidated financial statements, the related Notes, and management’s
discussion and analysis included in our annual report on Form 10-K for the year ended September 30,
2010. This discussion contains forward-looking statements and involves numerous risks and
uncertainties, including, but not limited to the risk factors discussed in the “Risk Factors”
section of our annual report on Form 10-K for the year ended September 30, 2010, and in the
“Disclosures Regarding Forward-Looking Statements,” and elsewhere in this quarterly report on Form
10-Q. Actual results may differ materially from those contained in any forward-looking statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operation are based on our
condensed consolidated financial statements, which have been prepared in accordance with GAAP.
Preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We have identified the accounting principles that we believe are most critical to our reported
financial status by considering accounting policies that involve the most complex or subjective
decisions or assessments. These accounting policies are those related to revenue recognition, the
assessment of goodwill impairment, our allowance for doubtful accounts receivable, the recording of
our self-insurance liabilities and our estimation of the valuation allowance for deferred tax
assets. These accounting policies, as well as others, are described in Part 2. Item 8. Financial
Statements and Supplementary Data — Note 2, “Summary of Significant Accounting Policies” in our
annual report on Form 10-K for the year ended September 30, 2010.
In 2010, our Communications segment was separated from our Commercial & Industrial segment to form
a new operating segment. The decision to report Communications as a separate segment was made as
the Company changed its internal reporting structure and the communications business gained greater
significance as a percentage of consolidated revenues, gross profit and operating income.
Moreover, the Communications segment is a separate and specific part of future strategic growth
plans of the Company. We now manage and measure performance of our business in three distinct
operating segments: Communications, Residential and Commercial & Industrial.
SALES OF FACILITIES
Sale of Non-Strategic Manufacturing Facility
On November 30, 2010, a subsidiary of the Company (“Seller”) and Siemens Energy, Inc., a Delaware
corporation, (“Buyer”), executed an Asset Purchase Agreement (the “Agreement”) providing for the
sale of substantially all the assets and assumption of certain liabilities of a non-strategic
manufacturing facility engaged in manufacturing and selling fabricated metal buildings housing
electrical equipment such as switchgears, motor starters and control systems. In addition, another
subsidiary of the Company which is also a party to the Agreement, sold certain real property where
the fabrication facilities are located.
Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited
to, cash and cash equivalents, rights to names which include “IES”, business records relating to
pre-closing matters, which are required by law to be retained by Seller, performed contracts and
fulfilled purchase orders, insurance policies, non-assignable permits, licenses and software and
tax refunds relating to periods ending prior to the closing. Buyer also assumed liabilities and
obligations of Seller relating to certain customer contracts, vendor contracts and financing leases
as well as accounts and trade payables arising in the ordinary course of business other than
inter-company accounts payable.
The purchase price of $10.7 million was adjusted to reflect variances between Historical Working
Capital and Closing Working Capital (each as defined in the Agreement). Finally, the Agreement
contains representations and warranties by Seller and Buyer as well as covenants by Seller,
termination provisions and indemnifications by Seller and Buyer. The transaction was completed on
December 10, 2010 at which time we recognized a gain of $6.8 million.
Sale of Non-Core Electrical Distribution Business
On February 28, 2011, Key Electrical Supply, Inc, a wholly owned subsidiary of the Company
(“Seller”) and Elliot Electric Supply, Inc, a Texas corporation, (“Buyer”), executed an Asset
Purchase Agreement (the “Agreement”) providing for the sale of substantially all the assets and
assumption of certain liabilities of a non-core electrical distribution business engaged in
distributing wiring, lighting, electrical distribution, power control and generators for
residential and commercial applications.
24
Table of Contents
Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited
to, cash and cash equivalents, certain receivables, rights to the Key Electrical Supply, Inc name,
business records relating to pre-closing matters, which are required by law to be retained by
Seller, insurance policies, licenses and software and tax refunds relating to periods ending prior
to the closing. Buyer also assumed liabilities and obligations of Seller relating to certain
vendor contracts and financing notes and leases as well as accounts and trade payables arising in
the ordinary course of business other than inter-company accounts payable.
The purchase price of $6.2 million was adjusted to reflect variances between Historical Working
Capital and Closing Working Capital (each as defined in the Agreement). Buyer and Seller are
currently in the process of negotiating other elements of Historical Working Capital. Finally, the
Agreement contains representations and warranties by Seller and Buyer as well as covenants by
Seller, termination provisions and indemnifications by Seller and Buyer. As of March 31, 2011, we
recognized a gain of $0.1 million.
ASSET IMPAIRMENT
During the first quarter of our 2011 fiscal year, the Company recorded a pretax non-cash asset
impairment charge of $3.5 million related to internally-developed capitalized software. The Company
ceased use of the software in December, 2010. As a result, the software has a fair value of zero.
The charge of $3.5 million was recorded separately in the accompanying consolidated statements of
operations as a component of loss from operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Results of operations from our Residential construction segment are more seasonal, depending on
weather trends, with typically higher revenues generated during spring and summer and lower
revenues during fall and winter. The Communications and Commercial & Industrial segments of our
business are less subject to seasonal trends, as work in these segments generally is performed
inside structures protected from the weather. Our service and maintenance business is generally not
affected by seasonality. In addition, the construction industry has historically been highly
cyclical. Our volume of business may be adversely affected by declines in construction projects
resulting from adverse regional or national economic conditions. Quarterly results may also be
materially affected by the timing of new construction projects. Accordingly, operating results for
any fiscal period are not necessarily indicative of results that may be achieved for any subsequent
fiscal period.
RESTRUCTURING PROGRAMS
2011 Restructuring Plan
During the second quarter of our 2011 fiscal year, the Company has determined that certain
geographic areas of our Commercial & Industrial operations will be either sold or closed during the
next six to twelve months (the “2011 Restructuring Plan”). This is one part of management’s
overall plan to return the Company to profitability. The operations directly affected by this
decision are in several locations throughout the country, including Iowa, Florida and Nevada.
