UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended March 31, 2008 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 |
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76-0542208 |
(State or other jurisdiction of |
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(I.R.S. Employer |
Incorporation or organization) |
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Identification No.) |
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1800 West Loop South, Suite 500, Houston, Texas 77027 |
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(Address of principal executive offices and ZIP code) |
Registrants telephone number, including area code: (713) 860-1500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
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 x No o
The number of shares outstanding as of May 7, 2008 of the issuers common stock was 15,203,878 (includes 12,838 shares reserved for issuance upon exchange of previously issued shares pursuant to the issuers Plan of Reorganization approved by the United States Bankruptcy Court for the Northern District of Texas, Dallas Division which became effective on May 12, 2006).
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION |
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Condensed Consolidated Balance Sheets as of March 31, 2008 and September 30, 2007 |
5 |
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Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2008 and 2007 |
6 |
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Condensed Consolidated Statements of Operations for the Six Months Ended March 31, 2008 and 2007 |
7 |
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Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2008 and 2007 |
8 |
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9 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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38 |
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38 |
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40 |
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40 |
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40 |
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41 |
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42 |
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Rule 13a-14(a)/15d-14(a) Certification of Michael J. Caliel, Chief Executive Officer |
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Rule 13a-14(a)/15d-14(a) Certification of Raymond K. Guba, Chief Financial Officer |
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Section 1350 Certification of Michael J. Caliel, Chief Executive Officer |
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Section 1350 Certification of Raymond K. Guba, Chief Financial Officer |
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2
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 our subsidiaries, except as otherwise specified herein.
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 we believe to be reasonable as of the date hereof. These statements involve risks and uncertainties that could cause our actual future outcomes to differ materially from those set forth in such statements. Such risks and uncertainties include, but are not limited to:
· potential difficulty in fulfilling the covenant terms of our credit facilities;
· limitations on the availability of sufficient credit or cash flow to fund our working capital needs;
· increased cost of surety bonds affecting margins on work and the ability to obtain additional bonding;
· fluctuations in operating activity due to downturns in levels of construction, seasonality, and differing regional economic conditions;
· difficulty addressing the material weakness identified by us and our independent auditors;
· general economic and capital markets conditions, including changes in interest rates that affect the cost of construction financing and mortgages, and the availability of such capital to our customers;
· inaccurate estimates used when entering into fixed-priced contracts;
· potential errors when estimating revenue and progress to date on percentage of completion contracts;
· difficulty in managing the operation of existing entities;
· fluctuations in the cost of commodities used in our business, in particular copper, aluminum, steel, gasoline and certain plastics;
· competition in the construction industry, both from third parties and former employees, which could result in the loss of one or more customers;
· fluctuations in financial results due to assumptions made regarding future events used to value our stock options and performance-based stock awards;
· increase in cost of, or limitations on availability of, qualified labor, especially electricians and construction supervisors;
· accidents resulting from the physical hazards associated with our work and potential for vehicle accidents;
· loss of key personnel or transition of new senior management;
· challenges integrating new types of work or new processes into divisions;
· uncertainties inherent to estimating future operating results and our ability to generate revenues, operating income, or cash flow;
· difficulty incorporating new accounting, control and operating procedures;
· disagreements with taxing authorities with regard to tax positions we have adopted;
3
· unexpected liabilities or losses associated with warranties from our continuing or discontinued operations or other liabilities attributable to the retention of the legal structure or retained liabilities of business units where we have sold substantially all of the assets;
· the residual effect with customers and vendors from our reorganization leading to less work or less favorable delivery or credit terms;
· reduced productivity, either at the corporate office or operating level;
· difficulty in transferring all our electrical and construction licenses after our recent consolidation of subsidiaries;
· growth in latent defect litigation in the residential market in California and the expansion into other states where we provide residential electrical work for new home builders, and
· the possibility that our restructuring program will not be successfully executed.
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, 2007, could cause future outcomes to differ materially from those expressed in such forward-looking statements. We undertake no obligation to publicly update or revise information concerning our restructuring efforts, borrowing availability, or 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 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, and they will provide you with a copy.
4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
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March 31, |
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September 30, |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
31,867 |
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$ |
69,676 |
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Restricted cash |
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20,000 |
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20,000 |
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Accounts receivable: |
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Trade, net of allowance of $3,166 and $2,608 respectively |
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144,546 |
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131,767 |
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Retainage |
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27,915 |
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29,536 |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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15,422 |
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16,121 |
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Inventories |
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18,363 |
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15,268 |
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Prepaid expenses and other current assets |
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6,409 |
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4,618 |
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Assets from discontinued operations |
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1,809 |
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6,431 |
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Total current assets |
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266,331 |
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293,417 |
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PROPERTY AND EQUIPMENT, net |
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22,133 |
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22,095 |
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GOODWILL |
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6,770 |
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14,574 |
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OTHER NON-CURRENT ASSETS, net |
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22,611 |
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23,336 |
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Total assets |
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$ |
317,845 |
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$ |
353,422 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Current maturities of long-term debt |
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$ |
173 |
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$ |
78 |
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Accounts payable and accrued expenses |
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91,597 |
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98,452 |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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37,935 |
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35,277 |
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Liabilities from discontinued operations |
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847 |
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1,920 |
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Total current liabilities |
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130,552 |
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135,727 |
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LONG-TERM DEBT, net of current maturities |
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25,136 |
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45,698 |
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OTHER NON-CURRENT LIABILITIES |
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10,124 |
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18,072 |
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Total liabilities |
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165,812 |
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199,497 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY: |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued and outstanding |
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Common stock, $0.01 par value, 100,000,000 shares authorized; 15,418,357 and 15,418,357 shares issued and 15,214,074 and 15,339,086 outstanding, respectively |
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154 |
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154 |
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Treasury stock, at cost, 204,283 and 79,271 shares, respectively |
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(3,677 |
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(1,716 |
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Additional paid-in capital |
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168,477 |
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168,070 |
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Retained deficit |
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(12,921 |
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(12,583 |
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Total stockholders equity |
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152,033 |
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153,925 |
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Total liabilities and stockholders equity |
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$ |
317,845 |
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$ |
353,422 |
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The accompanying Notes to condensed consolidated financial statements are an integral part of these financial statements.
5
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
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Three Months Ended |
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Three Months Ended |
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(Unaudited) |
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(Unaudited) |
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Revenues |
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$ |
196,499 |
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$ |
215,101 |
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Cost of services |
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165,730 |
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179,532 |
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Gross profit |
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30,769 |
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35,569 |
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Selling, general and administrative expenses |
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27,674 |
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35,310 |
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(Gain) loss on sale of assets |
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(7 |
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35 |
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Restructuring charges |
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2,098 |
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Income from operations |
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1,004 |
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224 |
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Other (income) expense: |
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Interest expense |
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1,918 |
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2,494 |
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Interest income |
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(441 |
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(973 |
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Other (income) expense, net |
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(896 |
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(2 |
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Interest and other expense, net |
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581 |
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1,519 |
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Income (loss) from continuing operations before income taxes |
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423 |
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(1,295 |
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Provision (benefit) for income taxes |
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330 |
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(415 |
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Net income (loss) from continuing operations |
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93 |
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(880 |
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Discontinued operations (Note 2) |
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Loss from discontinued operations, including gain on disposal of assets of $7 and $3, respectively |
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(110 |
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(126 |
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Benefit for income taxes |
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(56 |
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(266 |
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Net income (loss) from discontinued operations |
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(54 |
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140 |
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Net income (loss) |
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$ |
39 |
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$ |
(740 |
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Basic earnings (loss) per share: |
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Continuing operations |
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$ |
0.01 |
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$ |
(0.06 |
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Discontinued operations |
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$ |
(0.00 |
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$ |
0.01 |
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Total |
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$ |
0.00 |
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$ |
(0.05 |
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Diluted earnings (loss) per share: |
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Continuing operations |
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$ |
0.01 |
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$ |
(0.06 |
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Discontinued operations |
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$ |
(0.00 |
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$ |
0.01 |
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Total |
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$ |
0.00 |
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$ |
(0.05 |
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Shares used in the computation of earnings (loss) per share (Note 4): |
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Basic |
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15,015,717 |
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15,081,537 |
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Diluted |
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15,021,520 |
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15,081,537 |
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The accompanying Notes to condensed consolidated financial statements are an integral part of these financial statements.
6
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
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Six Months Ended |
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Six Months Ended |
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(Unaudited) |
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(Unaudited) |
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Revenues |
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$ |
394,472 |
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$ |
443,346 |
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Cost of services |
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330,710 |
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369,647 |
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Gross profit |
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63,762 |
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73,699 |
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Selling, general and administrative expenses |
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58,231 |
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70,662 |
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Gain on sale of assets |
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(24 |
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(26 |
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Restructuring charges |
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3,393 |
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Income from operations |
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2,162 |
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3,063 |
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Other (income) expense: |
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Interest expense |
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6,151 |
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5,069 |
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Interest income |
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(1,545 |
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(1,983 |
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Other (income) expense, net |
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(1,323 |
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95 |
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Interest and other expense, net |
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3,283 |
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3,181 |
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Loss from continuing operations before income taxes |
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(1,121 |
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(118 |
) |
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Provision (benefit) for income taxes |
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(186 |
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383 |
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Net loss from continuing operations |
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(935 |
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(501 |
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Discontinued operations (Note 2) |
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Income (loss) from discontinued operations, including gain on disposal of assets of $7 and $13, respectively |
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338 |
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(2,174 |
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Provision (benefit) for income taxes |
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161 |
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(1,136 |
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Net income (loss) from discontinued operations |
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177 |
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(1,038 |
) |
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Net loss |
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$ |
(758 |
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$ |
(1,539 |
) |
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Basic earnings (loss) per share: |
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Continuing operations |
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$ |
(0.06 |
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$ |
(0.03 |
) |
Discontinued operations |
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$ |
0.01 |
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$ |
(0.07 |
) |
Total |
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$ |
(0.05 |
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$ |
(0.10 |
) |
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Diluted earnings (loss) per share: |
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Continuing operations |
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$ |
(0.06 |
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$ |
(0.03 |
) |
Discontinued operations |
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$ |
0.01 |
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$ |
(0.07 |
) |
Total |
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$ |
(0.05 |
) |
$ |
(0.10 |
) |
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Shares used in the computation of earnings (loss) per share (Note 4): |
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Basic |
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15,054,431 |
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15,040,375 |
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Diluted |
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15,054,431 |
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15,040,375 |
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The accompanying Notes to condensed consolidated financial statements are an integral part of these financial statements.
