IES Holdings Inc (IESC) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Integrated Electrical Services first quarter 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. If anyone needs assistance at any time during the conference, please press the star, followed by the zero, on your touch-tone phone. And as a reminder, this conference is being recorded today, Tuesday, February 15th of 2005. I would like to now turn the conference over to Mr. Ken Dennard. Please go ahead, sir.

Thank you, Dustin, and good morning, everyone. We appreciate you joining us for IES's conference call today to review fiscal 2005 first quarter results. We would also like to welcome our Internet participants listening to the call simulcast over the web. Before I turn the call over to management, I have the normal housekeeping details to run through. You could have received an e-mail of the press release yesterday afternoon. But occasionally there are technical difficulties experienced during these broadcasts. So if you didn't get your release, please call our offices at DRG&E. That number is 713-529-6600, and we'll get that right out to you. Also, if you would like to be on e-mail distribution lists, please relay that information to us. There will be a replay of today's call, and it will be available via webcast by going to www.ies-co.com, or there is a telephonic instant replay that will be available for the next 7 days by calling 303-590-3000, using the pass code of 11024181. And of course, that information is in the press release. Please note that information reported on this call speaks only as of today, February 15, 2005, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay.

Also as you know, this conference call contains 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 result to differ materially from those set forth in these statements. Such risks and uncertainties include, but are not limited to, the inherent uncertainties related to estimating future operating results, or ability to generate sales, income, or cash flow, potential difficulty in addressing material weaknesses in the Company's accounting systems that have been identified to the Company by its independent auditors, potential limitations on our ability to access the credit line under our credit facility, litigation risks and uncertainties, fluctuations in operating results because of downturns in the 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 costs of labor, steel, copper and gasoline, limitations on the availability and increased surety bonds required for certain projects, inability to reach agreement with surety bonding company to provide sufficient bonding capacity, risks associated with failure to provide surety bonds on jobs where we have commenced work or are otherwise contractually obligated to provide surety bonds, loss of key personnel, inability to reach agreement for planned sales of assets, business disruption or transaction costs attributable to the sale of business units, business disruptions and costs associated with the ongoing SEC formal investigation, class action litigation and shareholder derivative action, costs associated with the closing of business units, unexpected liabilities associated with warranties or other liabilities attributed to the retention of the legal structure of business units where we have sold substantially all the assets of the business, inability to fulfill terms of the required paydown of the credit facility, difficulty in integrating new types of work into existing business, errors in estimating revenues and percentage of completion on contracts, and weather, and seasonality. 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.

Now with me this morning are Roddy Allen, President and Chief Executive Officer, and David Miller, the Company's Senior Vice President and Chief Financial Officer. Turn the call over now to Roddy.

Thank you, Ken. Good morning to all of you and thank you for joining us today as we discuss our first quarter of fiscal 2005. Before I start the call, I want to recognize David Miller, who became our Chief Financial Officer in January. Some of you may remember that he participated in last quarter's call. David has been with IES since its inception in 1997, and been IES's Chief Accounting Officer since 2001. His institutional knowledge of the Company, and finance and accounting experience has been invaluable to me over the years, and he will be an asset to IES as its Chief Financial Officer Also, let me thank everyone for their patience in waiting for our earnings release. We spent some additional time analyzing the mark-to-market accounting for the convertible debt issue that we did in November. David will elaborate later on in this call.

Our first quarter revenues from continuing operations were $303.2 million, a decline from 331.6 million in the first quarter a year ago, due to IES's reduced level of bonded work and focus on taking less bonded projects in order to improve our profitability and return performance. IES recorded an operating loss for the quarter of $1.6 million due to increased competition in our residential market, decreased profitability due to project management, and decreased awards of bonded projects in our commercial and industrial markets. In addition, we have significantly higher SG&A than the prior year, to due to higher than ordinary accounting, legal, and bank advisor fees. David will discuss these in more detail later in the call. IES reported a net loss from continuing operations of $11 million or $0.28 per share for the quarter, and a loss from discontinued operations of 6.6 million or $0.17 per share, making the reported net loss 17.6 million or $0.46 per share. Included in these results are certain charges and expenses that total 13.2 million or $0.35 per share.

