IES Holdings Inc (IESC) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Integrated Electrical Services second-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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded on Wednesday, May 11, 2005. I would now like to turn the conference over to Mr. Ken Dennard of DRG&E. Please go ahead, sir.

Thank you, Kristen, and good morning everyone. We appreciate you joining us for Integrated Electrical Services' conference call today to review fiscal 2005 second-quarter results. We would also like to welcome our Internet participants listening to the call as it is being simulcast live 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 early this morning. Occasionally there are technical difficulties experienced during these broadcasts. So, if you didn't get your release please call our offices at 713-529-6600 and we will get that right out to you. And also, we can put you on an e-mail distribution list if you so desire.

There will be a replay of today's call and it will be available via Web-cast by going to www.IES-CO.com. And of course there's the telephonic recorded instant replay that will be available for seven days by calling 303-590-3000, using a passcode of 11029447.

Please note that information reported on this call speaks only as of today, May 11, 2005, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. 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 results to differ materially from those set forth in such 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, cash flow; potential difficulty in addressing material weaknesses in the Company's accounting system that have been identified to the Company by its independent auditors; potential imitations on the ability to access the credit line under credit facilities; litigation risks and uncertainties; fluctuations in operating results because of downturns in levels of construction; inaccurate estimates used in entering into and executing contracts; difficulty in managing the operating existing entities; the high level of competition in the construction industry; changes in interest rates; the general level of the economy; level of competition from other electrical contractors; increases in costs of labor, steel, copper and gasoline; limitations on the availability and increased costs of surety bonds required for certain projects; inability to reach agreements with surety or co-surety bonding companies to provide sufficient bonding capacity; risks associated with failure to provide surety bond on jobs where we have commenced work or otherwise are contractually obligated to provide surety bonds; loss of key personnel; business disruption and costs associated with the Securities and Exchange Commission investigation and class action litigation; inability to reach agreement for planned sales of assets; business disruptions and transaction costs attributable to the sale of business units; 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 of the assets of the business unit; inability to fulfill the terms or meet the required financial covenants of the credit facility; inability to obtain a waiver of the existing event of default under the credit facility; cost defaults under the subordinated debt, senior convertible notes offering, or agreement with the surety if the event of default is not waived or cured and an acceleration occurs; difficulty in integrating new types of work into existing subsidiaries; inability of subsidiaries to incorporate new accounting, control and operating procedures; inaccuracies of estimating revenues and percentage of completion on contracts; and weather and seasonality. If the Company is unable to file an S1 in support of the senior convertible notes, the penalty interest may apply under that agreement. You should also understand that the foregoing important factors in addition to those discussed in other filings with the SEC, the Securities and Exchange Commission, including those under the heading Risk Factors contained in the annual report on Form 10-K for the fiscal year ended September 30, 2004, could affect our future results and could cause results to differ materially from those expressed in such forward-looking statements. We undertake 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. General information can be found at www.IES-CO.com under investor relations. The annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through the Website as soon as reasonably practical after we file them or furnish them to the SEC.

Now, with this behind us, let's move on to the conference call. This morning with me is Roddy Allen, President and Chief Executive Officer, and David Miller, the Company's Senior Vice President and Chief Financial Officer. I would like to turn the call to Roddy.

Thank you, Ken. Good morning to all of you and thank you for joining us today as we discuss our second quarter of fiscal 2005.

Our second-quarter revenues from continuing operations were 287.5 million, slightly less than revenues of 290.3 million for the same business units in the second quarter a year ago. The overall revenue decline is primarily due to limited bonding and an effort to reduce our dependence on larger bonded projects in order to improve our profitability and return on invested capital, a decision we made as a result of our strategic review that we conducted last fall.

Second-quarter revenues did, however, show a gain of $2 million over the previous quarter. IES recorded an operating loss from continuing operations of approximately $2.8 million because of decreased profitability due to project management issues on certain projects, gross profit losses associated with closing utility and plant work at one of our operation, costs to increase insurance reserves, as well as decreased awards of bonded projects in our commercial and industrial markets.

We reported a net loss from continuing operations of 8.4 million, or $0.21 per share for the second quarter, and a loss from discontinued operations of 4.8 million, or $0.12 per share, making the reported net loss 13.2 million, or $0.34 per share. Included in these results are certain charges and expenses and other items that totaled 9.8 million, or $0.25 per share. David will discuss these items in more detail later in the call.