7
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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Six Months Ended |
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Six Months Ended |
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(Unaudited) |
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(Unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(758 |
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$ |
(1,539 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Net (income) loss from discontinued operations |
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(177 |
) |
1,038 |
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Bad debt expense |
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782 |
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525 |
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Deferred financing cost amortization |
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1,400 |
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653 |
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Depreciation and amortization |
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4,586 |
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5,007 |
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Gain on sale of property and equipment |
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(24 |
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(26 |
) |
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Non-cash paid-in-kind interest added to term loan |
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3,513 |
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Non-cash compensation expense |
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1,859 |
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2,634 |
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Non-cash restructuring write-offs |
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131 |
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Equity in gains of investment |
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(550 |
) |
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Deferred income tax |
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(170 |
) |
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Changes in operating assets and liabilities, net of effect of discontinued operations: |
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Accounts receivable |
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(11,940 |
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25,436 |
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Inventories |
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(3,095 |
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3,101 |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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699 |
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(57 |
) |
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Prepaid expenses and other current assets |
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1,549 |
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4,903 |
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Other non-current assets |
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(952 |
) |
(25 |
) |
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Accounts payable and accrued expenses |
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(8,121 |
) |
(12,029 |
) |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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2,659 |
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2,144 |
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Other non-current liabilities |
|
228 |
|
166 |
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Net cash provided by (used in) continuing operations |
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(11,724 |
) |
35,274 |
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Net cash provided by discontinued operations |
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3,719 |
|
5,012 |
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Net cash provided by (used in) operating activities |
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(8,005 |
) |
40,286 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property and equipment |
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(6,138 |
) |
(906 |
) |
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Proceeds from sales of property and equipment |
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218 |
|
353 |
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Distribution from unconsolidated affiliate |
|
488 |
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|
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Net cash used in continuing operations |
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(5,432 |
) |
(553 |
) |
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Net cash provided by (used in) discontinued operations |
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7 |
|
(15 |
) |
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Net cash used in investing activities |
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(5,425 |
) |
(568 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings of debt |
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25,000 |
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69 |
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Repayments of debt |
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(45,467 |
) |
(26 |
) |
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Payments for debt issuance costs |
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(500 |
) |
|
|
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Acquisition of treasury stock |
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(3,412 |
) |
(637 |
) |
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Net cash used in financing activities |
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(24,379 |
) |
(594 |
) |
||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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(37,809 |
) |
39,124 |
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CASH AND CASH EQUIVALENTS, beginning of period |
|
69,676 |
|
28,166 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
31,867 |
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$ |
67,290 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for interest |
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$ |
1,902 |
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$ |
1,079 |
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Cash paid for income taxes |
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$ |
260 |
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$ |
849 |
|
Non-cash investing activities: During the six months ended March 31, 2008, we financed $3.2 million of prepaid insurance through an account payable to the insurance provider, we paid a $2.1 million account payable for property and equipment that was purchased and accrued during the year ended September 30, 2007, and we recorded a $0.4 million accrued liability for the purchase of property and equipment that was unpaid as of March 31, 2008.
The accompanying Notes to condensed consolidated finance statements are an integral part of these financial statements.
8
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(UNAUDITED)
1. BUSINESS
Integrated Electrical Services, Inc. (the Company or IES), a Delaware corporation, was founded in June 1997 to create a leading national provider of electrical contracting services, focusing primarily on the commercial, industrial, residential, low voltage and service and maintenance markets.
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. 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, 2007 with the exception of the adoption of Financial Accounting Standards Board (FASB) Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB 109 as described in the paragraph that follows. Please refer to the Notes of our 2007 Form 10-K when reviewing interim financial results.
On October 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109 (FIN 48). FIN 48 created a single model to address accounting for uncertain income tax positions and established a minimum recognition threshold a tax position must meet before being recognized in the financial statements.
The evaluation of a tax position under FIN 48 is a two-step process. The first step is the recognition process to determine if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.
As the result of the adoption of FIN 48 and recognition of the cumulative effect of the adoption of the new accounting principal, we recorded an $8.2 million decrease in contingent tax liabilities. The reduction of the contingent tax liabilities resulted in a $7.8 million decrease in goodwill as prescribed by Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7) and a $0.4 million increase in retained earnings. Upon the adoption of FIN 48, the total liability for unrecognized tax benefits was $6.2 million, excluding accrued interest and penalties, which are discussed below. The liabilities for unrecognized tax benefits are a component of Other non-current liabilities in our consolidated balance sheet. The reversal of the liabilities for unrecognized tax benefits would result in a $6.1 million adjustment that would first go to reduce goodwill, then intangible assets and then additional paid-in capital as prescribed by SOP 90-7. The remaining $0.1 million would result in a decrease in the provision for income tax expense.
We recognize interest and penalties related to unrecognized tax benefits as part of the provision for income taxes. Upon the adoption of FIN 48, we had approximately $0.4 million in accrued interest and penalties included in liabilities for unrecognized tax benefits. The accrued interest and penalties are a component of Other non-current liabilities in our consolidated balance sheet. The reversal of the accrued interest and penalties would result in a $0.2 million adjustment that would first go to reduce goodwill, then intangible assets and then additional paid-in capital as prescribed by SOP 90-7. The remaining $0.2 million would result in a decrease in the provision for income tax expense.
We are currently not under federal audit by the Internal Revenue Service. The tax years ended September 30, 2004 and forward are subject to audit as well as tax years prior to September 30, 2004 to the extent of unutilized net operating losses generated in those years. Currently, one of our subsidiaries is under a state audit for the tax years ended September 30, 2002 and 2003.
9
We anticipate that approximately $0.3 million of liabilities for unrecognized tax benefits, including accrued interest, may be reversed in the next twelve months. This reversal is predominately due to the expiration of the statues of limitation for unrecognized tax benefits and the settlement of a state audit.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to current year presentation, including the income statement item (gain) loss on sale of assets which was previously included in other (income) expense.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 for construction in progress billings. Other estimates consist of allowances for doubtful accounts receivable, inventory obsolescence reserves, fair value assumptions in analyzing goodwill and long-lived asset impairments and adjustments from fresh-start accounting, realizability of deferred tax assets, self-insured claims liabilities, and future forfeiture rates and projected earnings used to measure stock-based compensation awards.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our results of operations are seasonal, depending on weather trends, with higher revenues typically generated during spring and summer months and lower revenues typically generated during fall and winter months. 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 enhances the guidance for using fair value to measure assets and liabilities. In addition, SFAS 157 expands information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. This statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but it does not expand the use of fair value in any new circumstances.
SFAS 157 was originally to be effective for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2) that amends SFAS 157 to delay the effective date for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually) to fiscal years beginning after November 15, 2008. We currently do not have any assets that are measured at fair value; We are currently evaluating the potential impact, if any, SFAS 157 will have on our financial results for our fiscal year beginning on October 1, 2009. We believe we will likely be required to provide additional disclosures in future financial statements beginning after the effective date of the new standard.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) which allows companies to choose to measure certain financial instruments and other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact, if any, SFAS 159 will have on our financial results for our fiscal year beginning on October 1, 2008; however, as we do not intend to elect fair value for any of our assets and liabilities, there should be no impact.
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (SFAS 141(R)) which changes the accounting for acquisitions. SFAS 141(R) eliminates the step acquisition model, changes the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, forbids the capitalization of transaction costs, and changes when restructuring charges related to acquisitions can be recognized. The standard is effective for fiscal years beginning on or after December 15, 2008 and will only impact the accounting for acquisitions that are made after adoption.
10
STOCK-BASED COMPENSATION
Stock-based compensation consists of expenses related to employee stock option awards, restricted stock grants and performance-based restricted stock grants (see Note 6). We have adopted SFAS No. 123(R), Share-Based Payment (SFAS 123(R)) to record our stock-based compensation awards. SFAS 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation and focuses on accounting for share-based payments made to employees as compensation. We recognize stock-based compensation expense in a pro-rata manner based on the value of stock-based payment awards that are expected to vest, reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. We used the modified prospective application method at the time SFAS 123(R) was adopted.
SFAS 123(R) does not require a specific valuation model to measure the value of stock options, and either a binomial or the Black-Scholes model may be used. We used a binomial option pricing model to measure the fair value of stock options awarded in our 2007 and 2008 fiscal years. We believe the binomial pricing model is a more precise measure of the value of our stock options; however, the difference in the values between the two methods was not material for the options we granted.
The assumptions used in the binomial pricing model calculation for the six months ended March 31, 2008 and 2007 are disclosed in the following table:
|
|
Six Months Ended |
|
||||
|
|
2008 |
|
2007 (1) |
|
||
|
|
|
|
|
|
||
Weighted average value per option granted during the period (2) |
|
$ |
8.49 |
|
$ |
|
|
Assumptions: |
|
|
|
|
|
||
Stock price volatility |
|
51.6 |
% |
|
|
||
Risk free rate of return |
|
3.3 |
% |
|
|
||
Future forfeiture rate (3) |
|
0.0 |
% |
|
|
||
Expected term |
|
6.0 years |
|
|
|
||
(1) We did not award any stock options during the six month period ended March 31, 2007.
(2) We do not pay dividends on our common stock.
(3) The forfeiture rate is assumed to be zero based on the limited number of employees who have been awarded stock options.
2. STRATEGIC ACTIONS
Restructuring Program
We are restructuring our operations from our previous geographic structure into three major lines of business: Industrial, Commercial and Residential. This operational restructuring is part of our long-term strategic plan to reduce our cost structure, reposition our business to better serve our customers, strengthen financial controls and, as a result, position us to implement a market-based growth strategy in the future. The operational restructuring plan has consolidated administrative support functions, eliminating redundant functions that were previously performed at our 27 business units. We expect to incur pre-tax restructuring charges, including severance benefits and consulting charges, of approximately $5.0 million to $10.0 million over the course of the restructuring process, which will be substantially complete by September 30, 2008.
The first component of our restructuring program was initiated in June 2007. Under this portion of the planned restructuring, 5 of our business units were integrated under the IES Industrial division, and the support and administrative functions of those businesses were combined at an operating location in Houston, Texas. In connection with this realignment, we approved a transition and severance benefits program for 12 employees who were separated from the Company on or before February 29, 2008 through the elimination of redundant positions. During the six months ended March 31, 2008, we have recognized approximately $0.2 million in severance charges for the value of cash compensation and payroll taxes that will be paid out through August 2008 in the form of salary continuation. Since the inception of this program, we have recorded $0.4 million in severance charges at our Industrial segment. These charges have been included in the caption restructuring charges in the consolidated statement of operations, and we have a remaining liability of $0.1 million included in accounts payable and accrued expenses.