As we announced in our fiscal 2004 year-end earnings release on December the 14th, 2004, we are currently evaluating our business units in 3 broad categories: Core, under review, and planned divestitures. We assessed each unit based on its consistency of profitability, return on capital, including capital employed for bonding, construction spending and growth trends, and management strength. Our core units, which include the residential units, have what we consider an acceptable performance in these categories. The units under review are businesses that may be performing inadequately in a category, requiring further consideration to determine whether or not the unit can improve enough to meet our standards. The planned divestiture group is comprised of units that have unacceptable performance for our criteria, and we anticipate divesting these units in order to strengthen and improve the overall quality of our operations. Our core units form a sound operating group that produced 2004 revenues of $917.3 million and operating income of 50.8 million. In the first quarter they earned 220.7 million in revenues, and income from operations of $8 million.

The units under review are businesses that we may sell or retain, depending on their results over the next 6 months. We continue to evaluate these units. These units produced revenues of 233.5 million and operating income of 4.6 million in 2004, and revenues of 53.5 million and an operating loss of 0.1 million in the first quarter of fiscal year of 2005. The planned divestiture group, which consists of underperforming businesses planned for sale or closure was disclosed in an October 28, 2004, press release as having revenues of 289 million, and an operating loss of 13.1 million in fiscal 2004. Since that release, the planned divestiture list has changed slightly as a part of our ongoing evaluation, and may change going forward. The business units that now make up the planned divestiture list had fiscal 2004 revenues of 327.1 million, and an operating loss of 11.7 million. During the first quarter, IES sold 3 units from this group, and since the end of the first quarter IES has sold 3 additional units from this group. These 6 units, which service the commercial-industrial market, sold for cash proceeds of 19.6 million, and had fiscal 2004 revenues of 102.3 million and operating income of 1.2 million. Excluding these 6 units, the planned divestiture group produced 29.1 million in revenues and an operating loss of 1.9 million in fiscal 2005, Q1.

IES's backlog from continuing operations was 566.9 million as of December 31, 2004, compared to 667.7 million for those business units in the same period a year ago. The decline is due to a decrease in accepting work that requires surety bonding. Additionally, we are focusing on projects that have a smaller average size and duration. IES announced on January 19, 2005, that it had reached a new agreement with the surety bond provider, to provide surety bonds to the Company at acceptable rates. As permitted in the December 10, 2004, amendment to IES's credit facility, accounts receivable and certain other assets related to existing bonded projects that were previously pledged as collateral to the banks, have been pledged to the Company's surety provider. We were not required to provide additional cash collateral or letters of credit as part of this agreement, which was filed on Form 8-K with the Securities and Exchange Commission on January 18, 2005. We view this agreement as positive, and believe it will further expand the opportunities available to IES and our business units. We have issued $20 million of surety bonds since this agreement, and expect to issue further surety bonds related to recently awarded projects. New surety bonds will be considered each month, depending on certain conditions. Additionally, with the approval of our current surety provider, we are actively seeking a co-surety, to further expand bonding capacity and fulfill our bonding needs.

As announced on January 26, 2005, we received notice of a formal order of a nonpublic investigation by the SEC, concerning IES's internal investigation. The investigation conducted by counsel to the audit committee of the board of directors and the material weaknesses identified by IES's auditors in August, 2004. As we have previously stated, IES's internal investigation, and the investigation conducted by counsel, are complete, and the identified issues are being addressed with new internal controls. Now, I will turn the call over to David Miller for more details on our financial results. I will follow-up after his comments with further information regarding our strategy going forward. David?

