IES Holdings Inc (IESC) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Integrated Electrical Services third 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 Wednesday, August 10, 2005. I would now like to turn the conference over to Ms. Karen Roan, Senior Vice President of DRG&E.. Man, please go ahead.

Thank you and good morning everyone. We appreciate your joining us for Integrated Electrical Services conference call today to review fiscal 2005 third-quarter results. We would also like to welcome our Internet participants listening to the call simulcast live over the Internet. Before I turn the call over to management I have the normal details to cover. You could have received an e-mail of the press release yesterday. Occasionally there are technical difficulties with these broadcasts so if you did not get yours, please call our offices at DRG&E at 713-529-6600 and we will get one to you. Also if you want to be on the permanent e-mail distribution list 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 the Company's website at www.IES-CO.com or a recorded instant replay will be available for the next seven days. You can call 303-590-3000 and use pass code 11035351.

Please note that information reported on this call speaks only as of today, August 10, 2005. Therefore you are advised at any time since this information may longer be accurate at the time of any replay. 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 relating to estimating future operating results, or our ability to generate sales income or cash flow, potential difficulty in addressing material weaknesses in the Company's accounting systems that have been identified by the Company to the Company by its independent auditors, 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 operation of 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 cost 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 our surety or co-surety bonding company to provide sufficient bonding capacity, risks associated with failure to provide surety bonds on jobs were we have commenced work or are otherwise contractually obligated to provide surety bonds, loss of key personnel, business disruption and costs associated with the SEC investigation and class-action litigation, inability to reach agreement for planned sales of assets, business disruption and transaction costs attributable to the sale of business units, cost 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 we have sold substantially all of the assets of the Company, difficulty in integrating new types of work into existing companies, inability of companies to incorporate new accounting, control and operating procedures, inaccuracies in estimating revenues and percentage of completion on contracts, and weather and seasonality. If the Company is unable to (indiscernible) previously filed S-1 in support of the senior convertible notes to become effective, total to interest may apply under that agreement. You should understand that the foregoing important factors in addition to those discussed in our filings with the SEC, including those under the heading risk factors contained in our 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 report.

General information about the Company can be found at www.IES-CO.com under Investor Relations. Our annual report on form 10-K, quarterly reports on form 10-Q and current reports on form 8-K, as well as any amendments to those reports are available free of charge through our website as soon as reasonably practical after we filed them or furnished them to the SEC.

Now with me this morning are Byron Snyder, Chairman and Chief Executive Officer; Richard Humphrey, Chief Operating Officer; and David Miller, Chief Financial Officer.

Good morning, everyone and thank you for joining us today as we discuss our third quarter of fiscal 2005. To begin this morning's call I will provide a general overview of where we are in the process of implementing our new strategy and initiatives. And what we are doing as we move forward. My remarks will be followed by our Chief Operating Officer, Richard Humphrey, who will discuss some of the steps we are taking to improve our operations. Then David Miller, our Chief Financial Officer, will review this quarter's financial results.

Before we get into the detail, let me reintroduce you to IES. What we have is a company that began in January of 1998 with 16 unrelated entities of different sizes, services and requirements with approximately 300 million in revenues. Today we have 37 entities with annual revenues of approximately $1,100,000,000. We are a diversified company, and thus have had some of the same issues that other companies with diverse operations, and we have gone through a lot of learning and still have areas that need improvement. However, many of these good things have occurred at this company, such as we have a common operating system. We have a common purchasing system. We have a safety program that has been highly successful. And we are able to handle multilocation projects. The next step is to address the remaining issues. We are working through those. And we are and we will continue to improve this company.

SG&A as a percentage of revenue is too high. We are aware of that and we are attacking it vigorously. At the home office we have gone from a peak of 130 employees down to 53. This has put some pressure on the home office staff, but they have certainly risen to the task put before them. During our reorganization we have been incurring higher costs, especially accounting fees. And as we have embraced and continue to work through Sarbanes-Oxley, our goal is to get SG&A as a percentage of revenues back to 2004 levels.

Reduced surety capacity has hampered our ability to aggressively build backlog. With additional bonding capacity I believe that we can show a marked improvement in the operations of our company. We are still a highly leveraged company, and we will continue to look at ways to improve our balance sheet. We have taken the first step as we announced on August second, we obtained a new $80 million senior credit facility that will carry us into the future. This is a facility that we can expand as we move forward. David will provide more detail on the facility later in this call.

