<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____to_____.
Commission File No. 1-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0542208
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
515 Post Oak Boulevard
Suite 450
Houston, Texas 77027-9408
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding as of February 11, 1999, of the issuer's
common stock was 29,925,269 and of the issuer's restricted voting common stock
was 2,655,709.
<PAGE> 2
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1998 ........................................................ 2
Consolidated Statements of Operations for the three months ended
December 31, 1997 and 1998 ............................................... 3
Consolidated Statements of Stockholders' Equity for the three months
ended December 31, 1998 .................................................. 4
Consolidated Statements of Cash Flows for the three months ended
December 31, 1997 and 1998 ............................................... 5
Condensed Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 15
Signatures ................................................................... 16
</TABLE>
1
<PAGE> 3
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
------------- ------------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Cash ............................................................ $ 14,583 $ 4,044
Accounts receivable, net of allowance of $3,083
and $4,356, respectively .................................... 146,327 153,380
Inventories net ................................................. 6,440 7,756
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts ................ 12,502 14,445
Prepaid and other current assets ................................ 3,198 3,380
-------- --------
Total current assets ....................................... 183,050 183,005
Receivables from related parties ................................ 142 --
Goodwill net .................................................... 293,066 305,972
Property and equipment, net ..................................... 23,436 25,872
Other non-current assets ........................................ 2,774 3,157
-------- --------
Total assets .......................................... $502,468 $518,006
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Short-term debt and current maturities of long-term debt ........ $ 3,823 $ 3,637
Accounts payable and accrued expenses ........................... 69,225 71,017
Income taxes payable ............................................ 6,686 2,809
Billings in excess of costs and estimated
earnings recognized on uncompleted contracts ............... 27,807 27,175
Other current liabilities ....................................... 489 436
-------- --------
Total current liabilities .................................. 108,030 105,074
Long-term bank debt ............................................. 89,500 89,000
Long-term debt, net of current maturities ....................... 854 880
Other non-current liabilities ................................... 1,380 1,514
-------- --------
Total liabilities ..................................... 199,764 196,468
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock ............................................... 281 289
Restricted common stock .................................... 27 27
Additional paid-in capital ................................. 291,650 301,384
Retained earnings .......................................... 10,746 19,838
-------- --------
Total stockholders' equity ............................ 302,704 321,538
-------- --------
Total liabilities and stockholders' equity ............ $502,468 $518,006
======== ========
</TABLE>
The accompanying condensed notes to financial statements are an integral part of
these financial statements.
2
<PAGE> 4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1998
------------ --------------
(restated - note 3)
<S> <C> <C>
Revenues ......................................... $ 31,799 $ 197,712
Cost of services (including depreciation)......... 25,262 156,745
----------- ------------
Gross profit ................................ 6,537 40,967
Selling, general & administrative expenses ....... 7,718 21,841
Goodwill amortization ............................ -- 1,848
----------- ------------
Income (loss) from operations....... (1,181) 17,278
----------- ------------
Other (income)/expense:
Interest expense ............................ 55 1,695
Interest income ............................. (27) (151)
Gain on sale of assets ...................... -- (30)
Other income, net .......................... (29) (28)
----------- ------------
(1) 1,486
----------- ------------
Income (loss) before income taxes ................ (1,180) 15,792
Provision (benefit) for income taxes.............. (499) 6,700
----------- ------------
Net income (loss) ................................ $ (681) $ 9,092
=========== ============
Basic earnings (loss) per share .................. $ (.15) $ .29
=========== ============
Diluted earnings (loss) per share ................ $ (.15) $ .29
=========== ============
Shares used in the computation
of earnings per share (Note 5)-
Basic- ...................................... 4,492,039 31,134,718
=========== ============
Diluted- .................................... 4,492,039 31,668,316
=========== ============
</TABLE>
The accompanying condensed notes to financial statements are an integral part of
these financial statements.