Thank you, Roddy. Revenues for the first quarter of fiscal 2005 were 303.2 million, compared to 331.6 million a year ago. This 8.5 percent decline was primarily due to lower revenues in our noncore units, and from reduced work that requires surety bonding. This decline was partially offset by an increase in residential revenues. Gross profit was 34.4 million versus 46.7 million last year, a 26 percent decrease. Gross profit margin decreased from 14.1 percent a year ago to 11.3 percent in this year's first quarter. The decline in gross margin was due to lower than expected productivity on some jobs, due to a lack of focus on project management that we encountered during the quarter. Reduced job profitability related to the decrease in bonded projects and working off lower margin work in backlog at September 30th, 2004. The working off projects with margins lower than 5 percent accounted for approximately 10 percent of our total revenues during the quarter. At December 31st, 2004, we were approximately 90 percent complete in aggregate on these jobs.

SG&A expenses rose to 36 million or 11.9 percent of revenues, from 32.7 million or 9.9 percent of revenues a year ago. This was primarily due to increased auditor, legal, and bank advisor fees incurred in the quarter, and we also incurred incremental costs of approximately 1 million, as we implemented a new incentive bonus program in our first quarter. While we did not see much benefit during the quarter in the form of increased profitability, we expect this program to motivate and reward those who contribute to IES's success. The 2005 first quarter net loss of 17.6 million or $0.46 per share, included the following items: A loss of 6.6 million or $0.17 per share from discontinued operations, and this included 6.1 million of goodwill write-offs; a charge of 2.7 million or $0.07 per share, related to marking-to-market embedded derivatives in the recent $36 million convertible bond issue; an expense of 1.7 million or $0.04 per share from greater than ordinary legal, accounting, and bank advisor fees; a charge of 1.6 million or $0.04 per share, related to establishing valuation allowances against deferred tax benefits created by the Company's first quarter loss; a charge of 0.3 million or $0.01 per share, from writing off deferred financing costs related to the amendment of the Company's credit facility, and a charge of 0.3 million or $0.01 per share, related to losses in an investment accounted for under the equity method of accounting. These charges in aggregate total 13.2 million or $0.35 per share.

Interest expense for the first fiscal quarter was 8.8 million, compared to 6.5 million for the same fiscal quarter of 2004. The increase in 2005 is primarily due to the 2.7 million noncash charge for marking-to-market embedded derivatives in the convertible bond issue, as well as the 0.3 million charge from writing off deferred financing costs. The embedded derivatives are primarily related to the pieces of the convertible bond issue that could settle in cash, if shareholder approval of that debt is not obtained later this week. But accounting for these embedded derivatives attributed to our delay of releasing earnings last week. Our effective tax rate declined from 22 percent in the fiscal 2004 first quarter to a negative 2 percent in the first quarter 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, additional valuation allowances against certain federal and state deferred tax assets, and the change in contingent tax liabilities. Days sales outstanding were 81.5 days versus 78.3 days for the same quarter of 1 year ago. Now, our DSO's were higher, due to distractions that we experienced in the first quarter, but our new incentive program, which contains a modifier for collections, should help improve our DSO's going forward.

Now, looking at our business segments for the first quarter. First quarter segment revenues for commercial-industrial were 232.8 million, versus 268.6 million last year, a 13 percent drop due to reduced spending in certain regional markets, our decreased level of bonded projects, and lower service and maintenance revenues in some regions. Commercial-industrial gross profit dropped 36 percent in the first quarter to 20.9 million from 32.7 million a year ago. Commercial-industrial gross profit margin declined from 12.2 percent in last year's first quarter to 9.0 percent this year. The decrease is mainly at those units that are not part of our core group. Residential revenues for the first quarter were 70.4 million compared to 63.0 million last year, a 12 percent increase due to continued strong demand for new single and multifamily housing. Residential gross profit decreased however, 3.2 percent to 13.5 million from 14 million last year. And residential gross profit margins declined from 22.2 percent a year ago, to 19.2 percent, mainly due to increased competition in the residential sector and difficulty increasing prices with our customers.