The second component of our restructuring program was initiated in September 2007. Under this portion of the restructuring, 17 of our business units were integrated under the IES Commercial division, and the support and administrative functions of those businesses were combined at an operating location in Tempe, Arizona. In connection with this realignment, we approved a transition
11
and severance benefits plan for approximately 100 employees who have been or will be separated through the elimination of redundant positions. The affected employees will continue to work for the Company for up to six months. During the six months ended March 31, 2008, we recognized approximately $1.4 million in severance charges for cash compensation and payroll taxes that will be paid out through December 2008 in the form of salary continuation. Since the inception of this program, we have recorded $1.5 million in severance charges at our Commercial segment. These charges have been included in the caption restructuring charges in the consolidated statement of operations, and we have a remaining liability of $0.8 million included in accounts payable and accrued expenses. We expect to recognize an additional $0.1 million in severance liabilities for the value of cash compensation for Commercial employees who have already been included in the transition and severance program, which we expect to incur in our 2008 fiscal year. We also expect to incur approximately $1.0 million in severance charges for Commercial employees who have yet to be included in the transition and severance program. These charges would be recorded over the next six months.
The third component of our restructuring program was also initiated in September 2007. Under this portion of the restructuring, 5 of our business units were integrated under the IES Residential division during our 2008 fiscal year, and the support and administrative functions of those businesses has been combined at an operating location near Houston, Texas. In connection with this realignment, we approved a transition and severance benefits plan for approximately 20 employees who have been separated through the elimination of redundant positions. During the six months ended March 31, 2008, we recognized approximately $0.2 million in severance liabilities for cash compensation and payroll taxes. These charges have been included in the caption restructuring charges in the consolidated statement of operations, and we have a remaining liability of $0.1 million included in accounts payable and accrued expenses. During the remaining six months of our 2008 fiscal year, we expect to recognize less than $15,000 in severance liabilities for the value of cash compensation for employees who have already been included in the Residential transition and severance program.
In addition to the severance costs described above, we incurred charges of approximately $0.8 million and $1.5 million, respectively, for consulting services associated with our restructuring program during the three months and six months ended March 31, 2008. We also wrote off $0.1 million in the current quarter of leasehold improvements at a location we closed. Since we began the program in June 2007, we have recorded a total of $4.2 million of restructuring charges.
The following table summarizes the activities related to our restructuring activities by component (in thousands):
|
|
Severance |
|
Consulting / |
|
Total |
|
|||
Restructuring liability at September 30, 2007 |
|
$ |
208 |
|
$ |
180 |
|
$ |
388 |
|
Restructuring charges incurred during the six months ended March 31, 2008 |
|
1,768 |
|
1,625 |
|
3,393 |
|
|||
Less - cash payments during the six months ended March 31, 2008 |
|
(969 |
) |
(1,029 |
) |
(1,998 |
) |
|||
Less - non-cash expenses / write-offs |
|
|
|
(131 |
) |
(131 |
) |
|||
Restructuring liability at March 31, 2008 |
|
$ |
1,007 |
|
$ |
645 |
|
$ |
1,652 |
|
Exit or Disposal Activities
In March 2006, based on the recommendation of our Board of Directors, we committed to an exit plan with respect to certain underperforming subsidiaries in our Commercial and Industrial segments. The exit plan committed to a shut-down or consolidation of the operations of these subsidiaries or the sale or other disposition of the subsidiaries, whichever came sooner. In our assessment of the estimated net realizable value of the accounts receivable at these subsidiaries, we increased our general allowance for doubtful accounts having considered various factors including the risk of collection and the age of the receivables.
In June 2007, we shut down our Mid-States Electric operating company, located in Jackson, Tennessee. Mid-States operating equipment was either transferred to other IES companies or sold to third parties. All project work was completed prior to the subsidiary being closed, and legacy projects were completed by other IES companies. Mid-States assets, liabilities and operating results for both the current and prior periods have been reclassified to discontinued operations. Mid-States was part of our Commercial segment prior to being classified as discontinued.
Remaining net working capital related to these subsidiaries was $0.8 million and $4.3 million at March 31, 2008 and September 30, 2007, respectively. As a result of inherent uncertainty in the exit plan and the monetization of these subsidiaries working capital, we could experience additional losses of working capital. At March 31, 2008, we believe we have recorded adequate reserves to reflect the net realizable value of the working capital; however, subsequent events may impact our ability to collect these receivables.
12
The exit plan is substantially complete for the subsidiaries that we selected to exit in March 2006, and the operations of these subsidiaries substantially ceased as of September 30, 2006. Mid-States operations were shut down as of June 30, 2007. We have included the results of operations related to these subsidiaries in discontinued operations for the three months and six months ended March 31, 2008, and all prior periods presented have been reclassified accordingly.
Summarized financial data for all discontinued operations are outlined below (in thousands):
|
|
Three Months Ended |
|
||||
|
|
2008 |
|
2007 |
|
||
|
|
|
|
|
|
||
Revenues |
|
$ |
38 |
|
$ |
2,806 |
|
Gross loss |
|
$ |
(50 |
) |
$ |
(51 |
) |
Pre-tax loss |
|
$ |
(110 |
) |
$ |
(126 |
) |
|
|
Six Months Ended |
|
||||
|
|
2008 |
|
2007 |
|
||
|
|
|
|
|
|
||
Revenues |
|
$ |
933 |
|
$ |
6,225 |
|
Gross profit (loss) |
|
$ |
396 |
|
$ |
(1,648 |
) |
Pre-tax income (loss) |
|
$ |
338 |
|
$ |
(2,174 |
) |
|
|
March 31, |
|
September 30, |
|
||
Accounts receivable, net |
|
$ |
1,583 |
|
$ |
6,184 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
15 |
|
8 |
|
||
Property and equipment, net |
|
211 |
|
239 |
|
||
Total assets |
|
$ |
1,809 |
|
$ |
6,431 |
|
|
|
|
|
|
|
||
Accounts payable |
|
$ |
201 |
|
$ |
600 |
|
Accrued liabilities |
|
477 |
|
522 |
|
||
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
169 |
|
798 |
|
||
Total liabilities |
|
847 |
|
1,920 |
|
||
Net assets |
|
$ |
962 |
|
$ |
4,511 |
|
3. DEBT AND LIQUIDITY
Debt consists of the following (in thousands):
|
|
March 31, |
|
September 30, |
|
||
Term Loan, due May 15, 2013, bearing interest at 11.0% |
|
$ |
25,000 |
|
$ |
|
|
Term Loan, due May 12, 2013, bearing interest at an adjusted rate of 10.75% |
|
|
|
45,598 |
|
||
Capital lease and other |
|
309 |
|
178 |
|
||
Total debt |
|
25,309 |
|
45,776 |
|
||
Less Short-term debt and current maturities of long-term debt |
|
(173 |
) |
(78 |
) |
||
Total long-term debt |
|
$ |
25,136 |
|
$ |
45,698 |
|
Future payments on debt at March 31, 2008 are as follows (in thousands):
2008 |
|
$ |
81 |
|
2009 |
|
131 |
|
|
2010 |
|
89 |
|
|
2011 |
|
8 |
|
|
2012 |
|
|
|
|
Thereafter |
|
25,000 |
|
|
Total |
|
$ |
25,309 |
|
For the three months ended March 31, 2008 and 2007, we incurred interest expense of $1.9 million and $2.5 million, respectively. This included amortization of deferred financing charges of $0.7 million and $0.3 million. For the six months ended March 31, 2008
13
and 2007, we incurred interest expense of $6.2 million and $5.1 million, respectively. This included deferred financing changes of $1.4 million and $0.5 million, and a prepayment penalty of $2.1 million during December 2007.
The Revolving Credit Facility
On the date we emerged from bankruptcy, May 12, 2006, we entered into an agreement (the Loan and Security Agreement) for a revolving credit facility (the Revolving Credit Facility) with Bank of America and certain other lenders. On May 9, 2008 we renegotiated the terms of our Revolving Credit Facility and entered into an amended agreement with the same financial institutions. The terms of the amended agreement are described later in this section.
As of, and for the six month period ended March 31, 2008, the Revolving Credit Facility provided access to revolving borrowings in the aggregate amount of up to $80.0 million, with a $72.0 million sub-limit for letters of credit, for the purpose of refinancing the debtor-in-possession credit facility and to provide letters of credit and financing subsequent to confirmation of the reorganization plan. At March 31, 2008, we had $35.7 million available under the Revolving Credit Facility and $37.7 million in letters of credit issued against the Revolving Credit Facility. We have remaining availability under the Revolving Credit Facility of $34.3 million for letters of credit.
As of, and for the six month period ended March 31, 2008, loans under the Revolving Credit Facility bore interest at LIBOR plus 3.5% or the base rate plus 1.5% on the terms set in the credit agreement. In addition, we were charged monthly in arrears (1) an unused line fee of either 0.5% or 0.375%, depending on the utilization of the credit line, (2) a letter of credit fee equal to the applicable per annum LIBOR margin times the amount of all outstanding letters of credit, and (3) certain other fees and charges as specified in the revolving credit agreement.
The Revolving Credit Facility is guaranteed by our subsidiaries and secured by first priority liens on substantially all of our and our subsidiaries existing and future acquired assets, exclusive of collateral provided to sureties. The Revolving Credit Facility contains customary affirmative, negative and financial covenants that were modified in conjunction with its renewal and amendment on May 9, 2008. The financial covenants are described below in the section titled Financial Covenants. The Revolving Credit Facility also restricts us from paying cash dividends and places limitations on our ability to repurchase our common stock.
On December 12, 2007, we entered into an amendment to the Loan and Security Agreement. The amendment allowed for the exclusion from the calculation of fixed charges, in determining the fixed charge coverage ratio, of certain capital investments made in September 2007 by us as part of our transformation program to implement operational improvements. The amendment also permitted us to pay off our existing term loan and enter into a new subordinated note agreement for a reduced principal amount. This transaction is more fully described later in this Note. Finally, the amendment allowed us to implement a stock repurchase program for up to one million shares of our common stock over the following 24 months (see Note 6). We incurred a $0.5 million charge from Bank of America as a result of this amendment that was capitalized as a deferred financing fee.
On May 9, 2008 we renegotiated the terms of our Revolving Credit Facility, extending the maturity date to May 12, 2010, reducing the facility size to $60.0 million, and eliminating the restricted cash requirement. Interest on the loans under the amended Revolving Credit Facility will be calculated at LIBOR plus 3.0% or the lenders prime rate (the Base Rate) plus 1.0% through September 30, 2008. Thereafter, interest is based on our total liquidity, as defined in the Loan and Security Agreement, at LIBOR or the Base Rate, as shown in the following table.
Total Liquidity |
|
Interest Rate |
Greater than $60 million |
|
LIBOR plus 2.75% or Base Rate plus 0.75% |
From $40 million to $60 million |
|
LIBOR plus 3.00% or Base Rate plus 1.00% |
Less than $40 million |
|
LIBOR plus 3.25% or Base Rate plus 1.25% |
The letter of credit fee under the revised agreement will be 3.25% through September 30, 2008, after which the letter of credit fee will be based on the same factor as loans outstanding.