These locations were selected due to current business prospects and the extended time frame needed
to return these operations to a profitable position. Currently we are in the initial stages
of the plan, and we expect that costs could range from $4.5 million to $5.5 million in aggregate.
Costs associated with this action would include equipment and facility lease termination expenses,
consulting expenses and severance costs for employees. Should the Company be successful in the
sale of these facilities, these costs could be reduced.
2009 Restructuring Plan
In the first quarter of our 2009 fiscal year, we began a restructuring program (the “2009
Restructuring Plan”) that was designed to consolidate operations within our three segments. The
2009 Restructuring Plan was completed in our fiscal year 2010.
Details regarding the components of the restructuring charges are described in Part 1. Item 1.
Condensed Consolidated Financial Statements — Note 3, “Strategic Actions” of this report, which
is incorporated herein by reference.
25
Table of Contents
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2010
MONTHS ENDED MARCH 31, 2010
The following tables present selected historical results of operations of IES and its subsidiaries,
with dollar amounts in millions and percentages expressed as a percent of revenues:
| Three Months Ended | Three Months Ended | |||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||
|
Revenues
|
$ | 118.3 | 100.0 | % | $ | 107.6 | 100.0 | % | ||||||||
|
Cost of services
|
113.0 | 95.5 | % | 94.0 | 87.4 | % | ||||||||||
|
|
||||||||||||||||
|
Gross profit
|
5.3 | 4.5 | % | 13.6 | 12.6 | % | ||||||||||
|
Selling, general and administrative expenses
|
13.3 | 11.3 | % | 25.7 | 23.9 | % | ||||||||||
|
Gain on sale of assets
|
(0.1 | ) | (0.1 | )% | 0.0 | 0.0 | % | |||||||||
|
Asset Impairment
|
0.0 | 0.0 | % | 0.0 | 0.0 | % | ||||||||||
|
Restructuring charges
|
0.0 | 0.0 | % | 0.1 | 0.1 | % | ||||||||||
|
|
||||||||||||||||
|
Income (loss) from operations
|
(7.9 | ) | (6.7 | )% | (12.2 | ) | (11.3 | )% | ||||||||
|
Interest and other expense, net
|
0.5 | 0.5 | % | 0.8 | 0.7 | % | ||||||||||
|
|
||||||||||||||||
|
Loss before income taxes
|
(8.4 | ) | (7.1 | )% | (13.0 | ) | (12.1 | )% | ||||||||
|
Provision for income taxes
|
0.8 | 0.7 | % | 0.2 | 0.2 | % | ||||||||||
|
|
||||||||||||||||
|
Net loss
|
$ | (9.2 | ) | (7.8 | )% | $ | (13.2 | ) | (12.3 | )% | ||||||
|
|
||||||||||||||||
Revenues
| Three Months Ended | Three Months Ended | |||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||
|
|
||||||||||||||||
|
Communications
|
$ | 23.4 | 19.7 | % | $ | 16.4 | 15.2 | % | ||||||||
|
Residential
|
26.3 | 22.3 | % | 28.0 | 26.1 | % | ||||||||||
|
Commercial & Industrial
|
68.6 | 58.0 | % | 63.2 | 58.6 | % | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Consolidated
|
$ | 118.3 | 100.0 | % | $ | 107.6 | 100.0 | % | ||||||||
|
|
||||||||||||||||
Consolidated revenues for the three months ended March 31, 2011 were $10.7 million greater than the
three months ended March 31, 2010, an increase of 9.9%. While our Communications and Commercial &
Industrial segments revenues increased during the three months ended March 31, 2011, revenues for
our Residential segment declined during the three months ended March 31, 2011, primarily due to a
nationwide decline in single-family construction activity as a result of the challenging economic
environment.
Revenues in our Communications segment increased $7.0 million, or 42.7%, during the three months
ended March 31, 2011, compared to the three months ended March 31, 2010. This increase is due to an
increase in data center projects and increased business
from our national accounts.
Residential segment revenues decreased $1.7 million during the three months ended March 31, 2011, a
decrease of 6.1%, compared to the three months ended March 31, 2010. This decrease is primarily
attributable to declines in single-family housing construction resulting from the continued effect
of high unemployment rates and uncertain economic conditions. Weather was also a factor throughout
the quarter. The decline in single-family construction was offset by an increase in multi-family
construction as compared to the prior year period. The increase in multi-family construction was
driven by the current economic conditions which have adversely affected the sale of single family
houses.
Revenues in our Commercial & Industrial segment increased $5.4 million, or 8.5%, during the three
months ended March 31, 2011, compared to the three months ended March 31, 2010.
26
Table of Contents
Gross Profit
| Three Months Ended | Three Months Ended | |||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||
|
|
||||||||||||||||
|
Communications
|
$ | 2.4 | 10.5 | % | $ | 3.4 | 20.7 | % | ||||||||
|
Residential
|
3.6 | 13.6 | % | 6.3 | 22.3 | % | ||||||||||
|
Commercial & Industrial
|
-0.7 | -1.0 | % | 3.9 | 6.2 | % | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Consolidated
|
$ | 5.3 | 4.5 | % | $ | 13.6 | 12.6 | % | ||||||||
|
|
||||||||||||||||
Our consolidated gross profit for the three months ended March 31, 2011 declined by $8.3 million,
or 61.0% compared to consolidated gross profit for the three months ended March 31, 2010. Our
overall gross profit as a percentage of revenue decreased to 4.5% during the three months ended
March 31, 2011, compared to 12.6% during the three months ended March 31, 2010, primarily due to
lower margin construction projects, difficulties in execution on certain projects, and increased
costs of copper, steel and fuel. Additionally we are experiencing increased healthcare benefits
and unemployment costs.