3
<PAGE> 5
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
Common Stock Restricted Common Stock Additional Total
------------------- ----------------------- Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
---------- ------ --------- ------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1998 ............ 28,105,363 $281 2,655,709 $27 $ 291,650 $ 10,746 $ 302,704
Issuance of stock for
Acquisitions (unaudited) ......... 731,892 7 -- -- 9,959 -- 9,966
Options exercised (unaudited) ........ 41,834 1 -- -- (225) -- (224)
Net income (unaudited) ............... -- -- -- -- -- 9,092 9,092
---------- ---- --------- --- --------- -------- ---------
BALANCE, December 31, 1998 ............. 28,879,089 $289 2,655,709 $27 $ 301,384 $ 19,838 $ 321,538
========== ==== ========= === ========= ======== =========
</TABLE>
The accompanying condensed notes to financial statements are an integral part of
these financial statements.
4
<PAGE> 6
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1998
------------- --------------
(restated - note 3)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ (681) $ 9,092
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization .............................. 246 3,061
Gain (loss) on sale of property and equipment .............. 15 (30)
Changes in operating assets and liabilities
(Increase) decrease in
Accounts receivable ................................... (2,157) 552
Inventories ........................................... 413 (445)
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts....... 882 (595)
Prepaid expenses and other current assets ............. 424 167
Increase (decrease) in
Accounts payable and accrued expenses ................. (3,789) (3,227)
Billings in excess of costs and estimated earnings
recognized on uncompleted contracts .............. 2,170 (3,387)
Income taxes payable and other current liabilities .... (514) (4,060)
Other, net ................................................. 121 (240)
------- --------
Net cash provided by (used in) operating activities ............. (2,870) 888
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired .................... -- (7,451)
Proceeds from sale of property and equipment .................... 82 129
Additions to property and equipment ............................. (350) (1,976)
Collections of notes receivable ................................. 475 --
------- --------
Net cash provided by (used in) investing activities ............. 207 (9,298)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt .............................................. 392 19,500
Payments of debt ................................................ -- (21,404)
Distributions to accounting acquirer ............................ (132) --
Other ........................................................... -- (225)
------- --------
Net cash provided by (used in) financing activities ............. 260 (2,129)
------- --------
NET DECREASE IN CASH ................................................. (2,403) (10,539)
------- --------
CASH, beginning of period ............................................ 4,154 14,583
CASH, end of period .................................................. $ 1,751 $ 4,044
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for
Interest ................................................... $ 37 $ 1,034
Income taxes ............................................... $ -- $ 4,061
Non-cash property distribution ............................. $ 756 $ --
</TABLE>
The accompanying condensed notes to financial statements are an integral part of
these financial statements.
5
<PAGE> 7
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW
Integrated Electrical Services, Inc. ("IES" or the "Company"), a Delaware
corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial, residential, power line and data
communication markets. On January 30, 1998, concurrent with the closing of its
initial public offering ("IPO" or "Offering") of common stock, IES acquired, in
separate transactions 16 companies and related entities engaged in all facets of
electrical contracting and maintenance services (collectively, the "Founding
Companies" or the "Founding Company Acquisitions"). Subsequent to its IPO, and
through December 31, 1998, the Company has acquired 26 additional electrical
contracting and maintenance businesses (the "Post IPO Acquisitions"). Of these
"Post IPO Acquisitions", 25 were accounted for using the purchase method of
accounting (the "Purchased Companies") and one was accounted for using the
pooling-of-interests method of accounting (the "Pooled Company").
Pursuant to the Securities and Exchange Commission's ("SEC") Staff Accounting
Bulletin No. 97 ("SAB 97"), Houston-Stafford due to its significance is for
accounting purposes considered the entity which acquired the other Founding
Companies and IES (the "Accounting Acquirer"). As such, the Company's
consolidated financial statements for the three months ended December 31, 1997,
include the results of operations of Houston-Stafford and the Pooled Company.
The other Founding Companies are included in the Company's results of operations
beginning February 1, 1998, and the Purchased Companies beginning on their
respective dates of acquisition.
The accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and therefore the financial statements included herein should be reviewed in
conjunction with the financial statements and related notes thereto contained in
the Company's annual report filed on Form 10-K with the Securities and Exchange
Commission. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Actual operating results for the three months ended December 31, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 1999.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, refer to Note
2 of the Notes to Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1998.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and 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.