As we announced in our fiscal 2004 year-end earnings release on December 14, 2004, we are continuing to categorize our business units in three broad categories -- core, under review, and planned divestitures. We assess each unit based on its consistency of profitability, return on capital, including capital employed for bonding, construction spending (ph) 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 composed 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. Based on periodic evaluations, business units may be moved to different groups.

Our core units form a sound operating group that produced 2004 revenues of 838.3 million and operating income of 48.5 million. In the second quarter, this group reported $208.2 million in revenues and income from operations of 4.6 million. The units under review produced revenues of 195.8 million and operating income of 1.2 million in 2004 and revenues of 39.7 million and an operating loss of 300,000 in the second quarter of fiscal 2005. The planned divestiture group had 2004 revenues of 390 million and an operating loss of 1.5 million. In the second quarter this group had 55.9 million in revenue and 1 million in operating income.

On a cumulative basis since November 29, 2004, we have completed 10 sales for approximately $29.8 million in cash. During fiscal 2004, these 10 units which primarily operated in the commercial and industrial market produced combined revenues of 137.6 million and operating income of 4.2 million. In addition, we closed one business unit during the second quarter and are in the process of closing another. These units had combined fiscal 2004 revenues of $7.6 million and an operating loss of 2.5 million.

Currently, 39 business units are in active operations within IES. Seven of these units, earning 244.8 million in combined revenues and a total operating loss of 3.3 million in fiscal 2004, are intended for divestiture. Year-to-date, these seven units have earned combined revenues of 114.6 million and no operating income.

Three additional active units are under review for potential divestiture. These units generated combined revenue of 195.8 million and operating income of 1.2 million in 2004. In 2005, they have earned combined revenues of 81.5 million and no operating income year-to-date. Today's press release contains a table that shows the operating results of these business units by category.

IES generated positive cash flow from operations of 5.9 million in the second quarter versus $600,000 in the second quarter of 2004. The backlog from continuing operations was 458.2 million as of March 31, 2005, compared to 584.3 million for the same business units in the second quarter of fiscal 2004 and compared to 514.9 million for the same units at the end of the first quarter of fiscal 2005. The decline in backlog is due to the decrease of awards of bonded projects as well as our efforts to obtain shorter-term higher-margin work. Gross margin in our backlog from continuing operations increased 40 basis points in the second quarter compared to the previous quarter.

We announced on January 19, 2005 that we had reached a new agreement with our surety bond provider to provide surety bonds at acceptable rates. Since January 19, we have requested and received approximately $60 million in new surety bonds from our surety provider. We are currently in the process of identifying a co-surety to further expand bonding capacity and allow us to better fulfill our bonding needs in light of the increased amount of new work available in many of our markets.

Now I will turn the call over to David Miller for more detail on our financial results. I will follow-up after his comments with further information regarding our strategy going forward. David?

Thank you, Roddy. As Roddy mentioned, revenues for the second quarter of fiscal 2005 were 287.5 million compared to revenues of 290.3 million at one year ago. The revenue for our core group of units, however, increased 5% to 208.2 million from 198.2 million in the same quarter one year ago. 2005 second-quarter revenues increased over the first quarter by 8 million, or approximately 4%.

Gross profit was 33.1 million versus 35.9 million last year, a 7.9% decrease. Gross profit margin decreased from 12.4% a year ago to 11.5% in this year's second quarter. The decline in gross margin was due to lower-than-expected productivity on some jobs due to project management issues, the decrease in bonded projects, and working off lower margin work in backlog September 30, 2004.

At one of our business units, we encountered significant gross profit losses on some larger longer-term utility projects that are close to completion. The fate (ph) on these jobs was approximately 2.1 million in the quarter. Despite these issues, we are encouraged to report that based upon contract analysis, work awarded to IES in the second fiscal quarter had margins approximately 150 basis points higher than the worked awarded in the first quarter.

SG&A expenses rose to 35.9 million, or 12.5% of revenues, from 31.4 million, or 10.8% of revenues a year ago. This is primarily due to increased legal fees and additional fees for Sarbanes-Oxley compliance. A significant portion of the legal fees were derived from a lawsuit filed by the Company that went to trial where the Company subsequently received a favorable verdict. The matter concerned a claim by a business unit that had not been paid for work performed.