In addition, we will be charged monthly in arrears (1) an unused line fee of either 0.5% or 0.375%, depending on the utilization of the credit line, and (2) certain other fees and charges as specified in the revolving credit agreement. Finally, the Revolving Credit Facility is subject to a prepayment fee of 0.5% until May 2009 and 0.25% until May 2010.
14
The Eton Park / Flagg Street Term Loan
Immediately preceding our emergence from bankruptcy, we had $51.9 million in senior convertible notes (the Senior Convertible Notes). On the date we emerged from bankruptcy, May 12, 2006, we entered into a $53.0 million senior secured term loan (the Eton Park Term Loan) with Eton Park Fund L.P. and its affiliate and Flagg Street Partners LP and certain of its affiliates to refinance the Senior Convertible Notes. On December 12, 2007, we repaid the Eton Park Term Loan using cash on hand and the proceeds from a new senior subordinated note. Along with a prepayment penalty of $2.1 million that was included in interest expense and accrued interest of $1.0 million, the payoff amount was $48.7 million. Finally, we wrote off previously unamortized debt issuance costs of $0.3 million on the Eton Park Term Loan.
The Eton Park Term Loan bore interest at 10.75% per annum, subject to adjustment as set forth in the loan agreement governing the Eton Park Term Loan, and was to mature on May 12, 2013. Interest was payable in cash, quarterly in arrears, provided that, at our sole discretion, until the third anniversary of the closing date, we had the option to direct that interest be paid by capitalizing the interest as additional loans under the Eton Park Term Loan. We capitalized interest as additional loans of $1.7 million and $3.5 million, respectively, during the three months and six months ended March 31, 2007. We did not capitalize any interest expense during the period from October 1, 2007 to December 12, 2007, the date the Eton Park Term Loan was repaid. Through the life of the Eton Park Term Loan, we capitalized interest as additional loans of $7.6 million. The Eton Park Term Loan was guaranteed by our subsidiaries and was secured by substantially the same collateral as the Revolving Credit Facility, and was second in priority to the liens securing the Revolving Credit Facility. The interest rate on the Eton Park Term Loan was adjusted at the end of each quarter based on our performance for the period from January 1, 2006 through the end of the quarter. Based on this criterion, the adjusted interest rate on the Eton Park Term Loan was as follows:
Quarter ended / Period ended: |
|
Interest Rate |
|
December 31, 2006 |
|
12.60 |
% |
March 31, 2007 |
|
12.00 |
% |
June 30, 2007 |
|
11.55 |
% |
September 30, 2007 |
|
10.75 |
% |
December 12, 2007 |
|
10.75 |
% |
Our weighted average interest rate under the Eton Park Term Loan was 10.75% for the period from October 1, 2007 to December 12, 2007.
The Tontine Capital Partners 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. The proceeds of the subordinated note (the Note), together with cash on hand, were used to fund the repayment of the Eton Park Term Loan (discussed in the preceding section).
The Note bears interest at 11.0% per annum and is due on May 15, 2013. Interest is payable quarterly, beginning on December 31, 2007, in cash or in-kind at our option. Any interest paid in-kind will bear interest at the same rate (11.0%) as the Note. The Note may be repaid at any time prior to the maturity date by us at par plus accrued interest without penalty. The Note is subordinated to our existing Revolving Credit Facility. The Note is an unsecured obligation of the Company and its subsidiary borrowers. The Note contains no financial covenants or restrictions on dividends or distributions to stockholders.
Financial Covenants
The financial covenants for the Revolving Credit Facility in effect on March 31, 2008 are described in the table that follows. As discussed above, on December 12, 2007, we entered into an amendment to the Loan and Security Agreement. In determining the fixed charge coverage ratio, the amendment allowed for the exclusion from the calculation of fixed charges of certain capital investments we made in September 2007 as part of our transformation program to implement operational improvements. As of March 31, 2008, we are in compliance with all of the amended financial covenants under the Revolving Credit Facility, which are shown in the following table:
15
Covenant |
|
Requirement |
|
Actual as of |
|
Shutdown Subsidiaries Earnings Before Interest and Taxes |
|
Cumulative loss not to exceed $2.0 million |
|
$1.0 million |
|
Fixed Charge Coverage Ratio |
|
Minimum of 1.25:1.00 |
|
1.52:1.00 |
|
Leverage Ratio |
|
Maximum of 4.00:1.00 |
|
2.09:1.00 |
|
Maintain Cash Collateral |
|
Minimum of $20.0 million |
|
$20.0 million |
|
As of September 30, 2007, we were also in compliance with all of our amended financial covenants under the Revolving Credit Facility.
As noted above, we entered into an amendment to the agreement governing our Revolving Credit Facility on May 9, 2008 which also modified the financial covenants. The revised covenants are indicated below.
Covenant |
|
Requirement |
Shutdown Subsidiaries Earnings Before Interest and Taxes |
|
Cumulative loss not to exceed $2.0 million |
Fixed Charge Coverage Ratio (1) |
|
Minimum of 1.25:1.00 |
Leverage Ratio (1) |
|
Maximum of 3.50:1.00 |
(1) |
This covenant requirement will not be in effect at any time our total liquidity, as defined in the Loan and Security Agreement, exceeds $50 million. |
4. EARNINGS PER SHARE
In conjunction with the reorganization plan, effective May 12, 2006, our common stock underwent a reverse split which converted 17.0928 shares of old common stock into the right to receive one share of new common stock. In accordance with FASB Statement No. 128, Earnings per Share, the computations of basic and diluted earnings per share have been adjusted retroactively for all periods presented to reflect that change in capital structure.
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 as required by Emerging Issues Task Force Issue No. 03-6, Participating Securities and the Two-class method under FASB Statement No. 128. The two-class method 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 months and six months ended March 31, 2008 and 2007 (in thousands, except per share and per share data):
|
|
Three Months Ended |
|
||||
|
|
2008 |
|
2007 |
|
||
Numerator: |
|
|
|
|
|
||
Net income (loss) from continuing operations attributable to common shareholders |
|
$ |
91 |
|
$ |
(880 |
) |
Net income (loss) from continuing operations attributable to restricted shareholders |
|
2 |
|
|
|
||
Net income (loss) from continuing operations |
|
$ |
93 |
|
$ |
(880 |
) |
16
Net income (loss) from discontinued operations attributable to common shareholders |
|
$ |
(54 |
) |
$ |
138 |
|
Net income (loss) from discontinued operations attributable to restricted shareholders |
|
|
|
2 |
|
||
Net income (loss) from discontinued operations |
|
$ |
(54 |
) |
$ |
140 |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
$ |
38 |
|
$ |
(740 |
) |
Net income (loss) attributable to restricted shareholders |
|
1 |
|
|
|
||
Net income (loss) |
|
$ |
39 |
|
$ |
(740 |
) |
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
||
Weighted average common shares outstanding basic |
|
15,015,717 |
|
15,081,537 |
|
||
Effect of dilutive stock options and non-vested restricted stock |
|
5,803 |
|
|
|
||
Weighted average common and common equivalent shares outstanding diluted |
|
15,021,520 |
|
15,081,537 |
|
||
|
|
|
|
|
|
||
Basic income (loss) per share: |
|
|
|
|
|
||
Basic income (loss) per share from continuing operations |
|
$ |
0.01 |
|
$ |
(0.06 |
) |
Basic income (loss) per share from discontinued operations |
|
$ |
(0.00 |
) |
$ |
0.01 |
|
Basic loss per share |
|
$ |
0.00 |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
||
Diluted income (loss) per share: |
|
|
|
|
|
||
Diluted income (loss) per share from continuing operations |
|
$ |
0.01 |
|
$ |
(0.06 |
) |
Diluted income (loss) per share from discontinued operations |
|
$ |
(0.00 |
) |
$ |
0.01 |
|
Diluted loss per share |
|
$ |
0.00 |
|
$ |
(0.05 |
) |
|
|
Six Months Ended |
|
||||
|
|
2008 |
|
2007 |
|
||
Numerator: |
|
|
|
|
|
||
Net loss from continuing operations attributable to common shareholders |
|
$ |
(935 |
) |
$ |
(501 |
) |
Net loss from continuing operations attributable to restricted shareholders |
|
|
|
|
|
||
Net loss from continuing operations |
|
$ |
(935 |
) |
$ |
(501 |
) |
|
|
|
|
|
|
||
Net income (loss) from discontinued operations attributable to common shareholders |
|
$ |
174 |
|
$ |
(1,038 |
) |
Net income (loss) from discontinued operations attributable to restricted shareholders |
|
3 |
|
|
|
||
Net income (loss) from discontinued operations |
|
$ |
177 |
|
$ |
(1,038 |
) |
|
|
|
|
|
|
||
Net loss attributable to common shareholders |
|
$ |
(758 |
) |
$ |
(1,539 |
) |
Net loss attributable to restricted shareholders |
|
|
|
|
|
||
Net loss |
|
$ |
(758 |
) |
$ |
(1,539 |
) |
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
||
Weighted average common shares outstanding basic |
|
15,054,431 |
|
15,040,375 |
|
||
Effect of dilutive stock options and non-vested restricted stock |
|
|
|
|
|
||
Weighted average common and common equivalent shares outstanding diluted |
|
15,054,431 |
|
15,040,375 |
|
||
|
|
|
|
|
|
||
Basic income (loss) per share: |
|
|
|
|
|
||
Basic income (loss) per share from continuing operations |
|
$ |
(0.06 |
) |
$ |
(0.03 |
) |
Basic income (loss) per share from discontinued operations |
|
$ |
0.01 |
|
$ |
(0.07 |
) |
Basic loss per share |
|
$ |
(0.05 |
) |
$ |
(0.10 |
) |
|
|
|
|
|
|
||
Diluted income (loss) per share: |
|
|
|
|
|
||
Diluted income (loss) per share from continuing operations |
|
$ |
(0.06 |
) |
$ |
(0.03 |
) |
Diluted income (loss) per share from discontinued operations |
|
$ |
0.01 |
|
$ |
(0.07 |
) |
Diluted loss per share |
|
$ |
(0.05 |
) |
$ |
(0.10 |
) |
5. OPERATING SEGMENTS
In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance.
We manage and measure performance of our business in three distinct operating segments; commercial, industrial, and residential. We also have a corporate segment that provides general and administrative services to our operating segments. The commercial
17
segment provides electrical and communications contracting, 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 plant, network enterprises and switch network customers. The industrial segment provides electrical contracting, design, installation, renovation and engineering and maintenance and replacement services in facilities such as manufacturing and distribution centers, water treatment facilities, refineries, petrochemical and power plants, and alternative energy facilities. In addition to these services, our industrial segment also assembles modular power distribution centers. The residential segment consists of electrical contracting, installation, replacement and renovation services in single-family, condominium, townhouse and low-rise multifamily housing units. Corporate includes expenses associated with our home office.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies, see Note 5 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2007. We evaluate performance based on income from operations of the respective business units prior to home office expenses. Management allocates costs between segments for selling, general and administrative expenses, goodwill impairment, depreciation expense, capital expenditures and total assets. In our previous financial statements we managed and measured our performance in two operating segments; commercial and industrial, and residential. On October 1, 2007, in conjunction with our restructuring program described in Note 2, we began to utilize the three segment approach that we have described above. Accordingly, we have restated our prior year segment results to be consistent with the current year presentation.