Our Communications segment’s gross profit decreased $1.0 million during the three months ended
March 31, 2011 compared to the three months ended March 31, 2010. The decrease in gross profit is
attributed to lower margins on competitively bid projects.
During the quarter ended March 31, 2011, our Residential segment experienced a $2.7 million
reduction in gross profit compared to the three months ended March 31, 2010. Gross margin
percentage in the Residential segment declined to 13.6% during the three months ended March 31,
2011. We attribute much of the decline in Residential’s gross margin to increased competition
resulting from the decline in both single-family and multi-family projects in the past year. This
was especially noticeable in our multi-family projects. Additionally, increases in the cost of
materials have negatively impacted gross margins.
Our Commercial & Industrial segment’s gross profit during the three months ended March 31, 2011
decreased $4.6 million compared to the three months ended March 31, 2010. During the three months
ended March 31, 2011, the Commercial & Industrial segment experienced significant execution
difficulties on five projects which resulted in a negative impact to gross margin of $2.7 million.
The continued weak economy and competitive environment continues to adversely affect margins on
competitively bid projects.
Selling, General and Administrative Expenses
| Three Months Ended | Three Months Ended | |||||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||||
| $ | % | $ | % | |||||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||||
|
|
||||||||||||||||||
|
Communications
|
$ | 2.3 | 9.8 | % | $ | 1.8 | 11.0 | % | ||||||||||
|
Residential
|
4.5 | 17.1 | % | 6.5 | 23.3 | % | ||||||||||||
|
Commercial & Industrial
|
3.8 | 5.6 | % | 12.9 | 20.4 | % | ||||||||||||
|
Corporate
|
2.7 | — | 4.5 | — | ||||||||||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Total Consolidated
|
$ | 13.3 | 11.3 | % | $ | 25.7 | 23.9 | % | ||||||||||
|
|
||||||||||||||||||
Selling, general and administrative expenses are those costs not directly associated with
performing work for our customers. These costs consist primarily of compensation and benefits
related to corporate and business unit management, occupancy and utilities, training, professional
services, consulting fees, travel, and certain types of depreciation and amortization.
During the three months ended March 31, 2011, our selling, general and administrative expenses were
$13.3 million, a decrease of $12.4 million, or 48.2%, over the three months ended March 31, 2010.
The reduction in 2011 expenses was primarily due to a reduction to bad debt expense of $8.0
million. In the three months ended March 31, 2010, we recorded $3.7 million in bad debt expense
related to a long-term receivable. In the three months ended March 31, 2011, we recovered $2.9
million related to this long-term receivable. This accounted for 53.2% of the $12.4 million
decrease. Further, bad debt was reduced $1.4 million. We also experienced decreases of $2.8
million in employment expenses and $0.4 million in occupancy expenses as a result of our ongoing
cost reduction efforts.
27
Table of Contents
Restructuring Charges
The 2009 Restructuring Plan was completed in our 2010 fiscal year. We recognized the following
costs during the three months ended March 31, 2011 and 2010:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in thousands) | ||||||||
|
|
||||||||
|
Severance compensation
|
$ | — | $ | 0.1 | ||||
|
Consulting and other charges
|
— | — | ||||||
|
Non-cash asset amortization and write-offs
|
— | — | ||||||
|
|
||||||||
|
|
||||||||
|
Total restructuring charges
|
$ | — | $ | 0.1 | ||||
|
|
||||||||
Interest and Other Expense, Net
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in thousands) | ||||||||
|
|
||||||||
|
Interest expense
|
$ | 0.5 | $ | 1.0 | ||||
|
Debt prepayment penalty and deferred cost amortization
|
— | 0.1 | ||||||
|
|
||||||||
|
|
||||||||
|
Total interest expense
|
0.5 | 1.1 | ||||||
|
Interest income
|
— | (0.1 | ) | |||||
|
Other income (expense)
|
— | (0.1 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Total interest and other expense, net
|
$ | 0.5 | $ | 0.9 | ||||
|
|
||||||||
During the three months ended March 31, 2011, we incurred total interest expense of $0.5 million on
an average debt balance of $10.0 million for the Tontine Term Loan and an average letter of credit
balance of $13.1 million and an average unused line of credit balance of $46.9 million under the
Revolving Credit Facility. This compared to total interest expense of $0.9 million for the three
months ended March 31, 2010, on an average debt balance of $25.0 million on the Tontine Term Loan
and an average letter of credit balance of $23.3 million and an average unused line of credit
balance of $36.7 million.
During the three months ended March 31, 2011, we generated $0.0 million in interest income on
average cash and cash equivalents balance of $32.9 million. During the three months ended March
31, 2010, we generated $0.1 million in interest income on average cash and cash equivalents balance
of $55.1 million. Interest income was derived from average interest rates of 0.3% during the three
months ended March 31, 2011, and 0.6% during the three months ended March 31, 2010.
Provision for Income Taxes
On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. As
such, our net operating loss utilization after the change date will be subject to Section 382
limitations for federal income taxes and some state income taxes. We have provided valuation
allowances on all net operating losses where it is determined it is more likely than not that they
will expire without being utilized.
The
provision for income taxes increased from $0.1 million for the three months ended March 31, 2010
to $0.8 million for the three months ended March 31, 2011. The increase in the provision for income
taxes for the three months ended March 31, 2011 is attributable to the decrease in net loss, an
increase in state income taxes and an increase in the provision for uncertain tax benefits.