2. INITIAL PUBLIC OFFERING AND FOUNDING COMPANY ACQUISITIONS
On January 30, 1998, the Company completed its initial public offering of its
stock, which involved the sale to the public of 7,000,000 shares of the
Company's common stock at $13.00 per share. The Company received net proceeds
from the Offering of approximately $78.8 million. Concurrent with the completion
of the Offering, IES acquired the Founding Companies for consideration
consisting of $53.4 million in cash and 12,313,025 shares of common stock.
Additionally, on February 5, 1998, the Company sold 1,050,000 shares of its
common stock pursuant to the overallotment option granted to the underwriters in
connection with the Offering for net proceeds of approximately $12.7 million.
The Company used approximately $7.6 million of the net proceeds from the
Offering to retire outstanding third party debt and approximately $16.0 million
to pay indebtedness incurred by the Founding Companies for distributions to the
owners prior to the Acquisitions. The Company used the remaining net proceeds
for acquisitions (see Note 3).
6
<PAGE> 8
Pursuant to the SEC's SAB 97, Houston-Stafford due to its significance is for
accounting purposes considered the entity which acquired the other Founding
Companies and IES (the "Accounting Acquirer"). As such, the Company's actual
results of operations for the three months ended December 31, 1997,
include the results of operations of Houston-Stafford and the Pooled Company
(see Note 3).
3. ACQUISITIONS
Subsequent to its IPO, and through December 31, 1998, the Company has acquired
26 additional electrical contracting and maintenance businesses for
approximately $100.5 million of cash and 7.1 million shares of common stock (the
"Post IPO Acquisitions"). Of these 26 Post IPO Acquisitions, 25 were accounted
for using the purchase method of accounting (the "Purchased Companies") and the
Pooled Company was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical financial statements have been
restated to include the historical financial statements of the Pooled Company.
The total consideration paid for the Purchased Companies was approximately
$100.5 million of cash and 5.9 million shares of common stock. The $152.2
million excess of the total consideration paid over the net tangible assets
acquired has been recorded as goodwill in the accompanying consolidated
financial statements. The accompanying balance sheets include allocations of the
respective purchase prices to the assets acquired and liabilities assumed based
on preliminary estimates of fair value and are subject to final adjustment.
The unaudited pro forma data presented below assume that the Founding Company
Acquisitions, the Offering, and the Post IPO Acquisitions had occurred at the
beginning of each period presented (all other pro forma adjustments are
consistent with those included in the Overview and Basis of Presentation for
Financial Statements):
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1998
---------- ----------
(in thousands, except per share data)
<S> <C> <C>
Revenues ..................... $191,052 $203,116
Net income ................... $ 8,039 $ 8,915
Basic earnings per share ..... $ .25 $ .28
Diluted earnings per share ... $ .25 $ .28
</TABLE>
4. LONG-TERM DEBT
On August 7, 1998, the Company increased its three-year revolving credit
facility from $70.0 million to $175.0 million with NationsBank of Texas, N.A. as
agent (the "Credit Facility"). The Credit Facility matures on July 30, 2001. The
Credit Facility will be used for working capital, capital expenditures, other
corporate purposes and acquisitions. The amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio
of the Company's total funded debt to EBITDA (as defined), or (b) the higher of
(i) the bank's prime rate and (ii) the Federal Funds rate plus 0.5%, plus up to
an additional 0.5% as determined by the ratio of the Company's total funded debt
to EBITDA. Commitment fees of 0.25% to 0.375%, as determined by the ratio of the
Company's total funded debt to EBITDA, are due on any unused borrowing capacity
under the Credit Facility. The Company's subsidiaries have guaranteed the
repayment of all amounts due under the facility, and the facility is secured by
the capital stock of the guarantors and the accounts receivable of the Company
and the guarantors. The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends on the Company's common stock, restricts the ability
of the Company to incur other indebtedness and requires the Company to comply
with certain financial covenants. Availability of the Credit Facility is subject
to customary drawing conditions.
7
<PAGE> 9
The Credit Facility is used to fund acquisitions, capital expenditures and
working capital requirements. Under the terms of the Credit Facility the Company
is required to comply with various affirmative and negative covenants including:
(i) the maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, and (iii) restrictions on liens, guarantees and dividends.
