IES Holdings Inc (IESC) 2004 Q4 法說會逐字稿

Welcome to the Integrated Electrical Services third-quarter and year-end 2004 results conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) And as a reminder, this conference is being recorded today, Wednesday, December 15, 2004. I would now like to turn the conference over to Mr. Ken Dennard, managing partner of DRG&E.

Good morning, everyone. We appreciate you joining us for IES' conference call today to review fiscal third- and fourth-quarter results and fiscal 2004 year-end results. We'd also like to welcome our Internet participants listening to the call that's being simulcast live over the Web.

Before I turn the call over to the management team I have normal housekeeping details to run through. You could have received an e-mail of the press release yesterday and an e-mail of a small one sentence correction this morning. Occasionally there are technical difficulties experienced during these broadcasts, so if you didn't get your e-mails call our offices at 713-529-6600 and we'll make sure we get that right out to you and make sure you're on the regular distribution list.

Also a replay of today's call will be available by going to www.IES-CO.com and also a recorded telephonic instant replay will be available for the next 7 days by calling 303-590-3000 using the pass code of 1101-7223. And please note that the information reported on this call speaks only as of today, December 15, 2004 and therefore you're advised that any time sensitive information may no longer be accurate as of the time of any replay listening.

Also this conference call includes certain statements that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 inherent uncertainties related to estimating future operating results or IES' ability to generate sales, income or cash flow; potential difficulty in addressing material weaknesses in the Company's accounting systems that have identified to the Company by its independent auditors; potential limitations on IES' ability to access the credit line under its credit facility; litigation risks and uncertainties; fluctuations in operating results because of downturns in levels of construction; incorrect estimates used in entering into and executing contracts; difficulty in managing the operation of existing entities; the high level of competition in the construction industry; changes in interest rates; the general level of the economy; increases in the level of competition from other major electrical contractors; increases in cost of labor, steel, copper and gasoline; limitations on the availability and the increased cost of surety bonds required for certain projects; (technical difficulty) reach agreement with a surety bonding company to provide sufficient bonding (technical difficulty) risks associated with failure to provide surety bonds on jobs where the Company has commenced work or is otherwise contractually obligated to provide surety bonds; loss of key personnel; inability to reach agreement for planned sales of assets; business disruption and transaction costs attributed -- or attributable to the sale of business units; costs associated with the closing of business units; unexpected liabilities associated with warranties or other liabilities attributable to the retention of the legal structure of business units where the Company has sold substantially all the assets of the business unit; inability to fulfill the terms of the required pay down under the credit facility; difficulty in integrating new types of work into existing subsidiaries; errors in estimating revenues or percentage of completion on contracts and weather and seasonality.

You should understand that the foregoing important factors, in addition to those discussed in the Company's 10-K, could affect future results and could cause results to differ materially from those expressed in such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. The foregoing and other factors are discussed and should be reviewed in the Company's filings with the Securities and Exchange Commission including the Company's annual report on Form 10-K for the year ended September 30, 2004.

With me this morning are Roddy Allen, President and Chief Executive Officer, and David Miller, Vice President and Chief Accounting Officer. I'll turn the call over to Roddy.

Thank you, Ken. Good morning to all of you and thank you for joining us today. We thank you for your participation and your patience and we're pleased to be discussing our financial results with you today, reviewing events since our last call on August 18th and answering questions you may have to clarify this information. First, I know you're anxious to hear additional details about what has occurred during the last several months and to get an update on both IES' third- and fourth-quarter financial performance as well as our plans for the future.

I know the past few months have been difficult for IES' investors and interested parties as well as for IES. I believe we have successfully weathered a set of difficult circumstances and are moving back to focusing on our core business of electrical contracting. As you know, our third-quarter earnings release was delayed due to an ongoing evaluation of certain large and complex projects in one of our regions as part of our regular quarter end closing process. As part of this review IES determined there were issues with a few projects at two subsidiaries.

As a result of these matters we did not timely file our third-quarter 10-Q. In addition IES' audit committee engaged special external counsel to conduct an investigation of those matters and other significant projects. Our outside auditors communicated that there were two material weaknesses in internal controls related to reported results as defined under Sarbanes-Oxley. To address these material weaknesses IES made policy, training, control and organizational changes.

As part of this multi month process that regrettably did detract from our operating performance, IES made the decision that additional liquidity would be prudent in light of the issues and potential risk we were facing. We issued $36 million in 6.5 percent convertible debt and, based on what we have seen since, the market seemed to agree with our decision to add liquidity. The strategic realignment of our businesses was announced on October 28th and, as a step in that process, a number of commercial and industrial businesses will be divested.

To determine what assets to sell we evaluated our business units based on consistency of profitability; return on capital, including capital employed for bonding; construction spending and growth trends and management strength. Through this process we have created three categories for our subsidiaries -- core units which we believe are key to the future success of IES; units under review which are still being assessed; and planned divestitures which are units that we plan to sell.

We have already divested three units and received $11.5 million in cash which we used to reduce debt. Our star performers continue to be our residential units, all of which are a part of our core operations. Our residential segment reported another record-breaking year in fiscal 2004 in terms of profit, growth and capital efficiency with $310 million in revenues and $59.8 million in gross profit.