28
Table of Contents
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2011 COMPARED TO THE
SIX MONTHS
ENDED MARCH 31, 2010
ENDED MARCH 31, 2010
The following tables present selected historical results of operations of IES and its subsidiaries,
with dollar amounts in millions and percentages expressed as a percent of revenues:
| Six Months Ended | Six Months Ended | |||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||
|
Revenues
|
$ | 232.0 | 100.0 | % | $ | 227.9 | 100.0 | % | ||||||||
|
Cost of services
|
215.5 | 92.9 | % | 194.4 | 85.3 | % | ||||||||||
|
|
||||||||||||||||
|
Gross profit
|
16.5 | 7.1 | % | 33.5 | 14.7 | % | ||||||||||
|
Selling, general and administrative expenses
|
31.4 | 13.5 | % | 45.0 | 19.7 | % | ||||||||||
|
Gain on sale of assets
|
(6.8 | ) | (2.9 | )% | (0.1 | ) | (0.0 | )% | ||||||||
|
Asset Impairment
|
3.5 | 1.5 | % | 0.0 | 0.0 | % | ||||||||||
|
Restructuring charges
|
0.0 | 0.0 | % | 0.8 | 0.3 | % | ||||||||||
|
|
||||||||||||||||
|
Income (loss) from operations
|
(11.6 | ) | (5.0 | )% | (12.2 | ) | (5.3 | )% | ||||||||
|
Interest and other expense, net
|
1.1 | 0.5 | % | 1.7 | 0.8 | % | ||||||||||
|
|
||||||||||||||||
|
Loss before income taxes
|
(12.7 | ) | (5.5 | )% | (13.9 | ) | (6.1 | )% | ||||||||
|
Provision for income taxes
|
0.2 | 0.1 | % | 0.1 | 0.1 | % | ||||||||||
|
|
||||||||||||||||
|
Net loss
|
$ | (12.9 | ) | (5.6 | )% | $ | (14.0 | ) | (6.2 | )% | ||||||
|
|
||||||||||||||||
Revenues
| Six Months Ended | Six Months Ended | |||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||
|
|
||||||||||||||||
|
Communications
|
$ | 43.3 | 18.7 | % | $ | 35.1 | 15.4 | % | ||||||||
|
Residential
|
52.4 | 22.6 | % | 57.1 | 25.0 | % | ||||||||||
|
Commercial & Industrial
|
136.3 | 58.7 | % | 135.7 | 59.5 | % | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Consolidated
|
$ | 232.0 | 100.0 | % | $ | 227.9 | 100.0 | % | ||||||||
|
|
||||||||||||||||
Consolidated revenues for the six months ended March 31, 2011 were $4.1 million greater than the
six months ended March 31, 2010, an increase of 1.8%. While our Communications and Commercial &
Industrial segments revenues increased during the six months ended March 31, 2011, revenues for our
Residential segment declined during the six months ended March 31, 2011, primarily due to a
nationwide decline in construction activity as a result of the challenging economic environment.
Revenues in our Communications segment increased $8.2 million, or 23.4%, during the six months
ended March 31, 2011, compared to the six months ended March 31, 2010. This increase is due to an
increase in data center projects and increased business from our national accounts.
Residential segment revenues decreased $4.7 million during the six months ended March 31, 2011, a
decrease of 8.2%, compared to
the six months ended March 31, 2010. This decrease is primarily attributable to the declines in
multi-family housing construction due to a nationwide decline in apartment occupancy rates and
increased difficulty in obtaining project financing. This resulted in the deferral of certain
projects and the cancellation of other projects. Revenues also declined in single-family
construction as a result of the continued effect of high unemployment rates and uncertain economic
conditions on new home sales.
29
Table of Contents
Revenues in our Commercial & Industrial segment increased $0.6 million, or 0.4%, during the six
months ended March 31, 2011, compared to the six months ended March 31, 2010.
Gross Profit
| Six Months Ended | Six Months Ended | |||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||
|
|
||||||||||||||||
|
Communications
|
$ | 5.7 | 13.1 | % | $ | 6.8 | 19.4 | % | ||||||||
|
Residential
|
8.2 | 15.6 | % | 13.1 | 23.0 | % | ||||||||||
|
Commercial & Industrial
|
2.6 | 2.0 | % | 13.6 | 10.1 | % | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Consolidated
|
$ | 16.5 | 7.1 | % | $ | 33.5 | 14.7 | % | ||||||||
|
|
||||||||||||||||
Our consolidated gross profit for the six months ended March 31, 2011 declined by $17.0 million, or
50.7% compared to consolidated gross profit for the six months ended March 31, 2010. Our overall
gross profit as a percentage of revenue decreased to 7.1% during the six months ended March 31,
2011, compared to 14.7% during the six months ended March 31, 2010, primarily due to lower margin
construction projects, difficulties in execution on certain projects, and increased costs of
copper, steel and fuel. Additionally we are experiencing increased healthcare benefits and
unemployment costs.
Our Communications segment’s gross profit decreased $1.1 million during the six months ended March
31, 2011 compared to the six months ended March 31, 2010. The decrease in gross profit is
attributed to lower margins on competitively bid projects.
During the six months ended March 31, 2011, our Residential segment experienced a $4.9 million
reduction in gross profit compared to the six months ended March 31, 2010. Gross margin percentage
in the Residential segment declined to 15.6% during the six months ended March 31, 2011. We
attribute much of the decline in Residential’s gross margin to a decrease in higher margin,
multi-family construction projects and increases in costs of materials. Additionally, the decline
in both single-family and multi-family projects resulted in increased competition which has had a
negative impact on gross margins in both types of work.
Our Commercial & Industrial segment’s gross profit during the six months ended March 31, 2011
decreased $11.0 million compared to the six months ended March 31, 2010. During the six months
ended March 31, 2010, the Commercial & Industrial segment experienced significant execution
difficulties on six projects which resulted in a negative impact to gross margin of $4.1 million.
The continued weak economy and competitive environment continues to adversely affect margins.