In the six weeks that I have been in the role of CEO, we have improved communication. At the home office and in the field communication is clear, its crisper and more focused on the issues. IES employees should have a clear picture of where we need to go and what needs to happen. The communications will continue to be a priority at IES.

This has been a challenging year, and we've done a lot of hard work. We have taken steps to realign and improve the business and are focusing on improving our performance, our operational controls and support, and our bottom line. The quarter showed some positive results from those previously taken steps, and the progress in our third quarter is much better than that of our second quarter. This is the first real improvement, positive improvement we have seen on the operational side of the business since we initiated our new strategy. Going forward we will remain focused on reducing our dependency on bonding, choosing smaller and more profitable jobs and building our backlog with attractive opportunities.

These efforts were reflected in this quarter. Should our revenue -- although our revenues were lower, by almost 9% on a year-to-year comparison, they were up 1% sequentially from the second quarter and our overall margins improved. Also while our backlog decreased annually and sequentially the gross margin in the backlog improved. As it did in our second quarter. David will provide more detail in a moment.

Before I turn our call over to our COO, Richard Humphrey, for some remarks on some of the steps we are taking to improve our operations, I want to let everyone know that Richard and I are both fully committed to IES and its long-term improvement. I am a longtime resident of Houston, and I'm here in the office every day unless I am traveling to one of our companies. When Richard took the job as COO, he bought property in Houston and relocated from Chesapeake, Virginia. It is the first time in several years that IES has had both its CEO and COO permanently residing in Houston. I am very pleased to introduce Richard Humphrey.

Thank you, Byron. Some steps we are taking involve best practices. We have observed the processes used by consistent performers and as a result have developed a process called successful projects. Based on our observations, we determined the five key issues today that affect gross margin and developed a plan of attack on each. The first item is pricing and estimating and getting the right price out the door to our customer. Proper training of estimators continues to be a priority to accomplish this goal. The research has shown that when the estimate is broken down into smaller, more frequent monitoring steps, much like the project will be built by the general contractor or owner, management in reviewing the various monitoring steps can spend more time with the estimator evaluating the material and labor costs associated with each piece, rather than attempting to review the entire project just before bid time.

The monitoring process not only provides for a better, more accurate review of costs, it also enables management to spend time discussing each monitoring step and using that time for training estimators, as well. We accomplished two very important steps during this process, a better bid review enabling management and the estimator to bid a more accurately priced job, and training the estimator for growth and development in his position.

The next area of concern was our preconstruction conferences. It's important to communicate to those that are going to manage the project for us, how the project was bid and what the expectation is. Once the project is won it is time to communicate the project plans, specifications, schedule and the estimate to the field forman and the project manager assigned to the project. The estimated documents are presented in a notebook tabbed for each monitoring estimate as used to bid the job. The detail provided enables the forman and project manager to understand the project assume ownership of the cost and margin responsibilities.

Using this approach we start the job with a clear understanding of the work, the customer's schedule and the company's gross margin goal for this particular project. The third area was the construction schedule. Monitoring estimates are loaded on the construction schedule to set task timing and man hours indicated in each of the monitoring estimates. Should the project be behind schedule at any monitoring point, the company knows adjustments will be made to make on -- to be made on the job. In today's fast-paced construction (technical difficulty) schedule is not likely that a schedule will be extended. Therefore, we must manage our manpower based on what we agreed upon at the beginning and notify the project scheduler of potential labor and job management cost impact.

Monitoring estimates coordinated with construction schedules allow forman and project managers the opportunity to identify construction delays, assess cost and notify the customer of that assessed cost. The next area was managing the construction process in the field. Based on our observations we determined that the best IES performers develop ways to place the right materials in the right place at the right time. They also used the plan to determine the labor hours needed to install the work in specific areas. This process causes the schedule work to complete on or below budget. It also reduces the amount of time spent on inventory management, which is a big cost.

In most instances the job is built very similarly to the breakdown of the monitoring estimates enabling the foreman and project manager to review the materials needed for each monitoring step, make corrections necessary, therefore ordering the right materials or as close to right as possible for the specific work area. The man hours are also shown on each monitoring estimate, therefore goal setting can be used effectively. Employees at all levels in electrical contracting and in other contracting businesses enjoy meeting and exceeding expectations, and this process allows IES and its employees to benefit.