Other recent events include a successful resolution to a prior $30 million jury verdict for a settlement amount of $8 million. And most recently we successfully amended our credit facility with our senior secured lenders. The amendment provides flexibility and appropriate liquidity for our business plan going forward including divestitures. IES is in compliance with all the terms of its credit facility and the amended facility affords IES the opportunity for the first time to use bonded accounts receivable in connection with any new or existing surety bonds program.

During the year end audit process we determined it was necessary to restate prior period results. The amounts are fairly small but have the effect of reducing net income in 2002, 2003 and the first 6 months of fiscal 2004 by approximately 1.7 million, 1 million and 3 million respectively. Of those amounts 1.1 million, 0.5 million and 0.3 million respectively, were non operational and related to one of the Company's investments that was previously accounted for under the cost method of accounting for investments beginning in the year ended September 30, 2002 and have should have been account under the equity method of accounting for investments.

The press release we put out last might inadvertently reported those figures for the investment as 1.7 million, 0.8 million and 0.9 million, respectively. That was corrected with a correction a little while ago.

We are pleased to have successfully addressed many issues since August, and now look forward to managing and improving our day-to-day operations. Despite these issues IES was profitable for fiscal 2004 prior to what I call onetime charges and generated cash flow from operations of more than $6 million in fiscal 2004 including all of those charges. However, IES did report a loss of $3.23 per share for the year.

Now we'll turn it over to David Miller to give you some additional details on the financials. David?

Now I'll provide a more detailed discussion of our financial results. We provided tables in our press release distributed yesterday evening after the market close we thought would be useful to improve your understanding of the various moving parts and thus our overall results.

Revenues for the third quarter of fiscal 2004 were 367.0 million compared to revenues of 375.3 million for the third quarter a year ago. This 2 percent decline was due to a drop in revenues in a few select commercial and industrial markets offset partially by an increase in residential revenues. The Company reported net income for the third quarter of 700,000 or 2 cents per share versus net income of 5.3 million or 13 cents per diluted share in the third quarter of fiscal 2003.

Third-quarter gross profit dropped 19.9 percent from a year ago as gross profit margin declined from 14.2 percent in the third quarter last year to 11.7 percent in this year's third quarter due to significant increases in commodity prices including copper, steel and gasoline as well as reduced job profitability on certain large and complex projects at two subsidiaries. SG&A expenses in the third quarter increased slightly to 10.5 percent of revenues this year from 10.2 percent of revenues a year ago.

Looking at our business segments for the third quarter; our third-quarter segment revenues for commercial/industrial were 283.9 million in fiscal 2004, a 7 percent decline from 305.6 million in fiscal 2003 primarily due to decreased spending in certain regional markets. Residential revenues for the third quarter of fiscal 2004 rose 19 percent 283.1 million compared to 69.7 million in fiscal 2003 due to continued strong demand for new single- and multi-family housing.

Commercial industrial gross profit dropped from 38.6 million in the third quarter of 2003 to 28.3 million in 2004. And commercial/industrial gross profit margin declined from 12.6 percent in last year's third quarter to 10.0 percent this year primarily due to the record increases in commodity prices and the reduced job profitability at two subsidiaries as discussed earlier.

Residential gross profit was fairly flat at approximately 14.5 percent in the third quarter year-over-year and residential gross profit margins declined from 12.5 percent a year ago to 17.5 percent in this quarter mainly due to the increase in the cost of copper wire as well as increased competition for residential work.

Revenues in the fourth quarter were 356.9 million this year compared to revenues of 380.9 million for the fourth quarter a year ago. The decline was partially a result of the recent issues we discussed above as well as weak performance from the units we've decided to divest.

Gross profit was 37.2 million in the fiscal fourth quarter of 2004 versus 52.7 million in 2003. This decline was a result of the poor performance during 2004 of the units to be divested, reduced revenues in the commercial/industrial segment as well as some lasting effects of the increase in commodity prices in the second and third fiscal quarters.

SG&A expenses for the fourth quarter were 49.0 million. Income from operations was a loss of 111.6 million in 2004 compared to income of 13.3 million in the quarter one year ago. The fourth-quarter 2004 results did include a charge of 99.8 million for goodwill impairment and an 8 million charge for the litigation settlement. Excluding the charge and the settlement fourth-quarter income from operations was a loss of 3.9 million. Net loss for the fourth quarter was 134.4 million or $3.48 per share compared to net income of 7.3 million or 19 cents per diluted share in the fourth quarter a year ago.

Looking at our business segments for the fourth quarter, fourth-quarter segment revenues for commercial/industrial were 275.4 million in fiscal 2004 compared to 309.7 million in fiscal 2003. Residential revenues in the fourth quarter of fiscal 2004 were 81.5 million compared to 71.1 million in fiscal 2003. Gross profits from the commercial/industrial segment were adversely affected by higher job costs primarily associated with the business units the Company plans to divest.