Segment information for continuing operations for the three months and six months ended March 31, 2008 and 2007 is as follows (in thousands):
|
|
Three Months Ended March 31, 2008 (Unaudited) |
|
|||||||||||||
|
|
Commercial |
|
Industrial |
|
Residential |
|
Corporate |
|
Total |
|
|||||
Revenues |
|
$ |
111,491 |
|
$ |
34,688 |
|
$ |
50,320 |
|
$ |
|
|
$ |
196,499 |
|
Cost of services |
|
95,542 |
|
29,933 |
|
40,255 |
|
|
|
165,730 |
|
|||||
Gross profit |
|
15,949 |
|
4,755 |
|
10,065 |
|
|
|
30,769 |
|
|||||
Selling, general and administrative |
|
9,646 |
|
1,903 |
|
8,183 |
|
7,942 |
|
27,674 |
|
|||||
Loss (gain) on sale of assets |
|
(103 |
) |
|
|
61 |
|
35 |
|
(7 |
) |
|||||
Restructuring charge |
|
1,873 |
|
136 |
|
89 |
|
|
|
2,098 |
|
|||||
Income (loss) from operations |
|
$ |
4,533 |
|
$ |
2,716 |
|
$ |
1,732 |
|
$ |
(7,977 |
) |
$ |
1,004 |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Depreciation and amortization expense |
|
$ |
796 |
|
$ |
327 |
|
$ |
645 |
|
$ |
605 |
|
$ |
2,373 |
|
Capital expenditures |
|
$ |
106 |
|
$ |
474 |
|
$ |
212 |
|
$ |
637 |
|
$ |
1,429 |
|
Total assets |
|
$ |
131,382 |
|
$ |
34,288 |
|
$ |
64,094 |
|
$ |
86,272 |
|
$ |
316,036 |
|
|
|
Three Months Ended March 31, 2007 (Unaudited) |
|
|||||||||||||
|
|
Commercial |
|
Industrial |
|
Residential |
|
Corporate |
|
Total |
|
|||||
Revenues |
|
$ |
113,819 |
|
$ |
27,607 |
|
$ |
73,675 |
|
$ |
|
|
$ |
215,101 |
|
Cost of services |
|
97,437 |
|
22,937 |
|
59,158 |
|
|
|
179,532 |
|
|||||
Gross profit |
|
16,382 |
|
4,670 |
|
14,517 |
|
|
|
35,569 |
|
|||||
Selling, general and administrative |
|
13,268 |
|
2,070 |
|
7,678 |
|
12,294 |
|
35,310 |
|
|||||
Loss (gain) on sale of assets |
|
(42 |
) |
(11 |
) |
30 |
|
58 |
|
35 |
|
|||||
Income (loss) from operations |
|
$ |
3,156 |
|
$ |
2,611 |
|
$ |
6,809 |
|
$ |
(12,352 |
) |
$ |
224 |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Depreciation and amortization expense |
|
$ |
1,236 |
|
$ |
151 |
|
$ |
252 |
|
$ |
967 |
|
$ |
2,606 |
|
Capital expenditures |
|
$ |
25 |
|
$ |
194 |
|
$ |
64 |
|
$ |
62 |
|
$ |
345 |
|
Total assets |
|
$ |
111,166 |
|
$ |
31,840 |
|
$ |
63,469 |
|
$ |
145,603 |
|
$ |
352,078 |
|
18
|
|
Six Months Ended March 31, 2008 (Unaudited) |
|
|||||||||||||
|
|
Commercial |
|
Industrial |
|
Residential |
|
Corporate |
|
Total |
|
|||||
Revenues |
|
$ |
221,172 |
|
$ |
67,686 |
|
$ |
105,614 |
|
$ |
|
|
$ |
394,472 |
|
Cost of services |
|
188,965 |
|
57,099 |
|
84,646 |
|
|
|
330,710 |
|
|||||
Gross profit |
|
32,207 |
|
10,587 |
|
20,968 |
|
|
|
63,762 |
|
|||||
Selling, general and administrative |
|
20,597 |
|
4,533 |
|
16,712 |
|
16,389 |
|
58,231 |
|
|||||
Loss (gain) on sale of assets |
|
(120 |
) |
|
|
61 |
|
35 |
|
(24 |
) |
|||||
Restructuring charge |
|
3,025 |
|
227 |
|
141 |
|
|
|
3,393 |
|
|||||
Income (loss) from operations |
|
$ |
8,705 |
|
$ |
5,827 |
|
$ |
4,054 |
|
$ |
(16,424 |
) |
$ |
2,162 |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Depreciation and amortization expense |
|
$ |
1,359 |
|
$ |
615 |
|
$ |
1,333 |
|
$ |
1,279 |
|
$ |
4,586 |
|
Capital expenditures |
|
$ |
170 |
|
$ |
534 |
|
$ |
284 |
|
$ |
3,506 |
|
$ |
4,494 |
|
|
|
Six Months Ended March 31, 2007 (Unaudited) |
|
|||||||||||||
|
|
Commercial |
|
Industrial |
|
Residential |
|
Corporate |
|
Total |
|
|||||
Revenues |
|
$ |
226,304 |
|
$ |
57,837 |
|
$ |
159,205 |
|
$ |
|
|
$ |
443,346 |
|
Cost of services |
|
191,559 |
|
48,861 |
|
129,227 |
|
|
|
369,647 |
|
|||||
Gross profit |
|
34,745 |
|
8,976 |
|
29,978 |
|
|
|
73,699 |
|
|||||
Selling, general and administrative |
|
24,460 |
|
4,350 |
|
17,848 |
|
24,004 |
|
70,662 |
|
|||||
Loss (gain) on sale of assets |
|
(83 |
) |
(28 |
) |
27 |
|
58 |
|
(26 |
) |
|||||
Income (loss) from operations |
|
$ |
10,368 |
|
$ |
4,654 |
|
$ |
12,103 |
|
$ |
(24,062 |
) |
$ |
3,063 |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Depreciation and amortization expense |
|
$ |
1,943 |
|
$ |
308 |
|
$ |
509 |
|
$ |
2,247 |
|
$ |
5,007 |
|
Capital expenditures |
|
$ |
316 |
|
$ |
267 |
|
$ |
246 |
|
$ |
77 |
|
$ |
906 |
|
We have no operations or long-lived assets in countries outside of the United States.
Total assets as of March 31, 2008 and 2007 exclude assets from discontinued operations of $1.8 million and $12.7 million, respectively.
6. STOCKHOLDERS EQUITY
The 2006 Equity Incentive Plan (the 2006 Plan) became effective under our plan of reorganization on May 12, 2006. The 2006 Plan, as amended, provides for grants of both stock options and common stock, including restricted stock and performance-based restricted stock. We have approximately 1.5 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 plan is authorized through December 2009, and as of March 31, 2008, we have repurchased 156,161 shares at an average cost of $18.09. During the six months ended March 31, 2008, we repurchased 31,212 shares from our employees to satisfy tax withholding requirements upon the vesting of restricted stock issued under the Amended and Restated 2006 Equity Incentive Plan, we issued 101,650 shares of treasury stock under our share-based compensation programs, and 39,289 unvested shares have been forfeited by former employees and returned to treasury stock.
Restricted Stock
We granted 101,650 shares of restricted stock to our employees during the first six months of our 2008 fiscal year. These restricted shares were granted at prices ranging from $13.38 to $19.98 with a weighted average price of $19.17. 7,500 of these shares vest one-third per year beginning on the first anniversary of the grant, and the remaining 94,150 cliff vest on the third anniversary of the grant.
We granted 3,600 shares of restricted stock to one employee during the first six months of our 2007 fiscal year that were subsequently forfeited in October 2007. These restricted shares were granted at $23.61 and were to vest one-third per year beginning on the first anniversary of the grant.
During the three months ended March 31, 2008 and 2007, we recognized $0.7 million and $0.7 million, respectively, in compensation expense related to these awards. During the six months ended March 31, 2008 and 2007, we recognized $1.4 million and $2.5 million,
respectively, in compensation expense related to these awards. As of March 31, 2008, the unamortized compensation cost related to
19
outstanding unvested restricted stock was $3.0 million. We expect to recognize $1.2 million related to these awards during the remaining six months of our 2008 fiscal year, and $1.8 million thereafter.
All the restricted shares granted under the 2006 Plan (vested or unvested) participate in dividends issued to common shareholders, if any.
Performance-Based Restricted Stock
During the six months ended March 31, 2008, we granted 15 members of our senior management team performance-based phantom stock units (PSUs). Each PSU is convertible into shares of restricted common stock that will cliff vest on September 30, 2010, subject to the terms of the award. The size of the award is based on the Company achieving cumulative fully diluted earnings per share of $2.30 over the course of our 2008 and 2009 fiscal years. The potential range of this award is between 0 and 188,300 shares of restricted stock, depending on the actual cumulative earnings per share for this period.
At the time the awards were granted, we forecasted that we will ultimately issue 94,150 restricted shares, and we have based our compensation expense on this amount. The awards vest over three years and are being amortized in a straight-line manner throughout that period. As of March 31, 2008, we believe our target estimate is reasonable; however, any deviation in the cumulative fully diluted earnings per share that we achieve during our 2008 and 2009 fiscal years will result in a change in the actual amount of stock based compensation that we recognize over the vesting period. Under SFAS 123(R), the estimated fair value of these PSUs on the date of grant was $1.5 million.
During the three months and six months ended March 31, 2008, we recognized $0.1 million and $0.2 million, respectively, in compensation expense related to these PSU awards. As of March 31, 2008, the unamortized compensation cost related to the PSU awards was $1.3 million. We expect to recognize $0.3 million related to these awards during the remaining six months of our 2008 fiscal year, and $1.0 million thereafter.
Stock Options
We granted 21,000 stock options during the first six months of our 2008 fiscal year. These options have exercise prices ranging from $13.38 to $18.79 with a weighted average exercise price of $16.21. These options vest over a three year period at a rate of one-third on the annual anniversary date of the grant and expire ten years from the grant date if they are not exercised.
We did not grant any stock options during the first six months of our 2007 fiscal year.
During the three months ended March 31, 2008 and 2007, we recognized $0.1 million and $0.1 million, respectively, in compensation expense related to these awards. During the six months ended March 31, 2008 and 2007, we recognized $0.2 million and $0.2 million, respectively, in compensation expense related to these awards. As of March 31, 2008, the unamortized compensation cost related to outstanding unvested stock options was $0.9 million. We expect to recognize $0.3 million related to these awards during the remaining six months of our 2008 fiscal year, and $0.6 million thereafter.