On January 25, 1999, the Company completed its offering of $150 million Senior
Subordinated Notes (the "Notes"). The Notes bear interest at 9 3/8% and will
mature on February 1, 2009. The Company will pay interest on the Notes on
February 1 and August 1 of each year, commencing August 1, 1999. The Notes are
unsecured Senior Subordinated obligations and are subordinated to all existing
and future senior indebtedness. The Notes are guaranteed on a senior
subordinated basis by all of the Company's subsidiaries. Under the terms of the
Notes, the Company is required to comply with various affirmative and negative
covenants including: (i) restrictions on additional indebtedness, and (ii)
restrictions on liens, guarantees and dividends.
The net proceeds to the Company after the offering of the Notes was
approximately $144 million after deducting underwriting commissions and offering
expenses. The Company used a portion of the proceeds from the Notes to repay the
indebtedness outstanding on its Credit Facility. The balance of the proceeds of
the Notes, as well as amounts available under the Credit Facility, may be used
for general corporate purposes, including but not limited to future
acquisitions, capital expenditures and additional working capital.
5. PER SHARE INFORMATION
Basic earnings per share calculations are based on the weighted average number
of shares of common stock and restricted voting common stock outstanding.
Diluted earnings per share calculations are based on the weighted average number
of common shares outstanding and common equivalent shares from the assumed
exercise of outstanding stock options.
As of December 31, 1998, the Company had outstanding options to purchase
up to a total of approximately 3,396,750 shares of Common Stock issued
pursuant to the Company's stock option plans. The shares used to calculate the
historical earnings per share for the periods presented are summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1998
----------- --------------
<S> <C> <C>
Weighted average shares outstanding........ 4,492,039 31,134,718
Weighted average equivalent shares
from outstanding stock options........ -- 533,598
--------- ----------
4,492,039 31,668,316
========= ==========
</TABLE>
8
<PAGE> 10
6. COMMITMENTS AND CONTINGENCIES
Subsidiaries of the Company are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
7. SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company acquired or entered into definitive
agreements to acquire six companies for an aggregate consideration of
approximately 1,137,574 shares of common stock and $20.7 million in cash, net of
cash acquired. The cash portion of such consideration was provided by proceeds
from the Notes and cash on hand.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following should be read in conjunction with the response to Part I, Item 1
of this Report. Any capitalized terms used but not defined in this Item have the
same meaning given to them in Part I, Item 1. This report on Form 10-Q includes
certain statements that may be deemed to be "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
are based on the Company's expectations and involve risks and uncertainties that
could cause the Company's actual results to differ materially from those set
forth in the statements. Such risks and uncertainties include, but are not
limited to, the ability to successfully consummate acquisitions, fluctuations in
operating results because of acquisitions and seasonality, national and regional
industry and economic conditions, competition and risks entailed in the
operation and growth of existing and newly acquired businesses. The foregoing
and other factors are discussed in the Company's Annual Report on Form 10-K for
the year ended September 30, 1998 filed with the SEC.
Because of the significant effect of the acquisitions of the Founding Companies
(excluding Houston Stafford) and the acquisitions of the Purchased Companies
on the Company's results of operations, the Company's historical results of
operations and period-to-period comparisons will not be indicative of future
results and may not be meaningful. The Company plans to continue acquiring
electrical contracting and maintenance businesses in the future. The integration
of acquired electrical contracting and maintenance businesses and the addition
of management personnel to support existing and future acquisitions may
positively or negatively affect the Company's results of operations during the
period immediately following acquisition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1998
The following table presents selected historical financial information for the
three months ended December 31, 1997 and 1998. The historical results of
operations presented below include the results of operations of Houston-Stafford
and the Pooled Company for the three months ended December 31, 1997. The results
of operations of the Company for the three months ended December 31, 1998,
includes the results of operations for all Purchased Companies owned by IES at
October 1, 1998, and the Purchased Companies acquired during the three months
ended December 31, 1998, beginning on their respective dates of acquisition. See
Overview and Basis of Presentation for Financial Statements for further
discussion.