IES' residential segment gross profits were nearly 19 percent and exceeded the prior year quarter on a dollar basis. For the full year revenues for fiscal year 2004 were 1.42 billion compared to 1.45 billion in 2003, a decline of less than 2 percent primarily due to the completion of two large projects in the prior year and continued weakness in the commercial/industrial markets.

Net loss for fiscal 2004 was 124.9 million or $3.23 per share compared to net income of 19.4 million or 50 cents per fully diluted share in fiscal 2003. The 2004 net loss includes a 99.8 million goodwill impairment charge and an $8 million litigation settlement all of which were taken in this year's fourth quarter. Additionally as we've discussed throughout the year, commodity price increases, steel, copper, and gasoline had an estimated $8 to $10 million pretax impact on profits for the year. We estimate that the greatest impact was in the third quarter with a lesser impact in the fourth quarter as prices began to stabilize and we've been able to complete many of the fixed-price jobs bid prior to the price increases.

The effective October 1, 2001 the Company adopted FAS 142 goodwill and other intangible assets. And upon that adoption in fiscal 2002 the Company recognized a charge of 283 million. It has performed impairment tests on a regular basis in accordance with FAS 142 each year thereafter. During 2004 the Company performed impairment tests as required by FAS 142 and determined that the carrying value of goodwill had been impaired and required an adjustment. The amount of the adjustment was approximately 100 million and has been included in arriving at net income from operations.

Gross profit dropped by approximately 33 million or 16 percent from 206.4 million in 2003 to 173.9 million in 2004 due in part to commercial/industrial project mix and commodity price increases experienced on longer-term projects which were not recoverable in our revenues. Gross profit margin declined from approximately 14 percent last year to 12 percent this year. The reported loss from operations for 2004 was 84.8 million compared to operating income of 52.8 million last year. The 2004 reported operating loss includes the charges for goodwill impairment and the litigation settlement which are included in SG&A. Excluding these charges income from operations for 2004 was 23.0 million compared to 52.8 million in 2003.

Selling, general and administrative expenses increased by 5.3 million or 3.4 percent from approximately 153.7 million last year to 158.9 million this year primarily as a result of the litigation settlement. Excluding these charges SG&A expenses for 2004 were 150.9 million or 2.7 million below the prior year and were 10.6 percent of revenues. Interest expense for 2004 was 23.2 million, a 2.6 million decline from last year as a result of reduced debt levels during 2004 at lower interest rates.

Our effective tax rate declined from 28 percent in 2003 to a -10 percent this year due in part to the effect of a pretax net loss, permanent differences required to be added back for income tax purposes, the impairment of nondeductible goodwill and additional valuation allowances provided against certain federal and state deferred tax assets and the change in contingent tax liabilities.

Looking at our annual segment data, segment revenues for the commercial/industrial market for fiscal 2004 were 1.114 billion versus 1.172 billion in fiscal 2003. Residential revenues for fiscal 2004 were 310.0 million compared to 276.2 billion a year ago due to the continued strength in the housing market. Commercial/industrial gross profit for 2004 declined by 34.3 million to 114.1 million. Gross profit margin for commercial industrial was 10.2 percent this year versus 12.7 percent last year. And residential gross profit for 2004 rose 3 percent to 59.8 million from 58 million last year. Gross margin for residential dropped from 21 percent in 2003 to 19.3 percent in 2004 primarily due to the increased cost of Copper in 2004.

Thank you for your time. And with that I would like to turn the call back over to Roddy to provide more details about our strategy, expectations for the future, backlog and divestitures.

Thank you, David, for those details. IES' backlog was 662 million as of September 30, 2004 or 46 million less than the year ago backlog due to a decrease in work that required surety bonding. IES has completed several large projects that were included in last year's backlog that have not been replaced with similar size projects. Additionally, as a result of having fewer larger and longer-term jobs, the average size and duration of IES' projects have decreased slightly.

Bonded projects represented approximately 34 percent of the September 30, 2004 backlog compared to 40 percent last year. The amount of work in backlog that doesn't require surety bonding increased year-over-year by approximately 3 percent. IES has issued performance bonds totaling approximately $62 million during the last 120 days including 2.4 million in new bonds that did not require additional surety collateral recently.

The fourth amendment to our senior secured credit agreement permits the Company for the first time and under certain conditions to utilize the bonded Accounts Receivable, which were approximately $52 million as of September 30, 2004, for a purpose of obtaining new surety bonds with our current or new surety providers. We are encouraged by this development and believe that additional surety bond capacity is possible as a result.

Even with all of the recent issues IES generated cash flow from operations of $6.3 million for the year. As of September 30, 2004 total debt was 230.8 million excluding outstanding letters of credit compared to a total debt of 248.1 million at year end fiscal 2003 excluding letters of credit. As of December 13, 2004 total debt was 241.2 million excluding letters of credit outstanding. Cash and availability on our revolving credit line totaled approximately $76 million. Additional IES has placed cash collateral with its surety of $17.5 million which is subject to refund to IES as long as IES' surety provider does not incur costs associated with such bonded projects.