The following table summarizes activity under our stock option and incentive compensation plans.
|
|
Shares |
|
Weighted Average |
|
|
Outstanding, September 30, 2007 |
|
191,471 |
|
$ |
26.66 |
|
Options granted |
|
21,000 |
|
16.21 |
|
|
Exercised |
|
|
|
|
|
|
Forfeited |
|
5,000 |
|
13.38 |
|
|
Outstanding, March 31, 2008 |
|
207,471 |
|
$ |
25.92 |
|
Exercisable, March 31, 2008 |
|
84,804 |
|
$ |
33.75 |
|
20
The following table summarizes all options outstanding and exercisable at March 31, 2008:
Range of Exercise Prices |
|
Outstanding as of |
|
Remaining |
|
Weighted-Average |
|
Exercisable as of |
|
Weighted-Average |
|
||
$13.38 - $18.79 |
|
116,000 |
|
8.5 |
|
$ |
17.32 |
|
33,333 |
|
$ |
17.36 |
|
$25.08 - $33.55 |
|
40,000 |
|
9.1 |
|
27.15 |
|
|
|
|
|
||
$34.50 - $57.50 |
|
51,471 |
|
0.1 |
|
44.36 |
|
51,471 |
|
44.36 |
|
||
|
|
207,471 |
|
6.5 |
|
$ |
25.92 |
|
84,804 |
|
$ |
33.75 |
|
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 May 2008 and January 2018.
7. COMMITMENTS AND CONTINGENCIES
Legal Matters
In the construction business there are frequently claims and litigation. Latent defect litigation is a normal course for residential home builders in some parts of the country and it appears that such litigation will continue and expand into other parts of the country. There is also the inherent claims and litigation risk of the number of people that work on construction sites and the fleet of vehicles on the road everyday. Those claims and litigation risks are managed through safety programs, insurance programs, litigation management at the corporate office and the local level and a network of attorneys and law firms throughout the country. Nevertheless, claims are sometimes made and lawsuits filed and sometimes for amounts in excess of their value or amounts for which they are eventually resolved. Claims and litigation normally follow a predictable course of time to resolution. Given our size, with many contracts and employees, there can be periods of time where a disproportionate amount of the claims and litigation may be concluded all in the same quarter, or year. If these matters resolve near the same time then the cumulative effect can be higher than the ordinary level in any one reporting period. In our opinion, all such proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability which would have a material adverse effect on our financial position, liquidity or results of operations. We expense routine legal costs related to proceedings as incurred.
We are not aware of any litigation or pending litigation that we currently believe will have a material impact on our results of operations or our financial position.
We are subject to large deductibles on our property and casualty insurance policies. As a result, many or our claims are effectively self-insured. Many claims against our insurance are in the form of litigation. At March 31, 2008, we have $12.1 million accrued for self insurance liabilities including $4.3 million for general liability coverage losses. For those legal proceedings not expected to be covered by insurance, we have accrued $0.1 million at March 31, 2008.
Surety
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 our 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 significant expenses to indemnify our sureties for expenses they incurred on our behalf. As of March 31, 2008, our cost to complete projects covered by surety bonds was $118.7 million, and we utilized a combination of cash and letters of credit totaling $34.1 million to collateralize our bonding programs. At March 31, 2008, that collateral was comprised of $22.5 million in letters of credit and $11.6 million of cash and accumulated interest which is included in Other Non-Current Assets.
We obtain our surety bonds from three different providers. As is common in the surety industry, there is no commitment from these providers to guarantee our ability to issue bonds for projects as they are required. We believe that our relationships with these providers will allow us to provide surety bonds if and when they are required, however we cannot guarantee that such bonds will be available. If surety bonds are not provided, there are situations in which claims or damages may result. Those situations occur when surety bonds are required for jobs that have been awarded, contracts are signed, work has begun or bonds may be required in the future by the customer according to terms of the contracts. If our subsidiaries are in one of those situations and not able to obtain a surety bond then the result can be a claim for damages by the customer for the costs of replacing the subsidiary with another
21
contractor. Customers are often reluctant to replace an existing contractor and may be willing to waive the contractual right or through negotiation be willing to continue the work on different payment terms. We evaluate our bonding requirements on a regular basis, including the terms and coverage offered by each provider. We believe we presently have adequate surety coverage.
Surety bond companies may also provide surety bonds at a cost including (i) payment of a premium plus (ii) posting cash or letters of credit as collateral. The cost of cash collateral or letters of credit in addition to the selling, general and administrative costs and the industry practice of the customer retaining a percentage of the contract (5% - 10%) amount as retention until the end of the job, could make certain bonded projects uneconomic to perform.
Under the current terms of our primary surety agreement, we may have up to $150.0 million in costs to complete on bonded projects at any time. We maintain $9.0 million in cash collateral plus accrued interest, as well as $21.0 million in letters of credit under the agreement. The bond premium is $15.00 per thousand dollars of contract cost.
Other Commitments and Contingencies
Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral. This is common in the insurance industry. To date, we have not had a situation where an underwriter has had reasonable cause to effect payment under a letter of credit. At March 31, 2008, $14.7 million of our outstanding letters of credit were utilized to collateralize our insurance program.
We sold all or substantially all of the assets of certain wholly owned subsidiaries. Those 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 those assets is a previous owner of those assets. That previous owner may still be associated with the subsidiary as an officer of that subsidiary. To facilitate the desired timing, the sales were being made with more than ordinary reliance on the representations of the purchaser who is, in those cases, often the person most familiar with the business sold. There is the potential from selling assets net of liabilities, but retaining the entities from which they were sold, that if the purchaser is unwilling or unable to perform the transferred liabilities, we may be forced to fulfill obligations that were assigned or sold to others. If this were to occur, we would seek reimbursement from the purchasers. These potential liabilities will continue to diminish over time. To date, we have not been required to perform any projects sold under this divestiture program.
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 specific intervals at a fixed price over the term. As of March 31, 2008, we had $5.6 million in open purchase commitments for 1.7 million pounds of copper wire which we expect to take delivery on between April 2008 and June 2008.
As of March 31, 2008, one of our subsidiaries has received approximately $4.9 million in backcharges from a customer which we are disputing. We have performed an evaluation of the merits of the backcharges and, as a result, recorded $0.4 million as a loss reserve, included in current liabilities, specifically related to these backcharges. The remaining claim associated with the backcharges is approximately $4.5 million for which we have not recorded any liability as we do not believe in the validity of the claims and believe payment is not probable. In 2006 we reversed previously recognized revenues related to this project of $0.5 million and wrote off a related $0.4 million receivable and $0.1 million underbilling because we believed the revenues were uncollectible. We recognize that litigation may ensue related to the entire $4.9 million in backcharges. While we believe these charges are substantially without merit, there can be no assurances that we will ultimately prevail in this dispute or any litigation that may be commenced.
In March 2008 we reached a $1.1 million settlement with a group of former employees out of which $0.4 million was recorded as a reduction against legal fees and the remainder as other income. This settlement was to compensate the Company for damages associated with these employees departure from the Company. We collected this settlement in full in March 2008.
22
We have committed to invest up to $5.0 million in EnerTech Capital Partners II L.P. (EnerTech). EnerTech is a private equity firm specializing in investment opportunities emerging from the deregulation and resulting convergence of the energy, utility and telecommunications industries. Through March 31, 2008, we had invested $4.85 million under our commitment to EnerTech.
We are party to an arrangement with a third party to finance certain insurance premiums for which that company has rights to receive a refund of amounts paid to the insurance companies should we cancel the underlying insurance policies. At March 31, 2008, we had $3.2 million in prepaid expenses and a corresponding $3.3 million accrued liability related to this arrangement.
8. SUBSEQUENT EVENTS
On May 9, 2008 we entered into an amendment to our Revolving Credit Facility with Bank of America and other creditors, extending the maturity date to May 12, 2010 and reducing the facility size to $60.0 million. Other terms and covenants of the renewed agreement are described in Note 3, Debt.
23
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations with our audited consolidated financial statements, the related Notes, and managements discussion and analysis included in our September 30, 2007 Annual Report on Form 10-K. 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 Form 10-K and in the Disclosures Regarding Forward-Looking Statements, and elsewhere in this 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 accounting principles generally accepted in the United States of America. 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, which we believe are most critical to our
reported financial status by considering accounting policies that involve the
most complex or subjective decisions or assessments. We identified our most
critical accounting policies to be those related to revenue recognition, the
assessment of goodwill impairment, our allowance for doubtful accounts receivable,
the recording of our self-insurance liabilities and estimation of the valuation
allowance for deferred tax assets. These accounting policies, as well as
others, are described in Note 5 of Notes to Consolidated
Financial Statements in our 2007
Form 10-K.
During the first six months of our 2008 fiscal year, there has been only one change to our critical accounting policies and estimates from those described in our 2007 Form 10-K. On October 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109 (FIN 48). FIN 48 created a single model to address accounting for uncertain income tax positions and established a minimum recognition threshold a tax position must meet before being recognized in the financial statements. For additional analysis of our adoption of FIN 48, see Item 1. Condensed Consolidated Financial Statements Note 1, Business of this report.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We discuss recently adopted and issued accounting standards in Item 1. Condensed Consolidated Financial Statements Note 1, Business of this report.
RESTRUCTURING PROGRAM
As more fully described in Note 2 of our condensed consolidated financial statements, we are restructuring our operations from our previous geographic structure into three major lines of business: Industrial, Commercial and Residential. This operational restructuring is part of our long-term strategic plan to reposition our business to better serve our customers, strengthen financial controls, reduce our cost structure and, as a result, position us to implement a market-based growth strategy in the future. The operational restructuring plan has consolidated administrative support functions, eliminating redundant functions that were previously performed at each of our 27 business units. We expect to incur pre-tax restructuring charges, including severance benefits and consulting charges, of approximately $5.0 million to $10.0 million over the course of the process, which is expected to be substantially complete by September 30, 2008.
The first component of our restructuring program was initiated at our Industrial division in June 2007. Under this portion of the planned restructuring, 5 of our business units were integrated under the IES Industrial division, and the support and administrative functions of those businesses were combined at one operating location. In connection with this realignment, we approved a transition and severance benefits program for 12 employees who were separated from the Company on or before February 29, 2008 through the elimination of redundant positions.
The second component of our restructuring program was initiated at our Commercial division in September 2007. Under this portion of the restructuring, 17 of our business units were integrated under the IES Commercial division, and the support and administrative functions of those businesses were combined at one operating location. In connection with this realignment, we approved a transition
24
and severance benefits program for approximately 100 employees who have been or will be separated through the elimination of redundant positions. The affected employees may continue to work for the Company for up to six months.