Selling, General and Administrative Expenses
| Six Months Ended | Six Months Ended | |||||||||||||||
| March 31, 2011 | March 31, 2010 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| (Dollars in millions, Percentage of revenues) | ||||||||||||||||
|
|
||||||||||||||||
|
Communications
|
$ | 4.6 | 10.7 | % | $ | 3.7 | 10.5 | % | ||||||||
|
Residential
|
9.3 | 17.7 | % | 12.6 | 22.0 | % | ||||||||||
|
Commercial & Industrial
|
11.4 | 8.4 | % | 20.8 | 15.4 | % | ||||||||||
|
Corporate
|
6.1 | — | 7.9 | — | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Consolidated
|
$ | 31.4 | 13.5 | % | $ | 45.0 | 19.7 | % | ||||||||
|
|
||||||||||||||||
Selling, general and administrative expenses are those costs not directly associated with
performing work for our customers. These costs consist primarily of compensation and benefits
related to corporate and business unit management, occupancy and utilities,
training, professional services, consulting fees, travel, and certain types of depreciation and
amortization.
30
Table of Contents
During the six months ended March 31, 2011, our selling, general and administrative expenses were
$31.4 million, a decrease of $13.6 million, or 30.2%, over the six months ended March 31, 2010. The
reduction in 2011 expenses was primarily due to a reduction to bad debt expense of $8.3 million.
In the six months ended March 31, 2010, we recorded $3.7 million in bad debt expense related to a
long term receivable. In the six months ended March 31, 2011, we recovered $2.9 million related to
this long-term receivable. This accounted for 48.5% of the $13.6 million decrease. Further, bad
debt was reduced $1.7 million. We also experienced decreases of $3.9 million in employment
expenses as a result of our ongoing cost reduction efforts, $0.5 million in depreciation expense
and $0.5 million marketing and advertising expenses.
Restructuring Charges
The 2009 Restructuring Plan was completed in our fiscal year 2010. We recognized the following
costs during the six months ended March 31, 2011 and 2010:
| Six Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in thousands) | ||||||||
|
|
||||||||
|
Severance compensation
|
$ | — | $ | 0.8 | ||||
|
Consulting and other charges
|
— | — | ||||||
|
Non-cash asset amortization and write-offs
|
— | — | ||||||
|
|
||||||||
|
|
||||||||
|
Total restructuring charges
|
$ | — | $ | 0.8 | ||||
|
|
||||||||
Interest and Other Expense, Net
| Six Months Ended | ||||||||
| March 31, | ||||||||
| 2011 | 2010 | |||||||
| (Dollars in thousands) | ||||||||
|
|
||||||||
|
Interest expense
|
$ | 1.2 | $ | 1.9 | ||||
|
Debt prepayment penalty and deferred cost amortization
|
— | 0.2 | ||||||
|
|
||||||||
|
|
||||||||
|
Total interest expense
|
1.2 | 2.1 | ||||||
|
Interest income
|
(0.1 | ) | (0.1 | ) | ||||
|
Other income (expense)
|
— | (0.3 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Total interest and other expense, net
|
$ | 1.1 | $ | 1.7 | ||||
|
|
||||||||
During the six months ended March 31, 2011, we incurred total interest expense of $1.2 million on
an average debt balance of $10.0 million for the Tontine Term Loan and an average letter of credit
balance of $13.1 million and an average unused line of credit balance of $46.9 million under the
Revolving Credit Facility. This compared to total interest expense of $1.7 million for the six
months ended March 31, 2010, on an average debt balance of $25.0 million on the Tontine Term Loan
and an average letter of credit balance of $23.3 million and an average unused line of credit
balance of $36.7 million.
During the six months ended March 31, 2011, we generated $0.1 million in interest income on an
average cash and cash equivalents balance of $32.9 million. During the six months ended March 31,
2010, we generated $0.1 million in interest income on an average cash and cash equivalents balance
of $55.1 million. Interest income was derived from average interest rates of 0.3% during the six
months ended March 31, 2011, and 0.6% during the six months ended March 31, 2010.
Provision for Income Taxes
On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. As
such, our net operating loss utilization after the change date will be subject to Section 382
limitations for federal income taxes and some state income taxes. We have provided valuation
allowances on all net operating losses where it is determined it is more likely than not that they
will expire
without being utilized.
31
Table of Contents
The
provision for income taxes increased from $0.1 million for the six months ended March 31, 2010
to $0.2 million for the six months ended March 31, 2011. The increase in the provision for income
taxes for the six months ended March 31, 2011 is attributable to the decrease in net loss and an
increase in the provision for uncertain tax benefits.
Working Capital
| March 31, | September 30, | |||||||
| 2011 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$ | 36.7 | $ | 32.9 | ||||
|
Accounts receivable
|
||||||||
|
Trade, net of allowance of $2.5 and $3.4 respectively
|
82.9 | 88.3 | ||||||
|
Retainage
|
18.4 | 17.1 | ||||||
|
Inventories
|
9.5 | 12.7 | ||||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
15.1 | 12.6 | ||||||
|
Prepaid expenses and other current assets
|
5.0 | 5.4 | ||||||
|
|
||||||||
|
|
||||||||
|
Total current assets
|
$ | 167.6 | $ | 169.0 | ||||
|
|
||||||||
|
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Current maturities of long-term debt
|
$ | 0.5 | $ | 0.8 | ||||
|
Accounts payable and accrued expenses
|
71.0 | 67.8 | ||||||
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
14.2 | 17.1 | ||||||
|
|
||||||||
|
|
||||||||
|
Total current liabilities
|
$ | 85.7 | $ | 85.7 | ||||
|
|
||||||||
|
|
||||||||
|
Working capital
|
$ | 81.9 | $ | 83.3 | ||||
|
|
||||||||
During the six months ended March 31, 2011, working capital decreased by $1.4 million from
September 30, 2010, reflecting a $1.4 million decrease in current assets and a $0.0 million
decrease in current liabilities during the period.