The 2005 second-quarter net loss of 13.2 million, or $0.34 per share, included the following items -- a loss of 4.8 million, or $0.12 per share from discontinued operations, including 3.4 million of goodwill write-offs; a charge of 3 million, or $0.08 per share related to establishing valuation allowances against deferred tax benefits created by the Company's second-quarter loss; a loss of 2.1 million, or $0.05 per share related to gross profit losses on utility and plant projects at one business unit; a charge of 1 million, or $0.02 per share related to strengthening of insurance reserves for the Company's workers compensation, general liability, and automobile insurance programs; a charge of approximately 700,000, or $0.02 per share related to writing off certain leasehold improvements in compliance with the SEC's guidance on accounting for leases; a charge of approximately 300,000, or $0.01 per share related to losses in an investment as determined by the equity method of accounting.

These charges add up to 11.8 million, or $0.30 per share, offset by a gain of 2 million, or $0.05 per share related to marking-to-market embedded derivatives in the recent 50 million convertible bond issue, making the total adjustment 9.8 million, or $0.25 per share. Excluding these items, the net loss in the second quarter of fiscal 2005 would have been approximately 3 .4 million, or $0.09 per share.

Interest expense for the second fiscal quarter was 4.4 million. This is compared to 6.6 million for the second fiscal quarter of 2004. In this year, the interest expense included the 2 million gain from the marking-to-market of embedded derivatives in our convertible bonds issued November 2004, and this resulted from the shareholder approval of that convertible bond issue.

Our effective tax rate was a -5.3% in the second quarter due in part to the effect of pre-tax 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 during the quarter were 78.2 days versus 77.1 days for the previous quarter and 79.7 days for the same quarter one year ago. Our new incentive program which contains a modifier for collections helped improve collections this year.

Now, looking at our business segments for the second quarter. Second-quarter segment revenues for commercial/industrial continuing operations were 216.1 million versus 217.1 million in last year's second quarter; however, revenues from this segment rose slightly from the first quarter of this year, which had revenues of 215.9 million.

Commercial/industrial gross profit decreased in the second quarter to 17.8 million compared to 21.1 million a year ago. Gross profit margin for commercial/industrial was 8.2% in the first quarter versus 9.7% a year ago and 9.2% gross profit margin for this segment in the first quarter 2005. These decreases are partially due to the 2.1 million in losses experienced on utility and plant projects at one business unit.

Residential revenues for the second quarter were 71.4 million compared to 73.2 million last year, a 2.5% decrease, due to somewhat flat market conditions following two years of record growth. This is, however, 2.5% higher than the first quarter 2005 residential revenue number of 69.7 million, showing continued success within our residential units. Residential gross profit increased 3.1% to 15.3 million from 14.8 million in the second quarter last year, and residential gross profit margins grew from 20.2% in the year-ago quarter to 21.4% in this year's second quarter. Additionally, residential gross profit in our second quarter increased over the first quarter of 2005 by 10.6% and margins grew from 19.8% to 21.4% this quarter. Our residential units continue to excel despite flat market conditions and continually volatile commodity prices.

During the second quarter IES recorded a goodwill impairment charge of 3.4 million related to discontinued operations sold or to be sold during the quarter. We generated positive cash flow from operations of 5.9 million for the second fiscal quarter versus 0.6 million in the second fiscal quarter of 2004 and compared to a use of cash from operations of 9 million in the first fiscal quarter of 2005. And remember, the first fiscal quarter number included providing 10 million of cash collateral to the Company's surety provider.

Total debt at the end of the second quarter was 225.4 million compared to 223.1 million at the end of last year's second quarter. As of May 10, however, IES' total debt was approximately 223.1 million and cash totaled approximately 27.5 million. We have cash collateral of 17.5 million posted with our surety provider and an additional 2.6 million posted with our senior lenders for letters of credit, as required by our credit agreement, with proceeds derived from asset sales. We have no outstanding borrowings under our credit facility as of May 10, 2005. And currently, we are in discussions with potential lenders to refinance our credit facility.

As of March 31, 2005, the Company was in violation of the minimum EBITDA covenant of the credit facility as amended, and is in default. We are in discussions with our bank group to have the covenant waived or the facility otherwise amended to bring our company into compliance. If we had been in compliance with all of our financial covenants at March 31, 2005, our availability under the line of credit would have been approximately 32.3 million. If the senior credit facility is accelerated because of the existing default and remains uncured for 30 days, it can result in a cross default under our company's indentures with respect to the subordinated debt or convertible debt.