During the first quarter, IES recorded an impairment charge of 0.7 million and recorded a goodwill impairment charge of 6.1 million related to discontinued operations, comprised of certain business units identified to be sold by the end of the second quarter. We generated negative cash flow from operations of 9.0 million for the first fiscal quarter of 2005, versus 6.4 million of positive cash flow from operations in the first fiscal quarter of 2004. This decrease is primarily the result of having posted $10 million of cash collateral with our surety provider and the reduced earnings in the current year. Total debt at the end of the first quarter was 241.6 million, excluding the 2.7 million entry to mark-to-market the embedded derivatives and the convertible debt, compared to 248.3 million in last year's first quarter. Currently our debt is at 228.5 million, and cash and availability on our revolving credit line is approximately 55 million. Thank you for your time, and I will now turn the call back over to Roddy to provide more details about our strategy going forward.

Thanks, David. We will continue to focus on collecting receivables and reducing days sales outstanding. We increased our operations managers focus on this through our incentive plan designs, which focuses on profitability margins and collecting receivables. This plan will reward employees who produce appropriate returns for our investors. We have made significant reductions in administrative overhead, both in the field and at the corporate offices, and we'll continue to make reductions as necessary. We will also continue to divest selected operations and plan to substantially complete our divestiture program during 2005. We will use the majority of sales proceeds from this program to reduce debt.

Further, our operational results during the first quarter are not acceptable to us, and we are working to improve our operating results, with a renewed focus on bidding an estimating disciplines, project pricing, cost controls, and regular monitoring of projects and execution. We will maintain our focus on providing acceptable returns for our investors going forward, and continue to implement measures and programs to focus our employees at all levels to maximize profits. By creating a leaner and more efficient company, IES will be able to achieve stronger performance from its remaining operations as the commercial-industrial construction market gains strength. While total construction industry spending is projected to rise by 2 percent in 2005 and 1 percent in 2006 according to FW Dodge, the commercial-industrial sector is expected to improve by 10 percent and 11 percent, respectively, and we believe that will benefit IES. As we have previously disclosed, our outlook will change as we continue to divest businesses, and we will not be providing guidance at this time. With that, I will open it up for questions.

(OPERATOR INSTRUCTIONS) Jeff Beach.

Stifel Nicolaus. Regarding your first quarter results that you just reported, on the commercial side, I noted that your gross margin was up about 110 basis points sequentially, but the loss balloon there -- and it looks like there has to be severance and charges to close operations. If there is, can you quantify that?

Well, Jeff, I believe, and I will let David chime in. But I think most of those charges were accounted for under discontinued operations. But there were some charges, yes.

Jeff, I will follow on that. That is exactly right, what Roddy has just said. We did have some charges associated with those operations that hit down in SG&A. But as you did see, the margins were up 110 basis points, and we also disclosed that approximately 10 percent of our revenues were attributable to jobs that had margins of less than 5 percent. And in aggregate, we are about 90 percent complete with those jobs. So we do expect the margins to continue to rise going forward.

Okay. Sorry. I've got 2 additional, instead of 1. But, since you tried to get your branches focused back on business, which will help your margins, have you seen improved results through the first 4 or 5 weeks of this year?

Well, I can -- I think the best way to address that, Jeff, is to talk about morale. In the last 60 days, since we were able to get our Q and K filed in December, and now getting this Q filed and all, morale has improved significantly. And I can tell you that the people that are going forward, that are going to be part of the core business, and a lot of the businesses that are under review, will continue to improve in performance, and we are very much encouraged about the morale and the way things are looking out in the field for us.

Okay. The last question I have is, it looks like your business environment is improving. You have got access to -- I don't know if you are limited to some degree -- but you have access to more surety. Looking ahead over the next couple of quarters without being specific, is there improved pricing, improved margins in the market available, that you see continuing through the year? And at what point will we see marked progress in the backlog, and maybe in the reported results ahead? Can you give us some kind of flavor for that?