As we have previously announced, we identified a group of businesses to be sold which produce 2004 revenues of 289.9 million, an operating loss of 13.5 million and depreciation of 1.4 million. Now those targeted business, we have sold three as previously announced for cash proceeds of approximately 11.5 million dollars with revenues of 57.6 million, operating income of 1.1 million and depreciation of 412,000. This leaves us with approximately $232.2 million of 2004 revenues in those businesses and $12.4 million in losses to divest throughout the remaining few months.

Additionally as we have divided our businesses into three categories -- core units, units under review and planned divestitures. The core units are key to our future success and are a solid group that produced 2004 revenues of 830.8 million and operating income of 44.8 million. The units under review are businesses that we may sell or retain depending on their results over the next 6 months. These units produced 2004 revenues of 357 million and operating income of 12.4 million. We planned divestiture group, as I said, produced 289.9 million in 2004 revenues and lost $13.5 million from operations.

Going forward we will focus our business on providing an acceptable return on capital. As part of this focus we will continue to divest underperforming businesses and regularly review all of the businesses in our portfolio. We have already, as I said, divested three of these units and plan to complete or divestiture program during 2005 reducing debt with a net sales proceeds. We will also continue to implement measures and programs to focus our employees at all levels to maximize returns as well as profits. We also continue to work diligently to lower the overall capital cost of our surety bonding program.

I am very encouraged that the fourth amendment to the senior secured credit agreement permits the Company under certain conditions to utilize our bonded Accounts Receivable which were approximately $52 million, as I stated on October 31, 2004, for the purpose of obtaining new surety bonds with either our current or new surety providers. I expect that our SG&A spending will be reduced as business units are sold and the professional cost and expenses associated with recent events diminish.

Furthermore we will work to improve our operating results with our renewed focus on bidding and estimating disciplines, project pricing, cost control and regular monitoring of our projects and execution. Creating a leaner and more efficient company will position IES do achieve strong performance from his remaining operations as a commercial industrial construction market gains strength.

As we disclosed in our press release, given our divestiture program and the uncertainty of the construction market, IES as discontinued providing financial guidance. Other sources of information such as FW Dodge exist in the public domain related to forecasts of 2005 commercial and residential construction spending levels. With that, I will open it up to questions.

(OPERATOR INSTRUCTIONS) Jeff Beach.

Stifel Nicolaus. It's nice to be talking to you again. I think the key question I'd like to have you expand on is the exact situation with your surety bonds. I read through everything last night and I'm still unaware of whether you have the existing bond capacity you had 3 or 4 months ago, whether it's been reduced, whether it's all just a matter of higher cost bonds. It sounds like some of the steps you're taking to put up cash as collateral means that you don't have much availability, but I'd like you to expand on this. And then along with that, if you're divesting units is this freeing up more surety capacity for your core units?

That's a bunch of issues there, Jeff, and I'll try to address it as the situation exists. Obviously when we were unable to file our third-quarter results and it created a lot of difficulties from the standpoint of bank defaults, having to get amendments. We have now gotten our fourth amendment since, so we were unable to do that. We also at the same time had a default from our bondholders which we had to cure and get rid of. And then we had the additional issue that came along with the $30 million jury award on the lawsuit which was relatively unexpected. And we also had -- and along with all of that we have a CFO that departed unexpectedly for personal reasons.

So all of those things created a lot of uncertainty in our marketplace for us not only with our banks but -- with the bondholders, but also with the surety company. So we had a difficult marketplace and the surety started requiring us to put up additional collateral in order to issue bonds. The surety company has never, ever refused to issue a bond for us. It's just that the costs continued to get more unreasonable as we went forward so we had to start managing our surety program so that we could keep the things that we really needed to do and we started concentrating on work that did not require bonds, as I've stated in public press releases.

And as you all know from some of the things that we stated, that the amount of work in backlog that's bonded has dropped somewhat from a year ago and the non bonded work in backlog has increased 3 percent since a year ago. So we've been successful in doing that. So we have never not been able to get bonded at anytime during this period. It was just a matter of the cost of the bonds and whether we were willing to pay the bonds. All during the course of this, starting a year ago the bonding and surety industry requires things that we were unable to do in today's world as far as being able to sign their indemnity agreements.

All of the surety companies that I'm aware of at the moment require an indemnity agreement which gives them a secured interest as a minimum in bonded receivables. We have not been able to do that because of our bank covenants up until we just recently got the release in the fourth amendment to do that. That frees us up to be able to go out and talk to any surety company out there today, be able to sign their indemnity agreement, which is a requirement prior to giving us bonds, and get a bonding program.

We are in discussions with -- continued discussions with our regular surety provider and we intend to have a bonding program going forward and feel very good about the capability of getting that done now that we have the fourth amendment in place which gives us the right to assign a secured interest and to sign surety company's indemnity requirements or in order to get a program with them.

So going forward we feel good; we feel like we will be able to obtain a program to fit our needs. Our needs will be reduced as we divest of these units and some of the units that we are divesting are very large surety bond requirers and that will certainly reduce our necessary capacity going forward. Hopefully all of that answers your question, Jeff.