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.

Thank you, David. Though our performance this quarter was not as good as we had hoped, we have made some promising gains that will make IES a more solid company in the future.

Our efforts to pursue smaller shorter-term projects are beginning to show positive results. These smaller projects tend to have higher margins and our margin in backlog has already increased by 40 basis points from the end of the first quarter. Our divestiture program is continuing the significant progress it has shown in the first quarter and the proceeds from these sales are gradually improving our overall capital structure. We are addressing all of the identified material weakness by making changes to our disclosure requirements, reporting relationships and internal controls.

In addition, we have substantially implemented our enterprise resource planning system in all but three of our business units. We intend to finish the implementation in fiscal 2006. We will focus upon producing more consistent operating results through divesting under-performers and centering our business around a core group of operationally sound and successful business units. We will continue to reduce our dependency on surety bonds, thereby cutting the costs and risks associated with using them. We will also continue to improve our capital structure to reduce interest and debt burdens and improve IES' return on capital for stakeholders.

With that, I will open it up for questions.

(OPERATOR INSTRUCTIONS). Philip Volpicelli, CIBC World Markets.

I'm trying to figure out all the onetime charges, where they fell, and if we could try to come up with an adjusted EBITDA number. I appreciate there's a lot of moving parts here, but it seems to me that your adjusted number is higher than what is written in the press release as per your credit agreement. I just want to kind of go through each one of these adjustments that you have on the first page of your press release and then talk a little bit about the 2.4 million legal fees, the 1.3 incentive program, and the 0.5 of accumulated amortization for SG&A on leasehold.

Philip, let's take them one at a time. First one -- tell me the three that you need.

Philip Volpicelli Why don't we just go down the ones on your front cover of your press release. Where do they fall into your income statement?

Well, the loss on discontinued operations -- I think that one is fairly self-explanatory. It's on the income statement broken out as discontinued operations. Also in the 10-Q you'll see that we disclosed that depreciation expense associated with discontinued operations was approximately 0.2 million during the quarter and approximately 0.5 million for the year-to-date period. The charge of 3 million for establishing valuation allowances -- that is an offset to a tax provision. So, that's down in taxes. Loss of 2.1 million -- this is gross profit losses on utility and plant projects. That is up in gross profit. Those would be cost of sales and reduced revenues. Charge of 1 million, strengthening insurance reserves -- those are all up in cost of sales. Charge of 700,000, earning off leasehold improvements, approximately 200,000 of that is in cost of sales and 500,000 of that is in SG&A. And then the charge of 300,000 related to an investment is down in other expense between operating income and pre-tax income.

I appreciate that. That is helpful. The 2.4 legal fees, now that that loss has been settled favorably in your favor, we're not going to see more of those going forward? Is that accurate?

The Company is continually involved in ordinary course lawsuits, and so you will see legal fees going forward associated with that lawsuit. You shouldn't see any additional significant fees.

How about if I ask the question differently. That number, the 2.4 million figure should be smaller going forward? Would that be reasonable?

Yes. That would be reasonable. That also included accounting and some Sarbanes-Oxley fees as well.

And then, $1.3 million during the quarter for incentive program. Can you describe what the incentive program is and are we going to see more of that as we go forward?

You will see more of that going forward. The incentive program is essentially a program to incent the performing companies that are generating operating income as well as -- generating good operating income as well as focused on their collections. So, yes; you will see those going forward. I think you will see improved performance related to a lot of the companies that are getting those incentives.

In the press release it mentions that the backlog during the quarter was 40 basis points higher than previous. And, David, I believe in your comments you said something about second quarter, I guess, business was 150 basis points higher than the first quarter. Can you reconcile (multiple speakers)

Let me reconcile. The difference is the overall margin in backlog is 40 basis points higher at the end of the second quarter versus the end of the first quarter. However, new work awarded during the quarters -- okay? So, first quarter new work awarded versus second quarter new work awarded, the second quarter new work awarded margins were up 150 basis points. That is just a piece of the overall backlog.

Joe Farricielli, Imperial Capital.

Two questions. Obviously, trying to work through the original numbers you provided on asset sales, it appears you've moved a lot around. Originally the under review was 357. It looks like 162 has been moved out of there, and planned divestitures are only up by about 100 million. I was just wondering what happened with the other 62 million. And then at the same time, I see that '04 revenues, obviously, are adjusted down by 54 million. I was just hoping you could give some color on how all the pieces are moving around.