Currently employees using the process are staying within budget on most jobs and improving others. Margin fade is becoming less of a problem. The next step was training the processes. That was a primary concern, and seven of our company presidents, presently act as group leaders to conduct training on the use of these processes to manage construction projects successfully. This approach leads to continuous improvement in processes. Early results indicate a closer relationship between presidents, customers and improved margins.

Now I will turn the call over to David Miller for a review of financials.

Thank you, Richard. Our third-quarter revenues from continuing operations were 284 million, down 9% from revenues of 311 million for the same companies in the third quarter a year ago. But up a percent from the 282 million in this year's second quarter. The revenue decline from the previous year is primarily due to a reduction in bonded projects, more selective bidding on new project work and winding down of utility and plant work at one company.

Our overall gross margins in the quarter improved sequentially and year-over-year. Gross profit margin increased to 13.2% from 11.2% in this year's second quarter, and from 12% in the third quarter of 2004. G&A expenses as a percent of revenue rose to 13.5% in the third quarter from 11.2% a year ago and from 12.9% from this year's second quarter. The increase is primarily due to increased accounting fees associated with Sarbanes-Oxley compliance and audit fees, as well as an increase in legal reserves due to an unfavorable verdict received during the quarter.

IES recorded a loss from continuing operations of 1 million in the third quarter; an improvement from the $5 million loss in the continuing operations recorded in the second quarter. The overall third-quarter net loss of 14 million or $0.036 per share included the following items. A loss of 4.6 million or $0.0.12 per share of discontinued operations, primarily comprised of a non-cash write-off of goodwill of 4.3 million. We had charges of 1.6 million or $0.04 per share related to gross profit losses on utility projects at one of our companies.

We incurred 1.5 million or $0.04 per share increase in accounting fees related to Sarbanes-Oxley compliance procedures and increased audit fees. And approximately 1.4 million or $0.04 per share of non-cash interest costs associated with the accelerated amortization and write-off of deferred financing costs that resulted from the reduced size and shortened maturity of the Company's prior credit facility. A charge of 700,000 or $0.02 per share related to the increase in legal reserves due to the unfavorable verdict directed against the Company. And then a non-cash charge of 500,000 or $0.01 per share related to equity and losses on a prior investment. These items totaled 10.3 million or $0.27 per share. Excluding these items, the net loss in the third quarter would've been 3.6 million or $0.09 per share.

Interest expense for the third fiscal quarter was 7.6 million. The reduction in size and shortening of the maturity of the prior bank facility required the Company to write off a portion and accelerate the amortization of the remaining deferred financing costs, which resulted in a 1.4 million non-cash interest charge during the quarter. Although we didn't have a federal tax liability for the quarter, we still recorded a tax provision of 1.4 million for state and local taxes. We continue to focus on our collections and have seen improvements in days sales outstanding. At the end of the third quarter, DSOs were 77 days for continuing operations, an improvement of four days from the end of fiscal 2004 for the same companies. We wrote off 500,000 in the third quarter for losses on a past investment, and we have approximately $1 million of carrying value associated with this investment.

Now taking a look at our business segments for the third quarter, third-quarter segment revenues for commercial industrial continuing operations were 198 million versus 229 million in last year's third quarter, and versus 211 million in the second quarter. The commercial industrial gross profit margin in the quarter increased to 9.3% from 7.7% in our second quarter. That was less than the 10% in the third quarter a year ago. However, in the last two quarters we've had significant losses in one of our companies related to projects in its utility division, which we are in the process of shutting down. Excluding those projects, our gross margin would've been 10.3% in this year's third quarter and 8.9% in the second quarter.

Third-quarter residential revenues were 86 million compared to 82 million a year ago, a 5% increase, and compared to 71 million in the second quarter, a 21% increase, demonstrating continued success within our residential companies. Residential gross profit margins in the third quarter rose to 22% from 21% in the second quarter, and from 17.5% in the third quarter a year ago. We expect the markets to remain strong for the foreseeable future.

During the third quarter, we recorded a goodwill impairment charge of 4.3 million related to discontinued operations sold during the quarter. We generated negative cash flow from operations of 1 million in the third quarter. However, a large portion of this was related to opportunistic inventory purchases of wire for our residential companies, which will result in finished product in the near future. Total debt at the end of third quarter 223 million compared to 225 million at the end of the second quarter, and 231 million at the end of fiscal 2004. As of August 9, 2005, total debt remained unchanged at 223 million, and cash totaled approximately 35 million. As Byron mentioned, we recently closed on a new three-year $80 million credit facility that replaced our 60 million credit facility that was set to expire on the 31st of this month. The new facility is an asset-based loan that was fully underwritten by Bank of America, and provides the company with the necessary liquidity to meet its needs.