Well, I think the answer to the first 2 questions is yes. You know as far as the backlog and improved operations going forward, I can tell you we are going to be working very hard every day on making that happen, and we will just continue to devote our entire efforts in doing that. And we have also passed on a significant amount of work over the last couple of months that required bonding, that we were not prepared to provide the bonding for, for 1 reason or another, at that particular time. And we would like to think that will improve going forward also, Jeff.

And regarding the pricing and the margins, is it up significantly, say, since the mid-June, July of '04? Or is it gradually improving right now?

Well, I would say it is up a fair amount since the June, July time frame, and we see gradual improvement in a lot of our markets. Now, it is still tough in some marketplaces, but in a lot of our markets, the ones that we are concentrating on, and of course, that is part of our evaluation of businesses under review and all, is the marketplace that they are in, we are seeing improvements, yes.

Philip Volpicelli.

I am with CIBC. With regard to the surety bonding, you had 17.5 of cash collateral, with the surety underwriter. You have added an additional 10, if I understand correctly. So that makes 27.5. At what point do you start getting some of that cash back?

That is not correct, Philip. That 10 that David spoke about, that we provided in the last quarter, is part of the 17.5 total that we have out.

Okay.

We have a total of 17.5 in cash, and a $5 million letter of credit posted with our surety company. And you know, we don't have an exact time frame of when we will start getting that back. But as our performance improves, and as time goes by, and our risk profile with the surety company improves, then we would expect to start getting -- seeing a return of collateral.

So that's not necessarily earmarked to certain projects, or it is earmarked to certain projects, and as you roll those off, you will roll it on to new projects. Is that how it works?

Well, it's just a general collateral. It is not pledged against any particular project. It is just collateral we have posted with the surety company.

Okay. And in terms of the pricing with regard to your surety, has that come off? I know that was an issue that had gone up. Is that coming off? Is that -- ?

When we talk about of cost of surety, we were talking primarily from the collateral standpoint, not from the cost of the individual bonds.

Okay. David, you mentioned that 90 percent of those core margin jobs are done. At what point, I guess this is part of Jeff's question. But. at what point can we start seeing positive commercial-industrial I guess EBITDA numbers going forward? Is this a second quarter event, is it a third quarter event?

Well, we think that the margins will continue to improve. We are not giving out guidance at this time, in terms of exactly when you will start seeing positive EBITDA. But I think you did see a quarter-over-quarter improvement in commercial-industrial margins. And as we continue to work off some of these lower margin jobs, I would expect that margins would increase gradually over time.

Okay. Can you give us the LTM EBITDA, is it per your bank credit agreement covenants?

Well, we don't have LTM credit covenant with the banks. The covenant for the first quarter, we had a minimum EBITDA required of approximately 2.6 million, and for purposes of the banks, we delivered 3.2 million of EBITDA.

Okay. I'll let someone else ask questions. Thanks.

Kent Shaw.

Buckhead Capital Management. I just wanted to see if we could get some more color about the working capital needs, going forward. What you thought that was going to be for the year, and the trends in general. It seemed like there was additional working capital here in this quarter. I am just trying to get a flavor for what we might be able to see going forward.

I don't think you will start -- I don't think you will see lots of continued uses or needs for working capital, especially as we divest ourselves of companies and the revenues associated with those companies come down, and we collect some older receivables. When the DSOs -- our focus on DSOs should reduce working capital, going forward. And I think one thing that we did disclose is our CapEx requirements for the year at $5 million. I believe we are on track for that, based upon our CapEx in the first quarter.

The SG&A was obviously higher because there's a lot of 1 time items. And I think at 1 point, Roddy had mentioned the goal was somewhere around 10 percent maybe SG&A as a percent of revenues? And I was just trying to get an idea of what other cost cutting you thought would be possible? You know, the next handful of quarters? And if that 10 percent level is going to be something that is an achievable target, or would be lower?