I will do that. As we said on previous calls, as facts and circumstances change we may change companies between core, under review, and planned divestiture. The core group for the most part has stayed reasonably stable. We have taken some companies that (indiscernible) under review and have sold them. There were a couple that were planned divestitures that have now become core, and there were a couple that were core that facts and circumstances changed and that we decided to sell. And they went over into planned divestitures.

So then, what is -- maybe this was disclosed on the last call. What is the 54 million drop in total '04 revenue?

For the planned divestitures?

No. You're showing total revenue of 1.424 billion. And if I go back to, I think it was maybe December when you released -- when you first broke this out, I thought you had total revenue of 1.4 billion.

What we did differently this quarter, and we did disclose it in the press release in a footnote, was to state -- essentially present the companies net of elimination entries. So you have got inter-company elimination (indiscernible).

Okay. Just quickly, what is your total surety number? It was 170 last quarter. So, up by 60 to 230?

No, that is not exactly right. We have worked off a good bit of the bonded work in the backlog, obviously. And we don't know exactly what it is today. But, as of March 31, I believe it was about 156, going from memory.

Jeff Beech, Stifel Nicolaus.

I was a little bit disappointed with performance on the commercial side, even adding back in the 2.1 million loss from the utility projects. And as I understand, the problem is you are working off lower-margin business in the backlog and you've also had productivity problems. And you indicated at the last conference call morale is better. Why haven't we seen more gross margin improvement on the commercial side in this three months over the last three months, and do you think we're going to see that improvement come outside of what you are bidding? Are we going to see better productivity start to impact profit margins looking ahead?

First, let me just say I was disappointed too, Jeff. Obviously, no one likes to not perform better than what we did during the quarter. However, in trying to address a couple of your comments -- number one, we did have those bad projects at the one unit. And I don't even know whether I mentioned it or not in the prepared remarks, but we are closing down that utility division at that particular company. That particular company is making money on the electrical work (ph), it's just that they had a bunch of old projects where they were in the process of finishing up on the utility division of the thing. And quite honestly we got a number of surprises as we were completing those projects. And it created a $2.1 million loss at that particular unit during the quarter. So, obviously, that hurt considerably.

We had a few surprises on some large projects that we were finishing up in some other places; nothing of that magnitude. However, we are gradually completing all of these large long-term projects that we have had underway now, as I mentioned at the last call, in most cases two-plus years. You know, are we 100% done with them? Probably not. Are we very close to being done with them? Yes. Can I say that there won't be any additional charges as we are winding them up? No. But, I don't think we will see anything of the magnitude that we have had in the past for sure. And as we get rid of these large two to three-year projects, we feel very comfortable that going forward we will see better productivity. The morale is extremely good. We just finished our home-and-aways (ph) with all of our companies and we all commented on how enthused we were about the way the morale seems to be improving in our various and sundry places.

As a follow-up --

I hope that answered your question, Jeff.

That helped a lot. I guess I assume I will expect to see a little better margins in commercial in the current quarter. We'll see if you can put it in. The other question I have is you have been pursuing a co-surety for about three months now in negotiations. Where might -- I don't know how long this process takes, but where might be a sticking point? And do you feel the way the negotiations are going you'll have a co-surety in the near-term?

We certainly hope so, Jeff. Obviously, I can't -- until we get an agreement we don't have an agreement. But, I can tell you that we have been working closely with our agent in that regard and we have been providing the information that they have asked us to provide. And we would like to think that we will have an agreement in the near-term. Can I tell you when that will be? No, I can't. But, we certainly hope that it will be sooner rather than later.

Also, one other comment that I thought about on your last question. As you well know, our second quarter typically is about the weakest quarter that we have. And we are moving now into better weather and the third quarter being typically one of our better quarters, so we would certainly hope that's going to prove true this year.

Kent Shaw (ph), Buckhead Capital.

Regarding the longer-term projects and how those have affected gross margins, can you give any indication as to how much of the decline or the lower gross margins was attributed to what you referred to as lower-margin work?

We provided you all with some color last quarter, and I will ask David in a minute if we've got it for this quarter. But, of the amount of work that we had that had less than 5% gross profit in it that we were like 90-plus% complete with as of last quarter -- and I don't remember the exact dollar totals of that. David, do we have anything on that this quarter?