Backlog from continuing operations was 383 million as of quarter-end, compared to 435 million for the same companies at the end of the second quarter. However, gross margin in backlog continues to improve from 12.4% in the second quarter to 12.7% in the third quarter. Because we intentionally pursued fewer large private (ph) projects and are seeking smaller, shorter-term, higher-margin projects, as well as downsizing certain companies, our backlog has declined. We are encouraged that work awarded continues to be at increasing margins, as we mentioned in our last conference call.

New work awarded in the second quarter had gross margins that were 150 basis points higher than that in the first quarter, 12.9% versus 11.4%. The trend continued into the third quarter as new work obtained at gross margins of 13.3%, a 40 basis point improvement from the second quarter. This includes all work that is included in backlog, and we typically do not include single-family residential in-service work in our backlog.

On a cumulative basis since the beginning of the year, we've sold 12 companies, reporting 1.8 million in cash proceeds, and closed two additional companies. These 14 companies, which operated primarily in the commercial industrial market, together produced revenues of 218 million and operating income of 7.5 million in fiscal 2004. Our divestiture program is winding down, and we expect it to be substantially complete by the end of September. The businesses left to sell have generated approximately 90 million in revenue in the last 12 months.

Thank you for your time, and now I'll turn the call back over to Byron for some closing comments.

We have refocused IES and believe we are about halfway through this transition phase. We've been through a lot over this past year, yet we have taken many steps to move us forward in the right direction. We will continue to improve our operations and grow our residential and service businesses, which do produce higher margins. We are seeking shorter-term, lower-risk projects that can be managed better and that generate higher margins. In the future, we will typically not go after the larger $10 million projects, which have higher risk and usually produce lower margins. That doesn't mean that if the right large project comes along, we won't consider it, but that will not be our primary focus going forward. Our renewed focus has been reflected in the kind of work we have acquired during the year, and we are encouraged by the quality of the work that we have been able to obtain over the last several months.

Finally, I would like to take this time to thank our outside partners that have continued to express confidence in IES. I would like to thank our former bank group for working with us in the past. I'd like to thank our new bank group led by Bank of America, and we look forward to working with them. And our bonding company, CHUBB, that continues to support IES by providing surety bonds. We also want to thank our vendors, our customers and our shareholders, as well as a special appreciation to our employees for their support, their dedication, their focus over the past year.

With that, I would like to open it for questions.

(OPERATOR INSTRUCTIONS) Philip Volpicelli. Please state your company name followed by your question.

Hi, it's Phil Volpicelli at CIBC. Encouraged to hear Richard's summary of what affects gross profit the most, and it looks like gross profit is turning the right direction in certainly the residential business. The SG&A remains obviously a very serious concern for us, in that it seems you've sold about $80 million of business or $200 million versus last year, and SG&A is up. Can you give us any color on how soon we can see some cost savings there, what other efforts you are taking to bring that SG&A down? I would imagine that it should be down in line with the top line based on the sales that you've made.

Philip, excellent question. This is David Miller. A couple answers to that question. You are right, there ought to be some pro rata decline as revenues have declined and we've sold businesses. However, a large chunk of that G&A is at the corporate headquarters, and there's a couple things that impacted that. As you'll recall from the last call that we had, Sarbanes-Oxley costs for our annual audit this year are up dramatically from where they were last year and from where they were two years ago, and those costs don't necessarily go down. In fact, they are not going down as we are selling companies off this year.

Now we do expect to see some declines in those costs going into next year, which would be year two for Sarbanes-Oxley, but then also as the overall scope of an audit comes down, we would expect to see some decreases in our overall audit costs. But we are forecasting that Sarbanes-Oxley and our annual audit for this year to cost $4 million, the two of those together. Through June 30th, about 3 million of that 4 million has already been incurred. So there's another million to go in the fourth quarter.

Also, you will note from the press release that during the third quarter we had approximately $700,000 of costs associated with a verdict that was returned against us in a lawsuit that happened during the quarter. We are focused on making sure we have the right folks in the right positions, not only at the home office but also in the field, and that we don't have redundancies. We are working very hard to try to cut those costs. We are also focused on trying to cut some of the fixed costs of IES, focusing on some of the things that are a little harder to effect change in, such as leases, and really thinking about where our companies are located and determining if we are in the right place and the right location for the right price.