No. That still is our goal, and it is achievable, and we are working hard to achieve it. I can tell you just in regular SG&A, we cut $2 million out of the home office SG&A over the last quarter, in actual reductions of costs in various and sundry things. However, it is going to take a couple of quarters for it to flow through and then have a meaningful reduction in that kind of stuff. But our goal is 10 percent. And that is minus any incentive plans that we may pay to the field for performance, or for reducing DSO's et cetera, et cetera.

And just 1 final question about divestitures. Is that on track with what you -- the original timetable. I don't think you actually gave us a timetable specifically. But just trying to get an understanding of if things are going as you expected. And just based on the multiples that we have seen as far as -- in terms of price to sales multiples of what has been achieved so far. Do you think that is going to be able to continue for the remaining sales?

Yes, we do. And we are -- we feel very good about where we are with that. We have a number of those underway as we speak. And when I say underway, in various stages, as you can imagine, there is quite a bit of due diligence that goes on in completing 1 of these. But, our goal is as I stated. Right now, we have a little over 300 million in the planned to divestiture group, and we had a little over 100. So, you can see where we are. But we feel very good about where we are, and where we are going, and the stage that we are at.

Is there pretty strong interest that you can see in the market for these subsidiaries that you are still trying to divest? Are there multiple -- I guess multiple buyers? Or is it taking quite a bit of shopping in order to find interest for these?

No, we really have had no problem. There's a lot of tire kickers, if you know what I am saying.

Okay. I appreciate that. 1 quick follow up to the working capital. After -- what type of working capital improvements do you foresee, beyond the sale of these subsidiaries? I mean, do you have like a range of a dollar amount of what type of working capital might be able to be recaptured?

Well, let me focus it in terms of on day sales outstanding. We do anticipate some significant improvements in days sales outstanding. And each day is approximately 3.5 to $4 million of working capital, in terms of days sales outstanding. So, what I would say to you, is that we are expecting significant decreases. But I don't have a dollar amount that I can specifically give to you today.

Do you have an internal target for DSOs? Or just improvement, is (indiscernible)?

Yes, we would like to get our -- 70 days is where we are heading for, we think, in the near term.

David Degroff.

MFS. Was wondering how much cash you had at the February 11th date that you gave for the debt?

It was 22 million.

Okay. And that reflects the coupon payment, but does that reflect the asset sales that were done in the second quarter?

That includes everything that was done through February 11th, and the amount of cash -- recall the cash from the asset sales, the majority of it goes right to the banks to pay down debt. So it is not building in our cash balances.

Okay. On the cost cutting side, did we see the impact of the 2 million headquarter reduction in the first quarter, or is that going to flow through in the second quarter?

No. If you recall, I said it would take a couple of quarters for all that to take effect. There was a lot of things in there, and it would take a few months for it to work though the system. By the end of March, we should start to see the effect of most of it.

Okay. And was that the -- is that the only cost cutting program you have, or is there more on top of just the headquarters expense?

We examine every dollar we spend, on a very regular basis. And no, that is not the only thing. Not a week goes by that we aren't reducing our cost of doing business in some manner.

Okay. Do you have a number for the other programs, or is that -- ?

We want to be at 10 percent SG&A total, field and home office.

Okay. The corporate costs were up about 2 million year-over-year, or 2.5. I was wondering what was in that increase, and if some of that is the 1 time items?

Almost all of it was. David delineated, it was primarily additional legal costs, additional accounting costs, additional bank item costs for all of the things that happened in our last couple of quarters.

So is that, David, the 2.5 million add back for the credit agreement, is most of that in that negative 7.4 million number?

A large portion of it is.

Okay. And on that, how much were -- how much of gains was in the add back for the credit agreement?

A very small number. Close to 100,000 all together. And now, these aren't -- the gains actually count against us for purposes of the agreement.

Okay. So that's a net -- that $2.5 million is a net number?

That's right.