I would be delighted to answer that. The jobs that were less than -- that had margins of less than 5% during the quarter on an overall basis are about 93, 94% complete. And they accounted for about 12% of the revenues during the quarter.

And do you have any indication as to when those projects will be completed?

We were about 90% complete last quarter and we're continuing to inch away on it. So, I think they will complete in the near future.

Sort of in a different direction -- I think some other folks have asked this question in the past about your surety capacity, but I don't know that we've ever actually heard an answer. Could you tell us what you would prefer your surety capacity to be in order to support the business that you think you need?

Obviously, we would prefer it to be more than what it is. Exactly how much we need is kind of a nebulous number depending on where we wind up with our divestitures and those kinds of things, and is somewhat driven by that; the percentage of bonded work that we get; the percentage of our customers that ask for bond, etcetera, etcetera. We don't have an exact program. We have a program based on our work off as far as on a monthly basis. And as I said, we have provided about $60 million in bonds over the last 90 days or so.

Is there a specific amount of projects that you have had to turn down because of surety capacity?

I'm sure that there was on some larger projects that we know for sure would have required a bond that we did not have capacity and locations to pursue those. And it's not always -- some of them we probably would not have pursued had we had the bonding capacity. So, it's kind of a -- we specifically allocate to our more profitable units the capacity that we have, and also based on the type of work. Some types of work have not been profitable for us in the past so we're no longer pursuing that type of work, such as closing down the utility division at one of our companies. We are trying to be a little bit smarter on what we are doing and utilize our capacity for the things that put the most to the bottom line.

That's very helpful. One quick follow-up to that. If you're not able to get the additional surety capacity that you need, are you confident that you'd be ale to cut costs in order to meet the gross profit that you need?

We certainly will make a 110% effort to do that should that be the fact. Yes sir.

David Degroff (ph), MFS Investment Management.

I wanted to follow-up on that last question about SG&A. If I look at the numbers for the quarter, you did about 7.5 million in EBITDA at the unit level and had 7.5 million in negative corporate SG&A. It seems inconsistent. Is there a program today to cut out overhead at the corporate level? And what is, I guess, that $30 million on a run rate? What does that consist of today?

Let me just comment and then I will turn it over to David for any specifics. Yes, there is a program to reduce costs and reduce SG&A. You all have heard me on many occasions state that our goal is an overall SG&A of 10%. That is still our goal. We had a number of things happen to us in this past quarter and have been happening to us over the last two or three quarters that have increased our SG&A cost, all the legal expense that we incurred for the various and sundry things that we had to address legally. One being -- the latest being the lawsuit in California, which we retained a favorable -- or received a favorable verdict on. And hopefully we are going to be able to recoup those legal costs. All of the costs that we are incurring with the Sarbanes-Oxley and the 404 certification; obviously, that is a tremendous increase, and that expense this year over the previous year. And a number of other things that have -- the convert; all of the various and sundry things from that issue. I will let David address any additional costs, but our goal is still 10% SG&A. And we're going to be working hard to try to get there.

I would like to comment that we have been cutting costs at corporate, and over the last six or eight months have cut out a fair amount of overhead here at corporate at the salary level. What is offsetting that, of course, is the legal fees associated with fighting lawsuits, if you will. Thankfully we got a victorious verdict in one of them. As well as addressing kind of legal expenses associated with not filing -- timely filing our Q. last year. One other thing to keep in mind when you're looking at corporate EBITDA is -- one of the things we mentioned in the press release was the $300,000 equity and losses charge that we took on an investment. That's carried at the corporate level. So, that's in there as well.

What about the legal fees?

Those are at corporate.

So, we have get the corporate SG&A is really more like $5 million on a recurring quarterly basis?

Well, I think -- I'm not sure that I'm comfortable sharing that exact number with you, and here is why. You have got a little bit of uncertainty over audit costs associated with being compliant for Sarbanes-Oxley this year, as well as becoming compliant for Sarbanes-Oxley. I'm going to share with you our expectations for the year for Sarbanes-Oxley compliance -- this includes the audit fees -- are approximately 2.5 to $3 million.

Over and above last year?

No, no. That is all in. Last year the audit fees were approximately 1.3 million. We didn't have any outside -- we didn't have any significant outside Sarbanes-Oxley costs.

So, what is the SG&A cost reduction plan, and how much is it going to take out over what period of time?