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------------------
1997 % 1998 %
-------- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues .......................... $ 31,799 100.0% $197,712 100.0%
Cost of services .................. 25,262 79.4% 156,745 79.3%
-------- ----- -------- -----
Gross profit ...................... 6,537 20.6% 40,967 20.7%
Selling, general &
administrative expenses ...... 7,718 24.3% 21,841 11.0%
Goodwill amortization ............. -- --% 1,848 1.0%
-------- ----- -------- -----
Operating income (loss) ........... $ (1,181) (3.7)% $ 17,278 8.7%
======== ===== ======== =====
</TABLE>
REVENUES. Revenues increased $165.9 million, or 522%, from $31.8 million for
the three months ended December 31, 1997, to $197.7 million for the three
months ended December 31, 1998. The increase in revenues is principally due to
the acquisitions of the Founding Companies (excluding Houston Stafford) and the
acquisitions of the Purchased Companies.
10
<PAGE> 12
GROSS PROFIT. Gross profit increased $34.5 million, or 527%, from $6.5 million
for the three months ended December 31, 1997, to $41.0 million for the three
months ended December 31, 1998. The increase in gross profit was principally
due to the acquisitions of the Founding Companies (excluding Houston-Stafford)
and the acquisitions of the Purchased Companies. As a percentage of revenues,
gross profit increased from 20.6% in 1997 to 20.7% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $14.1 million, or 183%, from $7.7 million for
the three months ended December 31, 1997, to $21.8 million for the three months
ended December 31, 1998. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions of the Founding
Companies (excluding Houston-Stafford) and the acquisitions of the Purchased
Companies, a non-recurring $4.4 million bonus paid to the owners of
Houston-Stafford during the three months ended December 31, 1997 prior to the
Company's IPO, and corporate costs incurred in 1998 associated with being a
public company which did not exist in 1997. Excluding such bonuses and higher
corporate costs, selling, general and administrative expenses as a percentage of
revenues decreased from 10.4% in 1997 to 10.0% in 1998.
OPERATING INCOME. Operating income increased $18.5 million, or 1,563%, from
$(1.2) million for the three months ended December 31, 1997, to $17.3 million
for the three months ended December 31, 1998. This increase in operating income
is primarily attributed to the Founding Company Acquisitions (excluding
Houston-Stafford) and the acquisitions of the Purchased Companies, the
non-recurring owner bonuses in 1997, and partially offset by higher corporate
costs discussed above. As a percentage of revenues, operating income (excluding
the owner bonuses and higher corporate costs noted above) decreased from
approximately 10.1% in 1997 to 9.8% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash of $4.0 million, working capital
of $77.8 million, $89.0 million of outstanding borrowings under its Credit
Facility, $2.4 million of letters of credit outstanding, and available capacity
under its Credit Facility of $83.6 million.
During the three months ended December 31, 1998, the Company generated $0.9
million of net cash from operating activities. Net cash used in investing
activities was $9.3 million including $7.5 million used for the purchase of
businesses. Net cash flows used in financing activities was $2.1 resulting
primarily from borrowings under the Company's Credit Facility.
On August 7, 1998, the Company increased its three-year revolving credit
facility from $70.0 million to $175.0 million (the "Credit Facility"). The
Credit Facility will be used for working capital, capital expenditures, other
corporate purposes and acquisitions. The amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio
of the Company's total funded debt to EBITDA (as defined), or (b) the higher of
(i) the bank's prime rate and (ii) the Federal Funds rate plus 0.5%, plus up to
an additional 0.5% as determined by the ratio of the Company's total funded debt
to EBITDA. Commitment fees of 0.25% to 0.375%, as determined by the ratio of the
Company's total funded debt to EBITDA, are due on any unused borrowing capacity
under the Credit Facility. The Company's subsidiaries have guaranteed the
repayment
11
<PAGE> 13
of all amounts due under the facility, and the facility is secured by the
capital stock of the guarantors and the accounts receivable of the Company and
the guarantors. The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends on the Company's common stock, restricts the ability
of the Company to incur other indebtedness and requires the Company to comply
with certain financial covenants. Availability of the Credit Facility is subject
to customary drawing conditions.