The third component of our restructuring program was initiated at our Residential division in September 2007. Under this portion of the restructuring, 5 of our business units were integrated under the IES Residential division during our 2008 fiscal year, and the support and administrative functions of those businesses has been combined at one operating location. In connection with this realignment, we approved a transition and severance benefits plan for approximately 20 employees who have been separated through the elimination of redundant positions.
During the first six months of our 2008 fiscal year, we have expanded our restructuring efforts in response to the softening market conditions in certain segments of our business, and for further business optimization. During the quarter ended March 31, 2008, we have:
· Reorganized the Commercial line of business into six operating divisions, replacing several operating company presidents with six general managers.
· Accelerated the rollout of our employee severance programs, particularly within our Commercial line of business.
· Closed three office locations in our Residential line of business and two office locations in our Commercial line of business, consolidating them into other IES locations.
· Hired a new Group Vice President at our Industrial line of business.
· Reassigned a Residential Vice President to focus solely on multi-family housing.
EXIT OR DISPOSAL ACTIVITIES
In March 2006, based on the recommendation of our Board of Directors, we committed to an exit plan with respect to several underperforming subsidiaries. The exit plan committed to a shut-down or consolidation of the operations of these subsidiaries, or the sale or other disposition of the subsidiaries, whichever came sooner. In June 2007, we also shut down our Mid-States Electric operating company, located in Jackson, Tennessee. Mid-States operating equipment was either transferred to other IES companies or will be sold to third parties. Further information about these closures can be obtained by referring to Note 4 in the Consolidated Financial Statements of our 2007 Form 10-K.
The exit plan is substantially complete for the subsidiaries that we elected to exit in March 2006, and the operations of these subsidiaries ceased as of September 30, 2006. Mid-States operations were shut down as of June 30, 2007. We have included the results of operations related to these subsidiaries in discontinued operations for both the current period and all prior periods. Accordingly, previously reported results of these operations have been reclassified. Revenue for these subsidiaries totaled $0.9 million and $6.2 million for the six months ended March 31, 2008 and 2007, respectively. Remaining net working capital related to these subsidiaries was $0.8 million and $4.3 million at March 31, 2008 and September 30, 2007, respectively.
FINANCING
The Revolving Credit Facility
On the date we emerged from bankruptcy, May 12, 2006, we entered into an agreement (the Loan and Security Agreement) for a revolving credit facility (the Revolving Credit Facility) with Bank of America and certain other lenders. On May 9, 2008 we entered into a revised agreement governing the Revolving Credit Facility with the same financial institutions. The terms of the revised agreement are described in Note 3, Debt.
As of, and for the six month period ended March 31, 2008, the Revolving Credit Facility provided access to revolving borrowings in the aggregate amount of up to $80.0 million, with a $72.0 million sub-limit for letters of credit, for the purpose of refinancing the debtor-in-possession credit facility and to provide letters of credit and financing subsequent to confirmation of the reorganization plan. At March 31, 2008, we had $35.7 million available under the Revolving Credit Facility and $37.7 million in letters of credit issued against the Revolving Credit Facility. We have remaining availability under the Revolving Credit Facility of $34.3 million for letters of credit.
25
As of, and for the six month period ended March 31, 2008, loans under the Revolving Credit Facility bore interest at LIBOR plus 3.5% or the base rate plus 1.5% on the terms set in the credit agreement. In addition, we were charged monthly in arrears (1) an unused line fee of either 0.5% or 0.375%, depending on the utilization of the credit line, (2) a letter of credit fee equal to the applicable per annum LIBOR margin times the amount of all outstanding letters of credit, and (3) certain other fees and charges as specified in the revolving credit agreement.
The Eton Park / Flagg Street Term Loan
Immediately preceding our emergence from bankruptcy, we had $51.9 million in senior convertible notes (the Senior Convertible Notes). On the date we emerged from bankruptcy, May 12, 2006, we entered into a $53.0 million senior secured term loan (the Eton Park Term Loan) with Eton Park Fund L.P. and its affiliate and Flagg Street Partners LP and certain of its affiliates to refinance the Senior Convertible Notes. On December 12, 2007, we repaid the Eton Park Term Loan using cash on hand and the proceeds from a new senior subordinated note. Along with a prepayment penalty of $2.1 million and accrued interest of $1.0 million, the payoff amount was $48.7 million. Finally, we wrote off previously unamortized debt issuance costs of $0.3 million on the Eton Park Term Loan.
The Tontine Capital Partners 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. The proceeds of the subordinated note (the Note), together with cash on hand, were used to fund the repayment of the Eton Park Term Loan (as previously discussed).
The Note bears interest at 11.0% per annum and is due on May 15, 2013. Interest is payable quarterly, beginning on December 31, 2007, in cash or in-kind at our option. Any interest paid in-kind will bear interest at the same rate (11.0%) as the Note. The Note may be repaid at any time prior to the maturity date by us at par plus accrued interest without penalty. The Note is subordinated to our Revolving Credit Facility. The Note is an unsecured obligation of the Company and its subsidiary borrowers. The Note contains no financial covenants or restrictions on dividends or distributions to stockholders.
SURETY
Primary Surety Agreement
We are party to an underwriting, continuing indemnity and security agreement, dated May 12, 2006, since amended, with a major surety provider and its affiliates (collectively, the Primary Surety Provider) that provides for surety bonds to support our contracts with certain of our customers. As of March 31, 2008, we had $113.6 million in bonded costs to complete under this facility.
We have a financing agreement with our Primary Surety Provider that provides: (1) for the Primary Surety Provider, at its sole and absolute discretion, to issue up to an aggregate of $150.0 million in new surety bonds, and (2) that the Primary Surety Providers consent is required for our use of cash collateral in the form of proceeds of all contracts as to which the Primary Surety Provider has issued surety bonds. The bond premium is $15.00 per thousand dollars of contract cost.
26
Other Bonding Facilities
In addition to our Primary Surety Provider we also have additional surety bonding from two other providers.
We are party to a general agreement of indemnity dated September 21, 2005, since amended, with a national insurance company (the Secondary Surety Provider), which provides for surety bonds to support our contracts with certain of our customers. This facility provides for the Secondary Surety Provider in its sole and absolute discretion to issue up to an aggregate of $10.0 million in surety bonds. Bonding in excess of $5.0 million is subject to the Secondary Surety Providers receipt of additional collateral in the form of an additional irrevocable letter of credit from Bank of America in the amount of $1.5 million. As of March 31, 2008, we had under $50,000 in bonded cost to complete under this facility.
Finally, we are party to a general agreement of indemnity dated March 21, 2006, since amended, with an individual surety (the Individual Surety Provider), to supplement the bonding capacity under our facilities with the Primary Surety Provider and Secondary Surety Provider. Under this facility, the Individual Surety Provider has agreed to extend aggregate bonding capacity not to exceed $150.0 million in additional bonding capacity with a limitation on individual bonds of $15.0 million. The bonds from the Individual Surety Provider are not rated (as opposed to those of our Primary Surety Provider and Secondary Surety Provider); however, the issuance of these bonds to an obligee/contractor is backed by an instrument referred to as an irrevocable trust receipt issued by First Mountain Bancorp as trustee for investors who pledge assets to support the receipt and thus the bond. The bonds are also reinsured.
The Individual Surety Providers obligation to issue new bonds is discretionary, and the aggregate bonding is subject to the Individual Suretys receipt of $2.0 million in collateral to secure all of our obligations to them. Bank of America and the Individual Surety Provider have entered into an inter-creditor agreement. As of March 31, 2008, we had $41.6 million in aggregate face value of bonds issued under this bonding facility. As of March 31, 2008, we had $5.1 million bonded cost to complete under this facility.
27
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2007
The following tables present selected historical results of operations of IES and its subsidiaries with dollar amounts in millions. Percentages are expressed as a percent of revenues.
|
|
Three Months Ended |
|
Three Months Ended |
|
||||||
|
|
$ |
|
% |
|
$ |
|
% |
|
||
|
|
(Dollars in millions) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||
Revenues |
|
$ |
196.5 |
|
100.0 |
% |
$ |
215.1 |
|
100.0 |
% |
Cost of services (including depreciation) |
|
165.7 |
|
84.3 |
% |
179.5 |
|
83.5 |
% |
||
Gross profit |
|
30.8 |
|
15.7 |
% |
35.6 |
|
16.5 |
% |
||
Selling, general & administrative expenses |
|
27.7 |
|
14.1 |
% |
35.3 |
|
16.4 |
% |
||
(Gain) loss on sale of assets |
|
(0.0 |
) |
(0.0 |
)% |
0.1 |
|
0.0 |
% |
||
Restructuring charges |
|
2.1 |
|
1.1 |
% |
|
|
|
|
||
Income from operations |
|
1.0 |
|
0.5 |
% |
0.2 |
|
0.1 |
% |
||
Interest and other expense, net |
|
0.6 |
|
0.3 |
% |
1.5 |
|
0.7 |
% |
||
Income (loss) before income taxes |
|
0.4 |
|
0.2 |
% |
(1.3 |
) |
(0.6 |
)% |
||
Provision (benefit) for income taxes |
|
0.3 |
|
0.2 |
% |
(0.4 |
) |
(0.2 |
)% |
||
Income (loss) from continuing operations |
|
0.1 |
|
0.0 |
% |
(0.9 |
) |
(0.4 |
)% |
||
Income (loss) from discontinued operations |
|
(0.1 |
) |
(0.0 |
)% |
0.2 |
|
0.1 |
% |
||
Net income (loss) |
|
$ |
0.0 |
|
0.0 |
% |
$ |
(0.7 |
) |
(0.3 |
)% |
Revenues
|
|
Three Months Ended |
|
Three Months Ended |
|
||||||
|
|
$ |
|
% |
|
$ |
|
% |
|
||
|
|
(Dollars in millions) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||
Commercial |
|
$ |
111.5 |
|
56.7 |
% |
113.8 |
|
52.9 |
% |
|
Industrial |
|
34.7 |
|
17.7 |
% |
27.6 |
|
12.8 |
% |
||
Residential |
|
50.3 |
|
25.6 |
% |
73.7 |
|
34.3 |
% |
||
Total Consolidated |
|
$ |
196.5 |
|
100.0 |
% |
$ |
215.1 |
|
100.0 |
% |
Consolidated revenues for the three months ended March 31, 2008 were $18.6 million less than in the three months ended March 31, 2007, a decline of 8.6%. This reduction is largely attributed to the nationwide decline in demand for single-family homes which has affected our Residential line of business, particularly in markets such as Southern California, Arizona and Georgia. Industry studies indicate that housing starts declined by as much as 40% for the quarter ended March 31, 2008 versus March 31, 2007. Consistent with the slowdown in housing construction, our Residential line of business experienced a $23.4 million decrease in revenues, down 31.8%. We attribute approximately three quarters of this decrease directly to reduced building activity, while the remaining portion is mainly due to pricing pressure from our customers and increased competition.