Can you give us a sense -- I know that, I think Byron mentioned you want to be back down to the 2004 level of SG&A as a percentage of sales so that is about 11%. I seem to remember you guys had talked about 10% previously. How soon do we get to those numbers? Is that something that occurs in the next two quarters, something that occurs by the end of '06? Can you give us a sense of how soon we're going to get there?

Well, it's certainly not going to be over the next quarter, especially given that we are working with Sarbanes-Oxley in our annual audit fees for the rest of this year, and there is going to be a significant impact on the fourth quarter. I would expect that as we get into the second half of 2006, fiscal 2006 that we should be able to start making some significant improvements in the SG&A.

Okay. I'll just ask one more question, I'll let somebody else go. In terms of there is a lawsuit that was detailed in the Q regarding Cynthia Peeples. Can you give us some color on that? Is that the lawsuit you paid the 700,000 for or is that still pending?

No, this one is still pending, and this is a lawsuit that has been filed against the Company, and she is demanding quite a bit of damages. It is essentially surrounds a wrongful termination allegation, among others. And we believe that we've got meritorious defenses to this lawsuit, but given the size of the demand it is something we felt like we needed to disclose in the 10-Q.

Jeff Beach.

Stifel Nicolaus. Good morning, Byron. I'd like to have you expand somewhat on the commercial gross margin. Most of the industry sees a significant improvement in the second quarter to your second quarter, March to June. And when I strip out all the onetime items I don't see the same amount of gross margin improvement that you are talking about. And the gross margin level itself is extremely disappointing. And when I look at the level of gross margins in the backlog and you are shrinking it, doing more service work, I would like you to explain the disconnect between gross margins that run 12% plus in the backlog, higher gross margins in your service work, and reporting gross margins under 10.

I'll answer that question for you. First, I'll say that we were relatively pleased with the overall improvement in commercial industrial, not pleased with the actual delivery in terms of the actual gross margin, but the fact we are seeing quarter-over-quarter-over-quarter improvement in those margins. One thing to keep in mind related to the utility projects at one of our subsidiaries, that if you -- once we complete those projects the margins for this quarter -- excluding those projects, would have been 10.3% for commercial, significant improvements over last quarter. We are continuing to see improvement in commercial and industrial and expect that that will continue into the fourth quarter. I would like to tell you that in Q3 it would have -- we would have seen 12, 13% margins. But these things take time. We are still working through some older work and some lower margin work that we had taken on in the past, and that work as you know, has a significant downward impact on the overall margins that are delivered during the quarter.

As a follow-up question your backlog is down, and can you describe -- it seems like there might be two things working against backlog. Is backlog down more because you have insufficient surety capacity to replace work being done? Or is it more down because you are shifting from these large projects to smaller ones and you have to win twice as many to put as much backlog, as much work into the backlog. What is the driving force on the backlog and you see this stabilizing and turning up in the next couple of quarters?

I'll answer that question if I can, please. It is a little bit of both. We've also made a conscious decision to try and focus on projects with higher margins. Typically many times that is a smaller project that drives the higher margin. We are looking for negotiated work in markets where in the past we've depended upon competitive bid work to support backlog in certain companies. And when we make that change it takes a while to build relationships to gradually move into the negotiated marketplace. So that does have a tendency to slow down the growth in backlog. More bonding is going to help, yes, but right now we are focused on gross margin and finding the types of work that improve our gross margin. We also as Byron mentioned in his comments, looking to grow our residential divisions and also add residential divisions by using companies that presently do well in the commercial side of the business but use their management skills to put in our residential division and wire more houses in that particular marketplace -- condominiums, whatever the market may provide. We've said many times in the past that service and special projects is an area that we should grow the Company in, and we expect to. We own the perfect, we think, residential models. We have several that just perform consistently day in and day out. We don't have to go out and invent that. We know how to do that. We own the perfect service models. We don't have to go out and invent it. We understand how to do that. We are going to rely on those that do it well to teach other partners how to manage service departments and achieve the gross margins that a good performance achieves. So reocurring revenues is one of our primary focuses, and this is going to help us generate reocurring revenues going forward. The construction business is still very important to us. It is our core business. But we are also going to build on these others. Did I answer your question?