It sure does. I had one follow-up and that was in reviewing the significant decline in profitability and commercial in the fourth quarter you had cited in the press release it was primarily at your units that were basically in the process of being divested, but when you look at the numbers in your press release you see a significant decline in gross profits and operating income even at the core operations, significant. I'd like you to talk a little bit about whether that's a market change and are there onetime items in there not disclosed that hurt profitability across the board even your best performers? And expand a little bit on the current market conditions particularly in the Sunbelt?

Okay, well -- yes, I think there were a number of things, Jeff, that created the fourth quarter. As you can imagine, when IES was unable to file its financial documents for the third quarter it created a lot of disruption within our peoples' marketplace. A lot of our operators got to listening to what was going on with IES problems rather than tending to business we believe. There were a good many disruptions, they had general contractors calling them, customers calling them -- hey, what's going on with IES? -- etc., etc.

We had the Tesla situation came along with that lawsuit; that was very disruptive. We had all the defaults that we had with our bank facilities. Quite honestly I believe that a number of our people were paying more attention or were doing more worrying about what was going to happen to IES rather than trying to get out and make money. So I think that contributed a lot. I think we continue to have a deterioration in the divested units and also in the units that I say that we have under review as far as where they are. That's why they got on the under review list. The third quarter was not as good as we expected, the fourth quarter was not as good as we expected and we're looking at other units other than the ones that we are for sure going to divest to see exactly what we're going to do there.

We do expect now that we've got all these issues behind us. We've been able to file the Q and the K last night. We're now having his call where we can again talk to people now. And we see the marketplace out there going forward and FW Dodge does as being very good for our calendar year 2005. We anticipate being able to participate fully in that. Our residential units are still going strong, commercial industrial guys tell me they see a lot of interest back in the marketplace. We think with having being able now to tell the world where we are, what we're doing and what we're going to do that we will see a strong demand for our services picking up in the future and we look forward and plan on enjoying that.

Thank you.

Manish Somiaya.

JP Morgan. Good morning, everyone. Roddy, can you review for us the covenants under the fourth amendment to the bank agreement? Can you just outline what the minimum EBITDA is for fiscal '05 and what other covenants are there?

It's on file and I don't have that information in front of me, but I can tell you that the covenants are very favorable to the Company. We negotiated the covenants with the bank facility. They were amenable to doing that. And we expect to be able to meet all of the covenants going forward that we signed in the fourth amendment.

Obviously you guys filed a lot last night, so I haven't really had a chance to go through everything, especially in terms of the covenants. But my recollection last night was that it looked like the EBITDA run rate for '05 would be in the 25 to 30 million range. Is that --?

I believe that's close as far as what we have to do in order to meet the covenants. (indiscernible) it ratchets up a little bit each month starting out with a fairly low number and then getting up and then it's on a rolling 3-month basis. But I think on a total basis the number you gave is fairly close.

Okay. Looking at SG&A I just wanted to get a sense of how much additional room you have to reduce expenses going forward. Obviously you look at '04 SG&A expenses were about 11 percent of sales. How should we be thinking about that? Obviously that had one time, but going forward could you help us out?

Yes, my goal, and I've stated on a number of calls, is to have the overall SG&A percentage for IES at 10 percent. My goal is still that and, as I stated in my prepared remarks, going forward as we divest units and as we reduce revenues and we will be working extremely hard on reducing our SG&A cost too. My goal, again, for this fiscal year, IES is to have an SG&A of 10 percent.

10 percent, okay. And just finally, on the outlook you said you can't really comment much on that. In the K you do provide a 5 million CapEx budget for '05. Do you foresee spending additional money on systems or people or just infrastructure in general?

No, I think that budget will be fine. We're down to having one of our subsidiaries left to put on the forefront and so the CapEx budget we have I think is fine.

What was the impact of higher raw material costs in '04?

The last number I saw that we calculated was about $10 million and that was without fuel cost in it which we were running about 300K a month in additional gasoline costs on our 4000 units.

So that's a net number, right?

Correct.

Okay, net of price increases. And looking at the backlog would you say that the fixed-price backlog that you have now has price escalators built in so you don't really incur these expenses going forward?

Well, on fixed-price contracts, no, we do not have a material escalation clause in that. But what we have done on all the work that we have gotten over the last number of months. Obviously we have hedged our price as far as the bid to make sure that we were covered going forward on any reasonably expected price increases.

I'll get back in the queue. Thank you so much.

Robert Ryan.

Banc of America Securities. In terms of the surety -- and I understand it's a fluid process and perhaps you don't want to show all of your cards and you have bids out there -- and you're going to win some and you're going to lose some. In terms of your base case expectations, if you win your jobs are you expecting or are you expected to post additional collateral as the bonding needs increase?

Again, going back to what I said a few minutes ago, we expect our cost of bonding to get much more reasonable going forward and then that's our expectation.

And who is the bonding company today?

Today our bonding company is Chubb.

Chubb, okay. And in terms of the operating companies, the operating companies in the field, do they use the Integrated Electrical name?

Yes, they still use their original name. In all instances but one we have a company that's in Southern California that we call IES SouthCal --no, I'm sorry, there's two but it's now being merged into another company -- one was IES Northplanes. But other than those two the rest of them used their original names.