During the six months ended March 31, 2011, current assets decreased by $1.4 million, or 0.8%, to
$167.6 million, as compared to $169.0 million as of September 30, 2010. Days sales outstanding
(“DSOs”) decreased to 78 days as of March 31, 2011 from 83 days as of September 30, 2010. This
improvement was driven predominantly by increased collection efforts. Our secured position,
resulting from our ability to secure liens against our customers’ over due receivables, reasonably
assures that collection will occur eventually to the extent that our security retains value. In
light of the volatility of the current financial markets, we closely monitor the collectability of
our receivables.
Surety
Many customers, particularly in connection with new construction, require us to post performance
and payment bonds issued by a surety. Those bonds provide a guarantee to the customer that we will
perform under the terms of our contract and that we will pay our subcontractors and vendors. If we
fail to perform under the terms of our contract or to pay subcontractors and vendors, the customer
may demand that the surety make payments or provide services under the bond. We must reimburse the
sureties for any expenses or outlays they incur on our behalf. To date, we have not been required
to make any reimbursements to our sureties for bond-related costs.
As is common in the surety industry, sureties issue bonds on a project-by-project basis and can
decline to issue bonds at any time. We believe that our relationships with our sureties will allow
us to provide surety bonds as they are required. However, current market conditions, as well as
changes in our sureties’ assessment of our operating and financial risk, could cause our sureties
to decline to issue bonds for our work. If our sureties decline to issue bonds for our work, our
alternatives would include posting other forms of collateral for project performance, such as
letters of credit or cash, seeking bonding capacity from other sureties, or engaging in more
projects that do not require surety bonds. In addition, if we are awarded a project for which a
surety bond is required but we are unable to obtain a surety bond, the result can be a claim for
damages by the customer for the costs of replacing us with another contractor.
32
Table of Contents
As of March 31, 2011, we utilized cash and accumulated interest thereon (as included in Other
Non-Current Assets in our Consolidated Balance Sheet) of $4.0 million to collateralize our
obligations to our former sureties. On March 14, 2011, a former surety released $2.6 million of
cash back to the Company. As of March 31, 2011, the estimated cost to complete our bonded projects
was approximately $122.2 million. We evaluate our bonding requirements on a regular basis,
including the terms offered by our sureties. On May 7, 2010, we entered into agreements with two
primary sureties. We do not have any cash or letters of credit held as collateral by these
sureties. We believe the bonding capacity presently provided by these sureties are adequate for
our current operations and will be adequate for our operations for the foreseeable future.
The Revolving Credit Facility
On May 12, 2006, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”),
for a revolving credit facility (the “Revolving Credit Facility”) with Bank of America, N.A. and
certain other lenders. On April 30, 2010, we renegotiated the terms of, and entered into an
amendment to, the Loan and Security Agreement without incurring termination charges. Under the
terms of the amended Revolving Credit Facility, the size of the facility remains at $60.0 million,
and the maturity date has been extended to May 12, 2012. In connection with the amendment, we
incurred an amendment fee of $0.2 million and legal fees of $0.1 million, which are being amortized
over 24 months. Borrowings under the Revolving Credit Facility may not exceed a “borrowing base”
that is determined monthly by our lenders based on available collateral, primarily certain accounts
receivables and inventory.
The Revolving Credit Facility is guaranteed by our subsidiaries and secured by first priority liens
on substantially all of our subsidiaries’ existing and future acquired assets, exclusive of
collateral provided to our surety providers. The Revolving Credit Facility contains customary
affirmative, negative and financial covenants. The Revolving Credit Facility also restricts us from
paying cash dividends, prohibits repurchase our common stock and our ability to repay the Tontine
Loan.
At March 31, 2011, we had $10.1 million available to us under the Revolving Credit Facility, based
on a borrowing base of $23.3 million, $13.3 million in outstanding letters of credit, and no
outstanding borrowings.
As of March 31, 2011, we were subject to the financial covenant under the Revolving Credit Facility
requiring that we maintain a fixed charge coverage ratio of not less than 1.0:1.0 at any time that
our aggregate amount of unrestricted cash on hand plus availability is less than $25.0 million and,
thereafter, until such time as our aggregate amount of unrestricted cash on hand plus availability
has been at least $25.0 million for a period of 60 consecutive days. As of March 31, 2011, our
Total Liquidity was in excess of $25.0 million for the previous 60 days. Had our Total Liquidity
been less than $25.0 million for the previous 60 days at March 31, 2011, we would not have met the
1.0:1.0 fixed charge coverage ratio test.
The Tontine Term Loan
On December 12, 2007, we entered into a $25.0 million senior subordinated loan agreement (the
“Tontine Term Loan”) with Tontine Capital Partners, L.P., a related party (“Tontine”). The Tontine
Term Loan bears interest at 11.0% per annum and is due on May 15, 2013. Interest is payable
quarterly in cash or in-kind at our option. Any interest paid in-kind will bear interest at 11.0%
in addition to the loan principal. On April 30, 2010, we prepaid $15.0 million of principal on the
Tontine Term Loan. On May 1, 2010, Tontine assigned the Tontine Term Loan to TCP Overseas Master
Fund II, L.P. (“TCP 2”), an affiliate of Tontine. We may repay the Tontine Term Loan at any time
prior to the maturity date at par, plus accrued interest without penalty. The Tontine Term Loan is
subordinated to our Revolving Credit Facility with Bank of America, N.A. The Tontine Term Loan is
an unsecured obligation of the Company and its subsidiary borrowers. The Tontine Term Loan contains
no financial covenants or restrictions on dividends or distributions to stockholders.