Just on the backlog do you see being able to stabilize and turning it up in the next couple of quarters?

That is our goal, yes, absolutely.

All right. Thanks.

Joe Verselli. (ph)

Imperial Capital. First a clarification question probably for you, David. The LTM revenue of subsidiaries used to be divested is 90 million, is that correct?

It's approximately 90 million.

So what is the operating cash flow for those entities?

The operating cash flow for those entities, they are essentially breakeven, cash flow wise.

And how many does a total?

We've not disclosed that number.

Okay. All right. My question is regarding the credit facility. You essentially upsized by 20 million, but it doesn't appear that it really did anything for your liquidity since there is a $15 million reserve, and an additional $5 million LC that had to go out to CHUBB. So could you give us what your current availability is as opposed to the 12.6 as of 630 under your prior facility?

The prior facility, the facility that no longer exists?

Right. I think in the Q it stated that availability was 12.6 million.

And now we have got close to 20.

Joe Verselli" Can you just walk me through how you get there because from looking at it, you have an $80 million facility with a $50 million reserve, 5 million for LC's, 5 million that went to CHUBB, and then your LC number was what, somewhere around 42 or 44?

I understand what you're doing here. Total LC's as of today are approximately 45 million. That includes the new $5 million CHUBB LC. So we worked very hard to reduce some of our collateral requirements with our insurance companies. And so we've gotten a reduction from them on some of our collateral requirements and we continue to work on that.

Okay. And so then where does that leave -- I'm sorry, did you say where the availability is then as of today?

I have got 45 million of LC's outstanding. I've got no borrowings and 65 million of availability under the new facility. There is 20 million of availability.

Okay, all right. That's it for me. Thanks.

David DeGraw.

MSS. I was wondering how much of the SG&A improvement in the second half of next year is predicated on building backlog and sales going up, as opposed to absolute dollar reductions?

You're certainly going to see some significant dollar reductions associated with Sarbanes-Oxley and with the annual audit, I believe. Time will tell, I guess. We are continuing to work on the fixed costs in SG&A, and we will see some reductions there, but you're right. We are anticipating growing backlog and growing revenue going into or certainly in the second half of fiscal 2006. So it is going to be little bit of each; in terms of the exact dollar amount, I think that is a little difficult to forecast at this moment, but it will be little bit of each.

Do you have a list of projects at this point where you are cutting absolute dollars out? Can you share some of that with us?

No, not at this time.

Switching over to the cash, the disclosure on cash at August 9 was 35 million. Does that include the restricted cash?

Well, remember the restricted cash has now been released associated with our new facility. So.

Okay, so the 35 million in cash at August 9 is all the cash?

That is all in cash. That does not include cash that is deposited with our surety.

And how much is that?

That is 18 million today.

Okay, and what is the prospect on getting some of that back?

Just as soon as we possibly can it is going to require, in my opinion, continued improvement over the next several quarters in the operations of the business to give some of that cash back.

Okay. Can you guys buy back bonds under the new facility?

We can.

And one last thing on the SG&A. Just looking at the run rate sequentially, if you adjust the first couple quarters for some of the legal reserves that you took you were running at about a $5 million pace, if you do the same adjustment for this quarter you are up at $8.8 million. Sequentially what is the change of that $3 million?

I'm a little unclear on where your 5 million starting point is coming from. Will you walk me through that?

The reported numbers for the first quarter and the second quarter were 7.6 million and 8 million. And then in the releases in the Qs you have given some disclosure about legal reserves that were taken, 1.7 million in the first quarter and 2.4 million second quarter. So if you back those out you're around the $5 million area. I don't know if that was the terminology that you're also including Sarbanes-Oxley in those numbers and so that is --

My math is, I get to about the $6 million number, as a starting point.

Kevin Buckle.

Grandview Capital. Most of my questions have been answered, but you've spoken a lot about SG&A, Sarbanes-Oxley and audit fees in the corporate area. But what I'm trying to understand here is in the commercial industrial side you've got revenues down about 10% year-over-year, and your SG&A in (indiscernible) field operations look like it is relatively flat on an absolute dollar basis, meaning the percentage has gone up. Why aren't we seeing a reduction there, and is it planned to reduce that almost $80 million run rate in that division down significantly?