Net of gains. Okay. Great. In terms of the bonding, do you guys have any sense, or can you quantify how much that held back? I am assuming that didn't hold back any revenues on the residential side in the December quarter. But do you have a sense for how much the lack of ability to issue surety bonds held back your revenues in the December quarter, and now that you have got the agreement as of January 19th how much we may see that improve in this next quarter, in the June quarter?

Well, as I said, we passed up on about $100 million worth of projects that we could have booked over the past quarter, because of unacceptable surety levels et cetera, et cetera. So the fact that we do now have an agreement will help us tremendously going forward, and once and when we get a co-surety on board, that will further improve our situation.

Mitch Golden.

It is RH Capital. Couple of questions. Can you -- just following up on the last question, that 100 million of projects. Can you give an indication of the profitability of your surety projects versus your nonbonded projects?

Well, I would say that they are similar. Typically, one of the things that lends the jobs that require surety bonds to be a little lower than the other, is the fact that typically are larger jobs, and that they last longer, and those kinds of things. So that's why we are focusing so strongly on smaller projects that get done quicker, and typically we can make better margins on those.

The next question, just to understand a bit about the materials costs. The lower margin business that you guys are rolling off; is that a lot of business where you had fixed exposure to the materials costs? And also going forward, what type of exposure in your contracts do you have, where you have taken the materials risk?

Most of that is. And we talked a lot during the last year about what happened in the commodity business, and then what it did to not just IES, but a lot of contractors. And going forward, we feel like we are fully taking advantage of the new cost, as far as pricing them into the work, and that hopefully we will never see again, a year in which steel doubled in a 30 day period. Conduit doubled, copper goes up almost 50 percent, and has stayed, which is contrary to what's happened over the last long period of time that I have been in this business. So we feel like that we are doing the best we can to protect ourselves going forward, using commodity prices in existence today. And if the construction Gods line up, then I would think we would see some reduction in those prices sometime in the future. But I certainly can't predict when and where. One thing that probably has hurt the residential markets a little bit, is that there has been such an increase in Romex and copper and those kinds of things, that we can't always get -- we can't always maintain the margins that we have had in the past, and we're seeing some more competition as far as cost competitiveness for single family homes et cetera.

How much of the work that you currently book do you take the material risk, versus do you not assume that price?

Well, you know, just about all of our work, we take a material risk. You take a labor risk. You take a material risk. The majority of our work is on a firm contract basis. So, we have probably 15 to 20 percent of our business is time and materials, service, cost plus, et cetera. Probably 20 percent. The other 80 percent, we have to -- is probably on some type of firm contract.

Joe Faratelli.

Imperial capital. Some quick questions on the surety bonding. Dave, I spoke to you maybe a couple of months ago trying to get a feel for how much in surety bonds you actually have. And I think at that time you had indicated it exceeded 200 million. I don't know if maybe you already stated this today. But what is that level as of right now, or quarter end?

Well, as we said in our prepared statement, we had about -- we issued about 20 million since we reached our new agreement, and I don't know, do we have a new figure, David?

Yes. The bonded cost to complete is about 177 million at the end of December. That's -- you can also find that in the 10-Q.

Okay. Great. Thanks. So what -- I am following on that same line. What about the subsidiaries that you are divesting? The sureties, my understanding, generally have blanket guarantees. So that if you had a surety on a project for an entity that was divested, and 1 of those entities defaults, they would still have claim to your collateral. Is that how it works?

Well, we stay on the line for jobs that are in progress when we divest ourselves of these units. But they also require the new owner to come on the line. So they have additional collateral, or additional guarantees pledged from the new owner, as well as IES is still on the line until the jobs that are there at the time of the divestiture are completed.

Right. So, do you know -- do you have any idea as to how those projects are going? Because that is beyond your control, to manage those projects. So are the purchasers required to provide you any kind of update on the status of those projects?

Yes, yes, on a monthly basis. And I can tell you, as you can see from the sales, most of these new purchasers are plunking down millions of bucks to acquire these companies. So, we feel pretty comfortable that they will do what ever it takes to complete the projects.