Okay. Thanks very much.

Philip Volpicelli.

CIBC. In the press release you mentioned that debt as of December 14th was 241. Could you break that out in terms of the revolver, the term loan (indiscernible) convertible notes and then the bonds, please?

I've got somebody calculating that number over here right now.

And also if you had the cash number at the point that would be very helpful.

Cash in the bank, is that what you're talking about?

That's right, cash on the balance sheet and, if available --.

As of yesterday I believe it was about 36 million. We have as of right this minute 172.8 on our sub debt, on the bonded debt. We've got a little discrepancy on what we said our numbers are. I would rather -- if you want to call back in and talk to Elig Zipowics (ph) after the call, he can give you the exact numbers.

I'll do that.

I don't want to tell you the wrong number. The total is right; I just don't want to -- it is relatively -- I would rather you have the exact number.

Is it accurate to say that the revolver is somewhere below 5 million, the term loan is around 30, and the convertible is about 36?

I think that is close, yes. I think that is close.

Great. With regard to the amendment, it looks like your bank group has reduced the revolver size to $82 million. Can you talk about what their decision process was there? It looks like it's going further down to 76. What kind of agreements have you made with your bank group? It also looks like you have to pay the term loan off by 2005. What kind of relationship would you say you have with them now?

We feel very good about our bank group at the moment. As you know from the amendment that we filed, we've got an agreement with them that goes out through January of '06, which can be extended to a year from that. They were very good as far as filling our needs going forward from what we needed at this point in time and giving us the ability to negotiate with the surety companies, as far as bonded receivables, etc., etc. This is something that we have never had in all the years that we have been in existence and which we needed desperately. Basically, how we determined the amount is we came up with the number that we needed and basically negotiated with the banks to get to that number.

With regard to the -- you obviously have had to have some fees for the amendments. Can you detail how much you paid to your banks in terms of fees for the amendments that we've seen; I think it's 2 of them in the last 2 quarters?

You know, unfortunately, I can't. We have paid so many fees to so many people over the last several months that I couldn't begin to tell you. I think we quantified all of that in our release as far as total, but as far as the breakdown, I don't know. Obviously, with all of the amendments, with the bonds, with the various and sundry things that we've had to do, there has been a significant number of legal fees, accounting fees, and also cost fees from a financing standpoint. But we quantified that, I believe, in our press release.

I will try to circle back.

Suffice it to say, we have paid a fairly significant amount of fees to everybody.

What is the total amount of surety capacity that you have?

We don't really have a total capacity at the moment. As I said, we have never yet not been able at any one time to provide a bond if we wanted to on anything. It was just -- the relative cost was the issue, and that is what we have been working hard on getting that down to affordable, which we think we are going to be able to do going forward.

When we look at the business, obviously the raw material price impact about $10 million. Would you say that we are now past the point of that impact and that all contracts you're working on for this fiscal quarter, the fiscal first quarter, would have higher costs associated with the price of the contract as opposed to the impacts we had in the third and fourth quarter?

Restate your question, please.

What I'm trying to get at is, the raw material prices went up very rapidly last year, and that hurt your third and fourth quarter. What I am wondering is, has all of the contracts that had the unfavorable raw material prices included in them, have they been worked through and are they completed, and are now the contracts you're working on based upon much higher levels of raw material assumptions in the fixed-price contracts that you've --?

I would say that 90 percent of the contracts that we got stung on with higher material costs are completed.

Okay. I'll get back in queue. Thank you.

Richard Wesolowski.

Sidoti & Co. Roddy, have the employees and managers of the firms you're intending to sell been informed that they will be the ones that will be sold?

I would say all of the ones that we have made the firm decision on to divest know about it. Obviously the ones that are under review don't.

Okay. And that would be of the 289 million?

Right.

Could you give an estimate of how many subsidiary managers or heads of subsidiaries have voluntarily left the Company since July?

I'm sorry, I didn't catch the last part.

Have voluntarily left the Company since July?

At most one or so. One or two -- I can't even think of anybody at the moment, but I mean -- when you tie it down to the time frame -- but basically --.

Very few.

You're right, very few.

Excellent. And also, could you describe how the bidding process on the commercial side has changed between this time last year and today?

This time last year and today. No, (indiscernible) has at all.

Okay. So is the deterioration in the commercial margins, is that execution of the project's difference in the market? Which I don't think would be the case since it's getting better. I'm just trying to get an idea there how things are different.

There were too large single drivers to the deterioration of the margin. Number one was the poor performance of the companies we're divesting ourselves of, number one. That was a tune of many millions of dollars. The second largest driver of the poor margin was the vast increase in commodities and then the few months beginning last spring. And as I said earlier, that was approximately a $10 million hit to our margins to the best that we could determine. Not counting the huge increase in gasoline costs (inaudible). Those two things accounted for probably 75 percent of the hits to the margins at least.

Okay. In the 10-K in the risk section I believe there is a reference that more than ordinary reliance is being placed on the representations of the purchaser and that you guys might have to fulfill obligations assumed by others. Was this prompted by a specific situation or is this just a general risk that you guys have when selling subsidiaries?