On January 25, 1999, the Company completed its offering of $150 million Senior
Subordinated Notes (the "Notes"). The Notes bear interest at 9 3/8% and will
mature on February 1, 2009. The Company will pay interest on the Notes on
February 1 and August 1 of each year, commencing August 1, 1999. The Notes are
unsecured Senior Subordinated obligations and are subordinated to all existing
and future senior indebtedness. The Notes are guaranteed on a senior
subordinated basis by all of the Company's subsidiaries. Under the terms of the
Notes, the Company is required to comply with various affirmative and negative
covenants including: (i) restrictions on additional indebtedness, and (ii)
restrictions on liens, guarantees and dividends.
The net proceeds to the Company after the offering of the Notes was
approximately $144 million after deducting underwriting commissions and offering
expenses. The Company used a portion of the proceeds from the Notes to repay
indebtedness outstanding on its Credit Facility. As of February 12, 1999, the
Company has available borrowing capacity under its Credit Facility of
approximately $172.6 million.
The Company anticipates that its existing cash, cash flow from operations and
proceeds from its Credit Facility and the Notes will provide sufficient cash to
enable the Company to meet its working capital needs, debt service requirements
and planned capital expenditures for property and equipment through 1999.
Through February 11, 1999, the Company utilized a combination of cash and
its common stock to acquire 32 companies and the Founding Companies with
total annualized 1998 revenues of approximately $860.0 million. The cash
component of the consideration paid for these companies was funded with existing
cash and borrowings under its bank credit facility.
The Company intends to continue to pursue acquisition opportunities. The timing,
size or success of any acquisition effort and the associated potential capital
commitments cannot be predicted. The Company expects to fund future acquisitions
primarily with working capital, cash flow from operations and borrowings,
including any unborrowed portion of the Credit Facility, as well as issuances of
additional equity. To the extent the Company funds a significant portion of the
consideration for future acquisitions with cash, it may have to increase the
amount of the Credit Facility or obtain other sources of financing, including
the issuance of additional debt or equity. Capital expenditures for equipment
and expansion of facilities are expected to be funded from cash flow from
operations and supplemented as necessary by borrowings under the Credit
Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during the
spring and summer and
12
<PAGE> 14
lower revenues during the fall and winter. The commercial and industrial aspect
of the Company's business is less subject to seasonal trends, as this work
generally is performed inside structures protected from the weather. The
Company's service business is generally not affected by seasonality. In
addition, the construction industry has historically been highly cyclical. The
Company's volume of business may be adversely affected by declines in
construction projects resulting from adverse regional or national economic
conditions. Quarterly results may also be materially affected by the timing of
new construction projects and acquisitions and the timing and magnitude of
acquisition assimilation costs. Accordingly, operating results for any fiscal
period are not necessarily indicative of results that may be achieved for any
subsequent fiscal period.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income," which requires the display of comprehensive income and its components
in the financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. There was no
difference between the Company's "traditional" and "comprehensive" net income.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information,"
which establishes standards for the way public enterprises are to report
information about operating segments in annual financial statements and
requires the reporting of selected information about operating systems in
interim financial reports issued to shareholders. SFAS No. 131 is effective for
the Company for its year ended September 30, 1999, at which time the Company
will adopt the provision. The Company is currently evaluating the impact on the
Company's financial disclosures but they do not believe that they will be
significant.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for the Company
for its year ended September 30, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivatives' fair value be recognized as current earnings unless specific hedge
accounting criteria are met. The Company is evaluating SFAS No. 133 and the
impact on existing accounting policies and financial reporting disclosures.
However, the Company has not to date engaged in activities or entered into
arrangements normally associated with derivative instruments.
YEAR 2000
Year 2000 Issue. Many software applications, hardware and equipment and
embedded chip systems identify dates using only the last two digits of the
year. These products may be unable to distinguish between dates in the year
2000 and dates in the year 1900. That inability (referred to as the "Year 2000"
issue), if not addressed, could cause applications, equipment or systems to
fail or provide incorrect information after December 31, 1999, or when using
dates after December 31, 1999. This in turn could have an adverse effect on the
Company due to the Company's direct dependence on its own applications,
equipment and systems and indirect dependence on those of other entities with
which the Company must interact.
13
<PAGE> 15
Compliance Program. In order to address the Year 2000 issue, the Company has
established a project team to assure that key automated systems and related
processes will remain functional through year 2000. The team will address the
project in the following stages: (i) awareness, (ii) assessment, (iii)
remediation, (iv) testing and (v) implementation of the necessary modifications.