Liquidity and Capital Resources
As of March 31, 2011, we had cash and cash equivalents of $36.7 million, working capital of $81.9
million, $13.3 million of letters of credit outstanding and $10.1 million of available capacity
under our Revolving Credit Facility. We anticipate that the combination of cash on hand, cash flows
from operations and available capacity under our Revolving Credit Facility will provide sufficient
cash to enable us to meet our working capital needs, debt service requirements and capital
expenditures for property and equipment through the next twelve months. Our ability to generate
cash flow is dependent on many factors, including demand for our services, the availability of
projects at margins acceptable to us, the ultimate collectability of our receivables, and our
ability to borrow on our amended Revolving Credit Facility, if needed. We were not required to test
our covenants under our Revolving Credit Facility in the
period as our Total Liquidity was greater than the minimum $25.0 million under our Resolving Credit
Facility. Had we been required to test our covenants, we would have failed at March 31, 2011. At
March 31, 2011 our liquidity was $46.8 million.
33
Table of Contents
We continue to closely monitor the financial markets and general national and global economic
conditions. To date, we have experienced no loss or lack of access to our invested cash or cash
equivalents; however, we can provide no assurances that access to our invested cash and cash
equivalents will not be impacted in the future by adverse conditions in the financial markets.
Operating Activities
Our cash flow from operations is primarily influenced by cyclicality, demand for our services,
operating margins and the type of services we provide but can also be influenced by working capital
needs such as the timing of our receivable collections. Working capital needs are generally lower
during our fiscal first and second quarters due to the seasonality that we experience in many
regions of the country. Operating activities used net cash of $11.4 million during the six months
ended March 31, 2011, as compared to $8.9 million of net cash used in the six months ended March
31, 2010. The change in operating cash flows in the six months ended March 31, 2011 was due higher
cash requirements for payroll and materials used to support to increasing revenues, compared to a
declining revenue environment in the year ago period where cash collections on receivables exceeded
the cash required to fund for ongoing projects.
Investing Activities
In the six months ended March 31, 2011, we had net cash provided from investing activities of $15.7
million as compared to $0.2 million of net cash used in investing activities in the six months
ended March 31, 2010. Investing activities in the six months ended March 31, 2011 included $16.3
million of proceeds from the sale of two facilities. Investing activities in the six months ended
March 31, 2010 included $0.5 million used for capital expenditures, partially offset by $0.2
million of proceeds from the sale of equipment.
Financing Activities
Financing activities used net cash of $0.5 million in the six months ended March 31, 2011 compared
to $0.8 million used in the six months ended March 31, 2010. Financing activities in the six months
ended March 31, 2011 included $0.4 million used for payments of debt and $0.1 million used for the
acquisition of treasury stock. Financing activities in the six months ended March 31, 2010 included
$0.1 million used for the purchase of treasury stock and $1.4 million used for payments of debt
netted against $0.7 million provided by new financing.
Bonding Capacity
At March 31, 2011, we had adequate surety bonding capacity under our surety agreements. Our ability
to access this bonding capacity is at the sole discretion of our surety providers. As of March 31,
2011, the expected cumulative cost to complete for projects covered by our surety providers was
$122.2 million. We believe we have adequate remaining available bonding capacity to meet our
current needs, subject to the sole discretion of our surety providers. For additional information,
please refer to Part 1. Item 1. Condensed Consolidated Financial Statements — Note 11,
“Commitments and Contingencies —
“Surety”
of this report.
Controlling Shareholder
On April 30, 2010, we prepaid $15.0 million of the original $25.0 million principal outstanding on
the Tontine Term Loan; accordingly $10.0 million remains outstanding under the Tontine Term Loan.
On February 11, 2011, Tontine, filed an amended Schedule 13D indicating its ownership level of
58.1%. Although Tontine has not indicated any plans to alter its ownership level, should Tontine
reconsider its investment plans and sell its controlling interest in the Company, a change in
ownership would occur. A change in ownership, as defined by Internal Revenue Code Section 382,
could reduce the availability of net operating losses for federal and state income tax purposes.
Furthermore, a change in control would trigger the change of control provisions in a number of our
material agreements, including our Revolving Credit Facility, bonding agreements with our sureties
and employment contracts with certain officers and employees of the Company.
34
Table of Contents
Off-Balance Sheet Arrangements and Contractual Obligations
As is common in our industry, we have entered into certain off-balance sheet arrangements that
expose us to increased risk. Our significant off-balance sheet transactions include commitments
associated with non-cancelable operating leases, letter of credit
obligations, firm commitments for materials and surety guarantees.
We enter into non-cancelable operating leases for many of our vehicle and equipment needs. These
leases allow us to retain our cash when we do not own the vehicles or equipment, and we pay a
monthly lease rental fee. At the end of the lease, we have no further obligation to the lessor. We
may cancel or terminate a lease before the end of its term. Typically, we would be liable to the
lessor for various lease cancellation or termination costs and the difference between the fair
market value of the leased asset and the implied book value of the leased asset as calculated in
accordance with the lease agreement.
Some of our customers and vendors require us to post letters of credit as a means of guaranteeing
performance under our contracts and ensuring payment by us to subcontractors and vendors. If our
customer has reasonable cause to effect payment under a letter of credit, we would be required to
reimburse our creditor for the letter of credit. At March 31, 2011, $13.3 million of our
outstanding letters of credit were to collateralize our customers and vendors.
The underwriters of our casualty insurance program require us to post letters of credit as
collateral, as is common in the insurance industry. To date, we have not had a situation where an
underwriter has had reasonable cause to effect payment under a letter of credit. At March 31, 2011,
$12.6 million of our outstanding letters of credit were to collateralize our insurance programs.
From time to time, we may enter into firm purchase commitments for materials such as copper wire
and aluminum wire, among others, which we expect to use in the ordinary course of business. These
commitments are typically for terms less than one year and require us to buy minimum quantities of
materials at specified intervals at a fixed price over the term. As of March 31, 2011, we did not
have any open purchase commitments.
Many of our customers require us to post performance and payment bonds issued by a surety. Those
bonds guarantee the customer that we will perform under the terms of a contract and that we will
pay subcontractors and vendors. In the event that we fail to perform under a contract or pay
subcontractors and vendors, the customer may demand the surety to pay or perform under our bond.