We think that's a -- yes, David, go-ahead.

Yes, this is David Miller. This is primarily driven by the sales that we're making to previous owners of the Company and previous presidents of the Company. And also the fact that we are selling assets and not selling stock. And so ultimately we still have contingent liabilities in the event that those purchasers are unwilling or unable to perform on the liabilities that they've purchased. However, we would, of course, seek indemnification from those purchasers if we had to perform on any liabilities.

Okay. And finally, can you update us on the process of finding a new CFO?

I'm sorry, I didn't catch it.

Can you please update us on the process of finding a new CFO?

Well, we haven't been concentrating on that. The guy that we've got standing in has been doing an outstanding job, but I can tell you after the 1st of the year we will start addressing that issue very seriously.

Okay. Thank you, Roddy.

David Dugoff (ph).

MFS. I was wondering of the 17.5 million that you said you've posted as collateral for surety bonds, is that included in the 36 million in cash as of yesterday?

No.

So, as those jobs roll off that cash will come back into the business?

As we stated, at sometime in the near future we would like to think that we will get that $17.5 million back into our account, yes.

Is that just a function of being able to do the surety bonds through the bonded receivables and so it won't sit out there as you get more jobs that require surety bonds so it's mostly a function of just being able to back the surety bonds with the bonded receivables?

It is a function of our negotiations with the surety agency basically -- or the surety company basically is what it amounts to.

Okay. So the time frame on that is --?

I can't give you an exact time frame. I would be remiss to tell you -- give you an exact time frame.

Okay. Great. So cash needs for fiscal '05 sound like 5 million for CapEx, interest expense around 21, 23 million. Will there be any restructuring payments, pension payments, anything else?

There will be no pension payments. Restructuring costs obviously as we're slimming down there could be some minor stuff there, but we don't anticipate any huge amounts in that regard. But we'll be closing a unit or two so there will be some minor costs associated there, but nothing of a very large significance we don't believe.

Okay. So total cash needs for '05 are under 30 million?

Total what?

Total cash needs for fiscal '05 are under $30 million?

Yes, I would think so.

Just in terms of the commercial margins, it seems like the biggest issue -- those should improve sequentially with the raw materials being repriced in the contracts. What are the other drivers of the improvement in margins?

As I said a couple minutes ago answering some question, the two things that hurt us the most significantly was the very, very much underperformance of the units that we're divesting and the commodity cost which accounted for about 75 percent of the margin deterioration that we experienced this past year. So those two things as we're divesting these units and as we have now captured what our true material costs are should come back very quickly. In addition to that we're starting to see a much more robust market availability from the commercial industrial sector which should further improve margins somewhat as this flows through the system.

Okay. In the press release you break out corporate SG&A for this year, 22.6 million, last year it was 15.7. Wondering what the 7 million jump is there, if that's got any of the charges running through it or if those were allocated to the business units?

This year the $8 million legal settlement with the Tesla thing is in SG&A.

So corporate SG&A --.

Actually minus the Tesla settlement was I believe $2.6 million less than it was the previous year.

Okay. And is that a pretty good run rate going forward?

As I stated a while ago, my goal is 10 percent total SG&A companywide.

Okay.

And then we're a little over 10 right now so we've got a little bit of work to do.

Okay.

Jonathan Stark (ph).

Fike (ph) Street Capital. Just trying to understand a few things in the financials. For one, the question that just got asked a minute ago about the 17.5 million, was that included in the 36 million of cash? If it's not -- just with what you're saying, 241 of debt and 36 of cash, so 205 of net debt would be consistent with where you ended the quarter. So you're saying there's actually 17.5 million of cash not included in those numbers. And if that's the case how would net debt have improved so much?

As you all recall, we did the convert which we got $36 million out of here a few weeks ago; that improved our ability and we paid down some debt with that. We've been paying down debt all through the year. As you recall last February/March time frame we reduced our sub debt significantly through the program with our new facility. We've been paying on that all year. The 11.5 million on the three units that we've sold we've used to pay down debt. So our goal going forward is to pay down debt.

So the issuing of the convert would have been included in the 241 of debt you had, right?

Yes, correct.

But the sale of units -- okay, the sale of units has made an impact. And then, I'm just trying to tie up in your list of your core under review and planned divestitures, I'm trying to get from those numbers when you sum them to the actual reported EBITDA for the periods. And it doesn't look like you can just add in corporate SG&A and get there. So what would we be missing? If you take 2004, for example, you get 51+15-12 for the planned divestitures, you get 54 million of EBITDA and -- but of course you weren't close to 54 million of EBITDA. So can you just take us from there to what was reported for EBITDA?

I'm going to let David Miller answer that question.

I think in the press release on page 12 of the press release there's a reconciliation where we reconcile the net income for the full fiscal year all the way to our adjusted EBITDA and included in that number is a couple of items -- litigation settlement of 8 million, the goodwill impairment of 99.8 million, the loss on the purchase of sub debt and some other expenses as well of 700,000 and that gets you to the adjusted EBITDA that's actually in the press release.