Yes, we are addressing those issues. What we want to do over the next quarter and into first quarter of next year is adjust downward where necessary, but leave room for the Company to grow back also. Talent is hard to find in our business. So therefore, where we have quality talent and in many companies we have some excellent talent, we certainly want to retain that. But as far as our cost of facilities, cost of equipment, those kind of things, those are our primary focus. Areas where we can reduce real costs and those dollars fall to the bottom line; we clearly understand that and are focused on that.

Are you starting to reduce that now? Or has there been any events to this point in terms of reductions?

No. We've been working at this for quite some time as David has been working on the same issue at home office.

We should expect to see expanding margins both in the SG&A being reduced on an absolute basis as well as increasing margins on the gross profit side?

Could you repeat that please?

We should expect to see going forward some expansion on the operating income margin based on reductions in SG&A, as well as expansion of the gross profit margin?

That is our goal, absolutely.

Ronald Rich.

Miller, Taybeck (ph) Roberts. With regard to the business units you divested, can you speak to just how those units were valued? Is there any common metric in terms of multiple to revenue or net asset value, that was used?

We used a variety of valuation methods, and it really was case specific to the individual company. What you've seen, if you were to take all of the companies together, somewhere close to 19 or 20% price to revenues. I would suggest to you that that is somewhat coincidental. That is not how we value the companies, although I've been asked that question many, many times. We look at future performance. We look at historical performance. We look at the forecast for the market that these companies are going to be in. We look at our ability to provide bonding if in fact they are heavy bond users, and we look at the management teams that are in place at the individual companies and make an assessment of what we think the outlook for the future with those teams would be. So in some cases it is a multiple of EBITDA. In some cases it is a percentage of revenues. But there is no one valuation metric that we use.

Okay, and a separate topic with regard to current surety obligations, can you give a number to that and break out the components of security for those obligations, whether they are LCs or bonded AR, or cash collateral? I know you mentioned 18 million on the cash collateral.

There is 110 million of cost to complete as of June 30 on bonded projects. The collateral that is associated with those projects is 18 million of cash collateral. That is comprised of 17.5 million actually deposited with accumulated interest thereon. And 11.4 million of LC collateral and receivable collateral is approximately $60 million.

Robert Ryan.

Banc of America Securities. In terms of -- I may have missed it on the prepared portion of the call you provided a breakdown of the results by core business, by under review and by held for disposal or something like that. Have you provided that on the call?

No, we've not. What we've done on this call is said that we are in the final stages of our divestiture program, and we have approximately 90 million of revenues yet to go.

So we should consider everything outside of that 90 more or less core, is that fair?

That's fair.

And do you expect any LC requirements or restricted cash to be released or to travel with any of these units that represent 90 million in revenue that you are looking to sell?

That's the first part of your (technical difficulty) restricted cash portion, what was the first question?

In terms of the LCs, the surety, that you talked about and then the LC supporting the surety or any other LC requirement to travel with the disposed units.

Well I think the answer is I certainly would like to think that that is the case. But I don't believe that it's the case. I don't think we will see a reduction there.

Even on the surety?

Surety side, no.

And then in terms of your credit agreement, and you were able to file that ahead of the call, the fixed charge coverage ratio, and bear with me here, the test as of July was 0.59 times, and it stays in that neighborhood for an extended period on a monthly basis. Can you give us some sense of where you think your actual will shake out for July? And maybe enlighten us a little bit on what sort of cushion you think you have under that test?

We're not giving out guidance at this time.

Philip Volpicelli.

I just want to -- the last thing on the Cynthia Peeples -- what is the timing of that? Are you going to court or are you going to try to settle out of court and when will that happen?

The timing is the petition has only recently been filed, and so as you know some of these things can take many, many months, up to years. It is in the early stages of the case. It is likely that we will reach a settlement if we determine that there is any merits to her case.

And then just we've had a lot of onetime issues through the last couple quarters. Are we drawing to a close on that? The utility project that we are writing off? Are we getting to a point now where you are operating on a go forward basis and all these onetime noises are out of the way?

I believe that is a fair assessment. As you know, we've been working very hard to turn this company around over the last 12 months. And much of that turnaround results in having non-recurring and sometimes onetime charges so I do believe we are nearing an end to that.

Jeff Beach.

I have a couple of additional questions. First, on the commercial work as you are emphasizing smaller projects and service, I assume that the amount of work as a percentage of the total that is not going into the backlog is going up. Can you give us a rough idea now of what that percentage is?