Our relationship with our sureties is such that we will indemnify the sureties for any expenses
they incur in connection with any of the bonds they issue on our behalf. To date, we have not
incurred any costs to indemnify our sureties for expenses they incurred on our behalf. As of March
31, 2011, we utilized cash and accumulated interest thereon of $4.0 million to collateralize our
bonding programs.
As of March 31, 2011, our future contractual obligations due by September 30 of each of the
following fiscal years include (1) (in millions):
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||||||
|
Long-term debt obligations
|
$ | 0.3 | $ | 0.0 | $ | 10.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 10.3 | ||||||||||||||||
|
Operating lease obligations
|
$ | 2.4 | $ | 5.0 | $ | 2.7 | $ | 1.3 | $ | 0.6 | $ | 0.3 | $ | 0.9 | $ | 13.2 | ||||||||||||||||
|
Capital lease obligations
|
$ | 0.1 | $ | 0.2 | $ | 0.3 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.6 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 2.8 | $ | 5.2 | $ | 13.0 | $ | 1.3 | $ | 0.6 | $ | 0.3 | $ | 0.9 | $ | 24.1 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| (1) |
The tabular amounts exclude the interest obligations that will
be created if the debt and capital lease obligations are outstanding
for the periods presented.
|
Outlook
We anticipate that the combination of cash on hand, cash flows and available capacity under our
Revolving Credit Facility will provide sufficient cash to enable us to meet our working capital
needs, debt service requirements and capital expenditures for property and equipment through the
next twelve months. We expect that our capital expenditures will not exceed $1.0 to $1.5 million
for the fiscal year ending on September 30, 2011. Our ability to generate cash flow is dependent on
our successful finalization of our restructuring efforts and many other factors, including demand
for our products and services, existing or pending legislative or regulatory actions related to
renewable energy and the purchase of homes, the availability of projects at margins acceptable to
us, the ultimate collectability of our receivables and our ability to borrow on our amended
Revolving Credit Facility.
35
Table of Contents
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Management is actively involved in monitoring exposure to market risk and continues to develop and
utilize appropriate risk management techniques. Our exposure to significant market risks includes
fluctuations in commodity prices for copper, aluminum, steel and fuel. Commodity price risks may
impact our results of operations due to the fixed price nature of many of our contracts. We are
also exposed to interest rate risk with respect to our outstanding debt obligations, if any, on the
Revolving Credit Facility.
| ITEM 4. |
CONTROLS AND PROCEDURES
|
Disclosure controls and procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the
supervision and with the participation of management, including our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
March 31, 2011 to provide reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and
regulations. Our disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed in reports filed or submitted under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during
the six months ended March 31, 2011 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| ITEM 1. |
LEGAL PROCEEDINGS
|
For additional information, please refer to Part 1. Item 1. Condensed Consolidated Financial
Statements — Note 11, “Commitments and Contingencies —
Legal Matters
” of this report, which is
incorporated herein by reference. We are not aware of any litigation or pending litigation that we
believe will have a material impact on our results of operations or our financial position other
than those matters that are disclosed in Note 11.
| ITEM 1A. |
RISK FACTORS
|
There have been no material changes to the risk factors disclosed under Item 1.A. “
Risk Factors
”
in our annual report on Form 10-K for the year ended September 30, 2010.
| ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
| ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES
|
None.
| ITEM 4. |
REMOVED AND RESERVED
|
| ITEM 5. |
OTHER INFORMATION
|
None.
36
Table of Contents
| ITEM 6. |
EXHIBITS
|
| 3.1 |
Second Amended and Restated Certificate of Incorporation of Integrated Electrical
Services, Inc. (Incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form S-8 filed on May 12, 2006)
|
|||
|
|
||||
| 3.2 |
Bylaws of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit
4.2 to the Company’s Registration Statement on Form S-8, filed on May 12, 2006)
|
|||
|
|
||||
| 31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Michael J. Caliel, Chief Executive Officer (1)
|
|||
|
|
||||
| 31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Terry L. Freeman, Chief Financial Officer (1)
|
|||
|
|
||||
| 32.1 |
Section 1350 Certification of Michael J. Caliel, Chief Executive Officer (1)
|
|||
|
|
||||
| 32.2 |
Section 1350 Certification of Terry L. Freeman, Chief Financial Officer (1)
|
| (1) |
Filed herewith.
|
37
Table of Contents
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized, who has signed
this report on behalf of the registrant and as the principal financial officer of the registrant.
|
INTEGRATED ELECTRICAL SERVICES, INC.
|
||||
| Date: May 16, 2011 | By: | /s/ Terry L. Freeman | ||
| Terry L. Freeman | ||||
| Senior Vice President and Chief Financial Officer | ||||
38
Table of Contents
EXHIBIT INDEX
| 3.1 |
Second Amended and Restated Certificate of Incorporation of Integrated Electrical
Services, Inc. (Incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form S-8 filed on May 12, 2006)
|
|||
|
|
||||
| 3.2 |
Bylaws of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit
4.2 to the Company’s Registration Statement on Form S-8, filed on May 12, 2006)
|
|||
|
|
||||
| 31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Michael J. Caliel, Chief Executive Officer (1)
|
|||
|
|
||||
| 31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Terry L. Freeman, Chief Financial Officer (1)
|
|||
|
|
||||
| 32.1 |
Section 1350 Certification of Michael J. Caliel, Chief Executive Officer (1)
|
|||
|
|
||||
| 32.2 |
Section 1350 Certification of Terry L. Freeman, Chief Financial Officer (1)
|
| (1) |
Filed herewith.
|
39
TABLE OF CONTENTS
Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Removed and ReservedprintItem 5. Other InformationprintItem 6. Exhibitsprint