The key automated systems consist of (a) project estimating, management and
financial systems applications, (b) hardware and equipment, (c) embedded chip
systems and (d) third-party developed software. The evaluation of the Year 2000
issue includes the evaluation of the Year 2000 exposure of third parties
material to the operations of the Company. The Company has retained a Year 2000
consulting firm to assist with the review of its systems for Year 2000 issues.
Company State of Readiness. The awareness phase of the Year 2000 project has
begun with a corporate-wide awareness program which will continue to be updated
throughout the life of the project. The assessment phase of the project
involves, among other things, efforts to obtain representations and assurances
from third parties, including third party vendors, that their hardware and
equipment, embedded chip systems and software being used by or impacting the
Company or any of its business units are or will be modified to be Year 2000
compliant. To date, the Company does not expect that responses from such third
parties will be conclusive. As a result, management cannot predict the potential
consequences if these or other third parties are not Year 2000 compliant. The
exposure associated with the Company's interaction with third parties is also
currently being evaluated.
Management expects that the remediation, testing and implementation phases will
be completed prior to the year 2000.
Costs to Address Year 2000 Compliance Issues. While the total cost to the
Company of the Year 2000 project is still being evaluated, management currently
estimates that the costs to be incurred by the Company in 1999 and 2000
associated with assessing and testing applications, hardware and equipment,
embedded chip systems, and third party developed software will be less than
$300,000. The Company expects that planned capital expenditures to replace
existing financial system applications and hardware will substantially address
its existing Year 2000 issues with financial system applications and hardware.
To date, the Company has not expended significant funds related to its Year 2000
compliance assessment.
Risk of Non-Compliance and Contingency Plans. The major applications which pose
the greatest Year 2000 risks for the Company if implementation of the Year 2000
compliance program is not successful are the Company's project estimating and
management systems, financial systems applications and related third-party
software. Potential problems if the Year 2000 compliance program is not
successful include disruptions of the Company's revenue gathering from and
distribution to its customers and vendors and the inability to perform its other
financial and accounting functions.
The goal of the Year 2000 project is to ensure that all of the critical systems
and processes which are under the direct control of the Company remain
functional. However, because certain systems and processes may be
interrelated with systems outside of the control of the Company, there can be no
assurance that all implementations will be successful. Accordingly, as part of
the Year 2000 project, contingency and business plans will be developed to
respond to any failures as they may occur. Such contingency and business plans
are scheduled to be completed during 1999. Because the Company's internal
systems are PC-based, management does not expect the costs to the Company of the
Year 2000 project to have a material adverse effect on the Company's financial
position, results of operations or cash flows. However, based on information
available at this time, the Company cannot conclude that any failure of the
Company or third parties to achieve Year 2000 compliance will not adversely
affect the Company.
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<PAGE> 16
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
27. Financial Data Schedule
15
<PAGE> 17
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
INTEGRATED ELECTRICAL SERVICES, INC.
Date: February 12, 1999 By: /s/ JIM P. WISE
Jim P. Wise
President
Chief Executive Officer and
Chief Financial Officer
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FINANCIAL STATEMENTS OF INTEGRATED ELECTRICAL SERVICES, INC. AS OF DECEMBER 31,
1998 AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,044
<SECURITIES> 0
<RECEIVABLES> 157,736
<ALLOWANCES> 4,356
<INVENTORY> 7,756
<CURRENT-ASSETS> 183,005
<PP&E> 34,120
<DEPRECIATION> 8,248
<TOTAL-ASSETS> 518,006
<CURRENT-LIABILITIES> 105,074
<BONDS> 0
0
0
<COMMON> 316
<OTHER-SE> 321,222
<TOTAL-LIABILITY-AND-EQUITY> 518,006
<SALES> 197,712
<TOTAL-REVENUES> 197,712
<CGS> 156,745
<TOTAL-COSTS> 180,434
<OTHER-EXPENSES> (209)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,695
<INCOME-PRETAX> 15,792
<INCOME-TAX> 6,700
<INCOME-CONTINUING> 9,092
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,092
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