Well, I think we are just continuing to focus on it and everything we can to reduce SG&A, not only just at corporate but also in the field. And it's a day-in, day-out project here. And it will be continuing well this year and it will continue into the future.

And I could tell you, just as a side of that, we have -- on an annualized basis, we have reduced salary cost at corporate about $1 million over the last 90 days.

I wanted to follow-up on disclosure of the 12% of revenues below 5% operating profit margin for the quarter. Is that all on the commercial and industrial side?

It's primarily commercial/industrial, and that -- yes; it's just all the residential gross margins are fairly significant and up over last quarter. So, very little if any of that would relate to residential.

On the insurance charge, what is that? Why did it happen? Is it onetime in nature?

Let me share with you what is happening. Our safety program is excellent in the current year. We're continuing to keep costs down there. But, we are self-insured for workers' comp, general liability and automobile claims. And that particular charge is related to an actuarial study. We have an actuarial study performed twice a year, one at March and one at September. And that strengthening was required as part of some old lingering claims in old policy years that have continued to develop. So, that is what drove that.

Mitch Golden (ph), RH Capital.

Just a couple of different questions on a number of topics. First, can you just talk about the new business and the new bookings? And I'm just in reference to the significant decline in backlog quarter on quarter. Are you guys -- aside from the surety, are you guys losing market share or is the nonresidential construction market slower than what we may be perceiving from FW Dodge? Or are there other things just affecting the backlog decline?

As we've stated in all of the written matter, one of the things that has affected the backlog is the fact that we are being very selective on the larger longer-term work that we go after because of the surety requirements. In other words, we're not booking 5, $10 million jobs like we have in the past. We're concentrating on the smaller, quicker, shorter-term, get in get out type business which typically lasts six or eight months rather than two to three years. So, we booked significantly less, I would say $5-plus million jobs over the last six months, not just the last 90 days, than we typically have done in time gone by.

And I think a lot of that is good because as David mentioned, by concentrating on this shorter-term work, we have been able to increase our margins fairly significantly this quarter over last quarter, I think, about 150 basis points. It doesn't wind up being as much in backlog, but it does not mean that we're less busy then we would have been had we been booking to the jobs. It would just -- it would have taken a lot longer to have completed them. So, going forward, we will probably continue to chase the smaller, quicker, higher-margin stuff. And as our capacity for surety improves, we will start putting more in the mix probably with the longer-term jobs. I will tell you going forward, we probably won't ever concentrate on the really big jobs that's going to last three or four years that we have done in the past, just because of the danger in predicting what your costs are going to be three or four years down the road.

Just to follow-up on that and it's been asked sort of in reference to that. Given your working off of the lower than 5% gross margin business, as well as the booking of the higher margin business and entering into some seasonal strength, it seems like -- and this is, I think, part of one of the other questions -- a lot of us were expecting more improvement in this quarter, which didn't happen. But, it seems like you're really on the tail-end of the lower-margin work in backlog. Can you give any more indication of if that is going to work through this next quarter, or when we should see a lot of this higher-margin business actually materialize in the reported results?

I think as we continue to get rid of this old work, and as David said, we have -- we're steadily progressing. We have got less of it left to do now than we had a quarter ago. We have still got a little bit left to do, so it will have some effect in this quarter. However, as we are bringing this newer, higher-margin work on it should do a lot more towards offsetting that. We are relatively enthusiastic about the strength of our backlog and the margins in that going forward. And we're also very much enthusiastic about the way our residential units are performing.

Carter Newbold, Rutabaga Capital.

I wondered if you could restate or perhaps say in a bit more detail what the cross-default provisions are with the convertible and senior subordinated? I think you mentioned the 30-day period. Is that -- when did that 30 days start counting from? And do those cross defaults apply even if you cancel the facility?

No. They do not apply if we cancel the facility. The cost defaults are essentially if the credit facility is accelerated -- and it's not been accelerated -- but if it is accelerated, and that acceleration remains uncured for 30 days -- so, 30 days hasn't started -- then that would result in a default under the subordinated debt indenture as well as the convertible debt indenture. And then it would be up to those particular holders to determine whether or not to accelerate.