Right. But I'm just saying the adjusted EBITDA for the -- yes, the adjusted EBITDA in the press release is 36.6 million, right? That's correct isn't it?

I'm sorry, if you'll ask that question one more time.

The adjusted EBITDA in the press release is 36.6 million?

That's correct.

But if you sum the different pieces of core under review in planned divestitures you get to 54 million. So I'm just trying to see how do you get from the 54 million of those three combined to get to the 36.6 million?

Have you subtracted out the corporate SG&A?

Yes, if you subtract the corporate SG&A that's 25 million, so then you get to 29 million. So now you're actually lower than you'd be.

Why don't we come back to the answer on that question. I don't have those numbers right at my fingertips. But we do provide a very detailed reconciliation from net income up to adjusted EBITDA in the press release.

Right, no, I definitely saw that. I'm just trying to get from the three breakdowns of the segments for EBITDA to the EBITDA for the entire company. Okay, should I call and follow up after?

No, actually let me answer your question. What you take is you take the 54 million from the core EBITDA less the corporate piece and then add back rebates during the year which is approximately $3 million and then also some additional items that aren't included in core under review and planned divestitures such as the home office cost and income on the Navy project which is a pretty small number.

So if we take 54 the corporate is 25, so we take out 25, so you get 29, add 3 so you get to 32 and the rest of it's about --.

The rest would be in miscellaneous items which is talked about the rebates and the Navy project gets you back up to 36.

Okay. The Navy project. And those you just don't put into any of the segments?

They're more corporate level expenses and things that attract your corporate and don't relate directly to the core category, the under review category, the planned divestitures.

And then, I'm sorry -- just one other thing on the commercial/industrial side. Even before you -- it sounds like there were some bad contracts that were put in place. Is that correct? So even before selling them will there just be an improvement, not just on the commodity basis, just getting rid of some of the bad contracts or are these units that just for one reason or another cannot be improved?

Certainly. Getting those bad contracts managed up is a huge benefit to us and, as I stated earlier, we are fairly far along on doing that.

Is that more than just a commodity basis?

If you've got a bad contract to start with and then you get a double whammy from commodities all it does is just makes it doubly bad.

Jeff Beach.

Two questions. Can you give us an idea how much the cost of your surety bonds that you've issued has gone up since summer, since before these troubles hit?

As I stated, Jeff, as we have stated in the press release, it was all a matter of posting up the collateral. The actual cost of the bond other than the collateral has only increased like 25 percent. It's the additional collateral they require to post the bonds going back over the last few months that has made the cost excessive.

Okay. And then last, can you talk about the tone of commercial construction in some of your geographic markets? I guess in particular I was surprised to see that you've had some real underperforming units in Texas. But can you walk through some of the geographic markets and the tone of business there, just in the commercial/industrial side?

Yes, you kind of hit on it earlier. The Sunbelt is really coming back strong. And when I say the Sunbelt, over on the eastern side of the country things are really starting to pick up, things are picking up in a lot of the areas. Here in Texas now it's getting much better. We're seeing the Sunbelt, again, kind of leading the way and things are getting much better. And if you remember, there's lots of issues with companies.

We look at the performance over the last periods of time collectively and whether or not they are holding their own or deteriorating or whatever. We look at what we think their capabilities are in their marketplace going forward and assess that. And then a big item is we look at, Jeff, is management. So probably the most overriding thing that determines whether a company -- how well a company is going to do is management and what the chances are of improving management, etc., etc.. You've got to have the work availability and then you've got to have the right people there pursuing that.

So we add all those kinds of things up along with whether or not how much bonds the company uses. If a company basically is in a marketplace that they've got to provide 100 percent bonds, and they're in a very low margin area and the management team is not as strong as somebody else is and they're producing extremely low margins to the bottom line or no margin then you've got to start wondering whether or not their cost of capital is worth keeping and going forward.

Okay. And last, the units you're divesting, are they spread out all over your geographic markets or do you find one or two areas of heavy area?

Party much everywhere, Jeff.

Alright. Thank you.

Thank you. And listen, thank you all. I appreciate everything and the support that you all have given us over the past period of time. As I stated earlier, it's been a difficult period for IES; it's been a difficult period for our shareholders and our investors and all the people that are interested in IES. I'm happy to report to you that we're back now being able to talk to folks. We're back now being able to concentrate on running IES as an electrical contractor and doing the things that we need to do to make IES successful.

And I can assure you that every one is 100 percent devoted to doing that and we will be working extremely hard going forward to make it happen. And lastly, I would just like to wish everyone Happy Holidays at this time of the year and look forward to talking to you again in the very near future. Thank you very much and talk to you soon.

Thank you, sir. Ladies and gentlemen, this concludes the Integrated Electrical Services third-quarter and year end 2004 results conference call. If you would like to listen to a replay of today's conference call please dial 303-590-3000 with access code 1101-7223 followed by the pound sign. Once again, if you would like to listen to a replay of today's conference call please dial 303-590-3000 with access code 1101-7223. You may now disconnect and thank you for using AT&T Teleconferencing.