That percentage presently is going to be somewhat consistent with the past few months and maybe a couple of quarters. But our goal certainly is to raise that bar considerably, Jeff. And I can't give you -- I am not finished with the complete business plan on that yet. So I can't give you the exact percentage increase that we would expect. But we'll have that information soon.

And again a couple of other things. The increase in interest expense in this quarter was a write-off and accelerated amortization of deferred financing. How -- that was I think 1.4 million -- how long will that number continue before it is -- before you've amortized the amount?

It will be complete in the month of July. As you know, we refinanced our credit facility on August first and with the refinancing and replacing of the old credit facility any unamortized costs will need to be written off at that time.

Okay, and then going back to the previous quarter you won a -- had a favorable verdict on a lawsuit and were estimating getting between 5 and $7 million in that lawsuit returned to you. Can you tell us where you are, when you expect to receive some of those proceeds, and is it 5 million or is it closer to 7 million?

I will still say it is 5 to 7 million and the reason I will say that is it depends on what it actually becomes known as part of the briefing schedule. And the briefing schedule is set to go through October, and don't expect a judgment to be entered until October. So based on how the judge views the facts and views what the jury, the verdict that the jury reached, will influence on whether or not we think it is closer to 5 or closer to 7 million. But at this point, (indiscernible) set expectations here, we don't expect that during fiscal 2005 that we will receive any cash under that particular verdict. Again because the briefing schedule goes through October.

Joe Verselli.

I'm just having trouble with the divestiture process. And I think it was October 28 you announced 289 million of noncore for divestiture. I think then increased it by about 38 million in February of '05. And from my calculation noncore divestitures have only totaled 102 million. I think you had some core companies that people approached you on with healthy multiples. And my calculation then is that you actually have another 225 million of noncore to divest. Has that original 289 number changed?

Here is what has changed. We have shut down a few companies that would add to your 102 million; but what has changed is if you will recall on previous calls we said that look, our outlook on these companies could change as time goes on. And some of these companies our outlook has changed. But as we are right now we have about 90 million approximately of divestitures left to go, and we believe that the remaining base of companies is our core going forward.

Okay, and then just a follow-up on the comment going to your credit agreement. The lockbox that you're going to have to enter into, how will that affect your current cash position, as well as your cash going forward? In other words, percentage of your receivables, how much will go directly into the lockbox, and how much are unpledged to the ABL lender or do they all go into the lockbox?

They will all go into a lockbox of some type, but that doesn't necessarily change our cash position. And the fact typically a lockbox if it is done properly can increase the time to collections, as opposed to us going and collecting a check and then taking a day to go deposit it and then taking another day for the bank to actually reflect it in our account. Whereas a lockbox it is reflected in our account the day it hits that lockbox. From a cash management perspective I don't think you will see any negative impact on our cash at all.

Won't the balance be swept on a daily basis to pay down the revolver?

Right, but we have no borrowings on the revolver nor do we (multiple speakers).

Right, okay. Good point. Thank you.

Kevin Buckle.

On the utility projects what percentage of your backlog is now still entails utility division?

It is a terribly small number. Less than 5%.

Less than 5%, okay. If you exclude that from your backlog margins would your margins still be up sequentially from Q2 to Q3?

Absolutely.

It would be -- (multiple speakers) taken out the losses on that project?

Yes.

I think you had a 12.7 was your gross margin backlog, is that correct, that you said earlier?

Yes, that's correct.

And 13.3 was where you were writing business in Q3, correct?

That's right.

So you're backlog now is approaching close to what you are writing new business at. Are you expecting to see in the fourth quarter beyond here some continual improvement in the gross margin of awards written?

Yes, there has been a continuous improvement mode on everything, and yes also on gross margin. That is one of our primary goals is to get that up. It has been a problem child for us and we are going to fix it.

At this time I would like to turn the conference back over to management for any closing comments. Please go ahead.

I would like to thank you again for your interest in IES, and we look forward to talking with you at our next call. Just be assured that this management team and employees are focused on the future, and we have our goals in front of us. Thank you again.

Thank you, sir. Ladies and gentlemen, this concludes the Integrated Electrical Services third-quarter conference call. If you would like to listen to a replay of today's teleconference, you may do so by dialing 303-590-3000 and entering access code 110353511. (OPERATOR INSTRUCTIONS) Ladies and gentlemen, thank you all for your participation. You may now disconnect.