Okay. I apologize if you guys have addressed this on previous conference calls, but could you just talk about what restraints you place on insider selling? There's certainly been a lot of it, and it's hard to imagine that significant portions of it haven't happened at times when the sellers have been significantly advantaged with regard to knowledge about surety bonding our bank compliance or SEC investigations. I almost can't imagine there could have been a time in the last six months when you all were not in a privileged position with regard to information, yet you have all been selling stock fairly actively.

Let me just address that. That's Roddy. And I can assure you that I have not sold any stock that was not 100% in compliance with our window opening (ph) and with the legal advice that it was okay for me to do that. I certainly would not have been foolish enough to have done anything like that. I did have a 10b5-1 plan on file under which a good portion of that was done. And most of you are familiar with how that works. It's always done in accordance with the legal requirements.

And I did sell some stock. I'm going to be 65 years old in September. The largest amount of my assets was in IES stock, and I had had it for a number of years. And I elected at the time we got clear with all of the filing requirements and all, and the 10-K, the 10-Q, etcetera, etcetera. Back in December we had a window opening that was done in accordance with all the legal advice, etcetera, etcetera. And I did sell some stock back then. I did sell a little bit of stock in the past quarter under a 10b5-1 plan which was done in accordance with the 10b5-1. And that was under a family limited partnership in which I was a minority owner and it was primarily owned by my children.

So, to my knowledge, nobody that is an insider at IES has done anything outside of the parameters that they were allowed to do legally and correctly in accordance with all of the SEC rules and all of the requirements of that. And no insider sells stock without the concurrence and the okay from our legal department. And if they have any questions they go to the outside legal department to make sure that that is the case.

So, hopefully that answers your question. I still own a significant amount of IES stock. Will I sell some of the IES stock in the future? Probably. Do I have any plans to sell any today? No, I cancelled my 10b5-1 plan when the stock got down as cheap as it did. So, I do not have a 10b5-1 plan in effect at the moment. I don't have any plans to sell any stock at the moment, but I had obligations that I needed to meet and I sold stock to comply with those obligations. I don't apologize for it; I've still got a significant amount of my assets involved in IES stock. And I can assure you that neither I nor anyone else that is involved with this company on an insider basis will do anything that is outside of the legal requirements when they sell stock.

That's helpful. Since you mentioned your 65th birthday, does that trigger any sort of requirements with regard to management succession?

No. Well, we constantly look at succession planning. And we would be foolish since I am going to be 65 years old if we weren't trying to look around to see who in the devil is going to take my place when I either kick the bucket or can no longer limp around here or get out here or whatever. So, they are successions (ph) planning in place to take care of that. Am I announcing my retirement today? No, I'm not. That will be up to the Board of Directors and all of those kinds of things going forward.

Robert Whetenhall (ph), Edge (ph) Asset Management.

I just was hoping to get a little bit of clarification. It seems like the credit facility is in tactical default. And at the same time, you're fudging (ph) more of your receivables to your surety provider. If you want to keep in the future going forward any access to a credit facility, what kind of collateral can you post given that you're providing your surety provider with most of the receivables? Essentially, have you thought about using a restructuring adviser at some point to deal with the capital structure, just given the current situation -- declining revenues, low-margin EBITDA, and some sort of way around that?

Let me just address that question. You made mention that the majority of the receivables are pledged to the surety bond provider, and that is just not true.

No, no. Not the majority, but specifically those jobs which are (indiscernible) which are guaranteed by the surety provider. You're using receivables attached to that as collateral.

Absolutely. For the surety companies. And every company involved in the construction industry would be required to do that either through a previous agreement with their credit facility holders, or through statute. That is just the way it works. But, we have a significant portion of our receivables -- only about 30% of our receivables are actually bonded. A significant portion of those receivables are available for collateral to a lender or any other credit facility. Then, to answer your question about a restructuring adviser -- no, we're not currently looking at a restructuring adviser. But, we're always analyzing what is the best option for IES and for its shareholders.

Management, I would like to turn the call back over to you for closing remarks.

Well, thank you all very much. We appreciate you being with us today. I appreciate your continued interest in IES. And we hope that we will be able to continue to meet with you and then report progress towards getting back to where we want to be. So, thank you very much and talk to you again soon.

Ladies and gentlemen, this concludes the Integrated Electrical Services second-quarter conference call. If you'd like to listen to a replay of today's conference, please dial in to 303-590-3000 and use the access code of 11029447. (OPERATOR INSTRUCTIONS). Again, we thank you for your participation. You may now disconnect and thank you for using AT&T teleconferencing.