Our Commercial segment experienced a $2.3 million decline in revenues during the three months ended March 31, 2008, a 2.0% decrease compared to the same period in 2007. Our Commercial segment has been somewhat affected by reduced demand for light construction projects such as restaurants, movie theaters, grocery stores and local shopping centers, which is correlated to the slowdown in the housing sector. We have also experienced increased competition for low-end retail work from residential contractors who have been impacted by the housing slowdown. Partially offsetting the decline are several significant projects including university buildings, high-rise office towers, large regional retail shopping centers, and data centers.
Our Industrial segment posted an improvement in revenues of $7.1 million during the three months ended March 31, 2008, a 25.7% increase compared to the same period in 2007. The Industrial market has longer cycles than the overall construction industry due to the nature of the projects, which are often large-scale, multi-year contracts, financed by large corporations or government agencies.
28
For the 2008 period, our Industrial division has seen growth in utility line service projects, as well as increased construction at electrical substations, ethanol plants, and pulp and paper mills.
Gross Profit
|
|
Three Months Ended |
|
Three Months Ended |
|
||||||
|
|
$ |
|
% |
|
$ |
|
% |
|
||
|
|
(Dollars in millions) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||
Commercial |
|
$ |
15.9 |
|
14.3 |
% |
$ |
16.4 |
|
14.4 |
% |
Industrial |
|
4.8 |
|
13.7 |
% |
4.7 |
|
17.0 |
% |
||
Residential |
|
10.1 |
|
20.0 |
% |
14.5 |
|
19.7 |
% |
||
Total Consolidated |
|
$ |
30.8 |
|
15.7 |
% |
$ |
35.6 |
|
16.5 |
% |
The decline in our consolidated gross profit for the three months ended March 31, 2008 versus March 31, 2007 was primarily due to lower consolidated revenues, as discussed above. Also contributing to the reduction in gross profit was decreased margins as a percentage of revenue at our Industrial and Commercial lines of business, offset by an improvement in gross margin percentage in our Residential line of business.
The most significant decline in gross profit occurred in our Residential segment, which experienced a $4.4 million decline compared to the prior period. This decrease is due to the aforementioned $23.4 million decrease in revenues stemming from reduced construction of single-family homes. However, the gross margin percentage in the Residential line of business improved approximately 30 basis points in the current year in spite of the decline in the number of housing starts. We attribute the improvement in Residentials gross margin percentage to a stabilization of the pricing environment relative to prior periods for inputs, improved project execution, and the ability to increase and decrease labor to meet project demands. We have also added several new multi-family housing projects with higher profit margins than some single-family housing projects.
Industrial gross profit improved slightly by $0.1 million in the three month period ended March 31, 2008 compared to the prior year. Revenues increased $7.1 million; however, the gross profit percentage fell 330 basis points. The decrease in our gross margin percentage is due to certain operating cost increases, notably transportation expenses. We have also seen a mix change in some of our larger, more profitable projects that have been completed and not yet replaced.
Our Commercial segments gross margin percentage declined approximately 10 basis points to 14.3% of revenues during the three months ended March 31, 2008 from 14.4% from the same period in 2007. This decline was principally driven by two of our seventeen divisions, in which we had underperforming legacy projects at one division and the completion of low margin contracts at the other.
Selling, General and Administrative Expenses
|
|
Three Months Ended |
|
Three Months Ended |
|
||||||
|
|
$ |
|
% |
|
$ |
|
% |
|
||
|
|
(Dollars in millions) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||
Commercial |
|
$ |
9.6 |
|
8.7 |
% |
$ |
13.2 |
|
11.7 |
% |
Industrial |
|
1.9 |
|
5.5 |
% |
2.1 |
|
7.5 |
% |
||
Residential |
|
8.2 |
|
16.3 |
% |
7.7 |
|
10.4 |
% |
||
Corporate |
|
8.0 |
|
|
|
12.3 |
|
|
|
||
Total Consolidated |
|
$ |
27.7 |
|
14.1 |
% |
$ |
35.3 |
|
16.4 |
% |
Selling, general, and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and benefits related to corporate management, occupancy and utilities, training, professional service and consulting fees, travel, certain types of depreciation and amortization, and repairs and maintenance expenses.
During the three months ended March 31, 2008, our selling, general and administrative expenses fell to $27.7 million, a decrease of $7.6 million from the same period in the prior year. This decrease was in part due to our strategic efforts to restructure our field offices and to eliminate redundant positions and facilities. The greatest impact of these cost cutting measures was in our Commercial line of business, where approximately 100 positions have been eliminated. Lower revenues also reduced selling costs, including target
29
incentives for field office management. Notable declines in our selling, general and administrative costs between the three months ended March 31, 2008 and 2007 include a $1.7 million decrease in target incentives for our operating company leadership, $2.1 million in lower operating company general and administrative charges which are as a result of our restructuring efforts, and a $3.8 million decrease in corporate expenses, which includes reductions in corporate office salaries and bonuses, insurance costs, travel, and professional fees such as legal, consulting, accounting and auditing fees.
Restructuring Charges
As discussed previously in this report, we are in process of restructuring our operations from a decentralized structure into three major lines of business: Commercial, Industrial and Residential. Each of these lines of business is now supported by its own dedicated administrative shared services center which has consolidated many of the back office functions into a centralized location. This integration has enabled us to eliminate a number of redundant functions.
In conjunction with our restructuring program we recognized the following costs during the three months ended March 31, 2008 (in thousands):
Severance compensation |
|
$ |
1,139 |
|
Consulting and other charges |
|
828 |
|
|
Non-cash asset write offs |
|
131 |
|
|
Total restructuring charges |
|
$ |
2,098 |
|
We did not have any restructuring charges during the three months ended March 31, 2007.
Interest and Other Expense, Net
Interest and other expense, net decreased approximately $0.9 million, or 61.7%, from $1.5 million for the three months ended March 31, 2007, to $0.6 million for the three months ended March 31, 2008. These charges are made up of the amounts shown in the following table.
|
|
Three Months Ended |
|
||||
|
|
2008 |
|
2007 |
|
||
|
|
(Dollars in thousands) |
|
||||
|
|
|
|
|
|
||
Interest expense |
|
$ |
1,256 |
|
$ |
2,220 |
|
Deferred financing charges |
|
662 |
|
274 |
|
||
Total interest expense |
|
1,918 |
|
2,494 |
|
||
|
|
|
|
|
|
||
Interest income |
|
(441 |
) |
(973 |
) |
||
Other (income) expense |
|
(896 |
) |
(2 |
) |
||
Total interest and other expense, net |
|
$ |
581 |
|
$ |
1,519 |
|
During the three month period ended March 31, 2008, we incurred interest expense of $1.3 million on an average debt balance of $25.0 million for the Tontine Term Loan, on an average letter of credit balance of $38.0 million under the Revolving Credit Facility and on an average unused line of credit balance of $42.0 million. This compares to interest expense of $2.2 million for the six months ended March 31, 2007, on an average debt balance of $57.4 million for the Eton Park Term Loan, an average letter of credit balance of $46.3 million under the Revolving Credit Facility and an average unused line of credit balance of $33.7 million.
Deferred financing fees increased $0.4 million in the current period as a result of increased amortization charges on the Tontine Term Loan, compared to the amortization of the previous Eton Park Term Loan.
Total interest expense was offset by $0.4 million in interest income on an average cash and cash equivalents balance of $57.5 million in the 2008 period and $1.0 million in interest income on an average cash and cash equivalents balance of $90.0 million in the 2007 period.
30
Other income of $0.9 million in the 2008 period included a gain of $0.2 million associated with cash distributions from our investment in Enertech, and a $1.1 million settlement with a group of former employees out of which $0.4 million was recorded as a reduction against legal fees and the remainder as other income. This settlement was to compensate the Company for damages associated with these employees departure from the Company. We collected this settlement in full in March 2008.
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 from continuing operations increased from a benefit of $0.4 million for the three months ended March 31, 2007 to an expense of $0.3 million for the three months ended March 31, 2008. The increases in the provision for income taxes for the three months ended March 31, 2008 is attributable to our income from continuing operations for the three months ended March 31, 2008 and offset by a decrease in the provision for contingent tax liabilities.
For the three months ended March 31, 2008 and 2007, no income tax benefit was recorded for net operating losses in separate company state tax jurisdictions. In addition, under SOP 90-7, the reversal of valuation allowances provided against deferred tax assets in fresh-start reporting does not result in a reduction in the provision for income taxes.
Income (Loss) from Discontinued Operations
As discussed earlier in this report, we have shut down six underperforming subsidiaries since March 2006. This exit plan is substantially complete; however, there are still some revenues and expenses associated with the wind down of these subsidiaries. Such income statement amounts are classified as discontinued operations.
Revenues at these subsidiaries were $38,000 and $2.8 million for the three months ended March 31, 2008 and 2007, and net income (loss) was $(0.1) million and $0.1 million, respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2008 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2007
The following table presents selected historical results of operations of IES and its subsidiaries with dollar amounts in millions. Percentages are expressed as a percent of revenues.
|
|
Six Months Ended |
|
Six Months Ended |
|
||||||
|
|
$ |
|
% |
|
$ |
|
% |
|
||
|
|
(Dollars in millions) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||
Revenues |
|
$ |
394.5 |
|
100.0 |
% |
$ |
443.3 |
|
100.0 |
% |
Cost of services (including depreciation) |
|
330.7 |
|
83.8 |
% |
369.6 |
|
83.4 |
% |
||
Gross profit |
|
63.8 |
|
16.2 |
% |
73.7 |
|
16.6 |
% |
||
Selling, general & administrative expenses |
|
58.2 |
|
14.8 |
% |
70.7 |
|
15.9 |
% |
||
(Gain) on sale of assets |
|
(0.0 |
) |
(0.0 |
)% |
(0.0 |
) |
(0.0 |
)% |
||
Restructuring charges |
|
3.4 |
|
0.9 |
% |
|
|
|
|
||
Income from operations |
|
2.2 |
|
0.5 |
% |
3.1 |
|
0.7 |
% |
||
Interest and other expense, net |
|
3.3 |
|
0.8 |
% |
3.2 |
|
0.7 |
% |
||
Income (loss) before income taxes |
|
(1.1 |
) |
(0.3 |
)% |
(0.1 |
) |
(0.0 |
)% |
||
Provision (benefit) for income taxes |
|
(0.2 |
) |
(0.0 |
)% |
0.4 |
|
0.1 |
% |
||
Loss from continuing operations |
|
(0.9 |
) |
(0.2 |
)% |
(0.5 |
) |
(0.1 |
)% |
||
Income (loss) from discontinued operations |
|