What are you getting in form of guarantees? You're getting personal guarantees from -- ?

The bonding company gets a personal guarantee from the new owner. That they will take over and complete the work. And then we stay on as -- with the same amount of guarantee that we had prior to the divestiture.

Okay. And I am sorry. 1 just follow-up question to Dave's question earlier. The cash and availability, you said was what, 55 million?

We said 55 million of total cash and availability, of which cash is 22 million. So the availability is approximately 33 million.

And that's as of 2/11? As of -- was that Friday?

That's Friday.

Friday. Okay. Great. Thanks, guys.

Nick Valomanos.

Ramius Capital. Good morning. You guys have -- the term loan portion of your credit agreement comes due in September of this year. I was wondering if you can comment on any plans -- how you plan to deal with that?

I will comment on that. We do have the ability, if we improve our leverage enough, to refinance that debt, or renew the debt, with the existing bank group. However, we will be out looking for ways to address that leverage issue going forward. But to speak specifically to your question, and I will put out a couple of new specific numbers here. The term loan borrowings as of the 11th were 13.5 million. And the revolver borrowings were 6 million. We are continuing to pay that down. We are continuing to pay that down as we divest ourselves of companies. And we think that we are tracking on a very favorable line, in terms of paying down that debt. Don't expect to have any outstanding borrowings on that debt at September 30th.

Jeff Beach.

As a follow-up, a couple of questions. First, since your last conference call, have you had any key departures of corporate personnel, or branch managers at core or under review operations?

Not other than planned -- excuse me, Jeff. I believe the only senior person we had was Margery Harris, our HR Senior Vice President, that parted in January, January 15th.

Okay. And second, with the availability of surety, or better surety availability, is this going to help in the sale of some of the units to be divested, in terms of being able to sell them easier, or getting a little better price?

I don't know, Jeff. You know, could be. Obviously, we are looking at a lot of things, as far as which unit, how much, et cetera, et cetera. But it certainly doesn't hurt.

The last question I have is on the relationship with your auditor. Going back to the events of June, July, early August, which looking back in perspective, were not significant events and the Company was doing well. The, I guess, inability or unwillingness of your auditor to work with you on quarterly results put you in, basically into a corner, that you are still trying to extract yourself from. And then you come into this quarter, and you delay your earnings, because you are waiting on your auditor for some valuation. It doesn't sound like your auditor is supporting the Company. And I wondered if you are considering a different auditor going forward?

Well, let me address that. We are not -- in fact, one of the recommendations from the board of directors for the vote that's upcoming on Thursday, is to ratify Earnest & Young as our auditors. And then to address the comments. I am not sure that I agree that our auditors aren't working with us, in this quarter, or in prior quarters. I think that we are a victim, like so many other companies, of the new environment. And many other companies are having very similar issues that they are having to ferret out with their auditors, that are requiring them to delay earnings. And so I don't know that I would say that our auditors are any different than any other auditors, and we are getting treated differently than any other company out there.

All right. I just note, not too many companies are set back let's say a year, in terms of progress into an expanding economy, like you have been. And I am just looking from the outside, perplexed over the whole situation with Earnest & Young.

Well, and, -- but I think you have to go back to David's comments, Jeff. It is a new world out there, a new environment. And all I can tell you is that IES is going to make every effort going forward, that we are able to work with our auditors, file everything in a timely fashion, do everything that we need to be doing, and take care of business, and try to maximize the returns for our investors going forward.

All right. Thanks.

Okay. Listen, I want to thank you again, for your support and patience throughout last year. As we start a new year, IES is very encouraged about the future, and we look forward to updating you on our progress as we go forward, and on a regular basis. So thank you very much for being with us today.

Ladies and gentlemen, this concludes the Integrated Electrical Services first quarter conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000, followed by the pass code 11024181. Once again, if you would like to listen to a replay of today's conference call, please dial 303-590-3000, followed by the pass code 11024181. You may now disconnect, and thank you for using AT&T teleconferencing.