IES Holdings Inc (IESC) 2005 Q4 法說會逐字稿

Welcome to the Integrated Electrical Services fourth-quarter 2005 conference call. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded today, December 22, 2005. I would now like to turn the conference over to Mr. Ken Dennard, managing partner of DRG&E. Please go ahead, sir.

Good morning, everyone. We appreciate you joining us for IES' conference call today to review fiscal 2005 fourth-quarter and year-end results. We'd 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 details to run through. You could have received an e-mail of the press release this morning. Occasionally there are difficulties with these broadcasts; if you did not get yours please call our offices at DRG&E at 713-529-6600 and we'll get one right out to you. Also, if you'd like 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 and that address is www.IES-CO.com. Of course there is a recorded instant replay that will be available for the next seven days and that number is 706-645-0201 and use the pass code 357-1321. That information is in the press release.

Also please note that information reported on this call speaks only as of today, December 22, 2005, and therefore you are advised that any and all sensitive information may no longer be accurate at the time of any replay listening. This conference call also 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 Company's inability to complete a financial restructuring on terms acceptable to the Company or at all; the Company's ability to continue as a going concern; the inherent uncertainties related to estimating future operating results or the ability to generate sales, operating income or cash flow; potential difficulty in addressing a material weakness in the Company's financial close process that has been identified by the Company and its independent auditors; potential limitations on the ability to access the credit line under our credit facility; litigation risks and uncertainties; fluctuations in operating results because of downturns and levels of construction; inaccurate estimates used in entering into or executing contracts; difficulty in managing the operation of existing entities; the high level of competition in the construction industry from both third parties and ex employees; changes in interest rates that could affect the level of construction; the general level of the economy; increases in costs or limitations on availability of labor, steal, copper and gasoline; limitations on the availability and the increased cost of surety bonds required for certain projects; inability to reach agreements with our surety companies to provide sufficient bonding capacity; risk associated with failure to provide surety bonds on jobs where we have commenced work or otherwise contractually obligated to provide surety bonds; loss of key personnel; business disruption and costs associated with the Securities and Exchange Commission investigation; class-action litigation or shareholder derivative action now pending, unexpected liabilities associated with warrantees or other liabilities attributable to the retention of the legal structure or retained liabilities of business units where we have sold substantially all of the assets; the inability to fulfill terms or meet the required financial covenants of the credit facility; difficulty in integrating new types of work into existing subsidiaries; the inability of subsidiaries to incorporate new accounting control and operating procedures; inaccuracies in estimating revenues percentage of completion on contracts; disruptions or inability to effectively manage work related to hurricane Katrina and Rita and the expected increase in construction; the Company's failure to satisfy the listing requirements of the NYSE; suspension from trading and the Company's current on the NYSE and the NYSE's commitment on efforts to delist the Company's common stock and the Company's potential failure to appeal these efforts successfully; inability to reach agreement with our senior lender on amendments to the credit facility before December 31, 2005 if delisted from the NYSE and the senior unsecured note holders demand repayment of their notes; the Company's potential inability to pay the debt and accrued interest; inability to modify, restructure or replace the Company's substantial debt; inability to successfully restructure our operations to reduce operating losses; a material default in one or more of the Company's credit agreements which is not waived or rectified and unexpected whether interference.

You should understand that the foregoing as well as other risk factors discussed in our filings with the SEC including those listed under the heading risk factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2005 could cause results to differ materially from those expressed in such forward-looking statements. We undertake no obligation to publicly update or revise information concerning the Company's restructuring efforts or inability to cash position or any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

General information about the company can be found at the Company's website -- 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 our website as soon as reasonably practical after furnished to the SEC. Now with the foremost behind me I'd like to introduce Byron Snyder and David Miller. Byron is Chairman and Chief Executive officer and David is Chief Financial Officer. Now I'd like to turn the call over to Byron.

Thank you, Ken, and good morning. Thank you for joining us today as we discuss our physical 2005 fourth-quarter and full-year results. To begin this morning's call I'll provide some general comments and overview where we are in the process of implementing our strategy and initiatives and what we're doing as we move forward. Our remarks will be followed by David Miller, our Chief Financial Officer, who will review our financial results and other items and I will make some closing comments.

First of all, it's imperative to note that most of our issues over the past year have not been pervasive throughout this entire Company, they have been specific problems at certain companies; five of our total of 35 companies. We're monitoring these problems very closely and those issues are being resolved. The problems have occurred on approximately 25 jobs, creating a drag on this entire Company. At any given time at IES we have over 2,000 jobs in process. The problem jobs are as much as two years old and were taking it as times when the overall construction market was down. Those jobs from this group that have yet to be completed are now monitored on a weekly basis at the corporate office to help complete the jobs within the revised estimate.

The fourth quarter was another challenging one and we're not satisfied with our results. However, we're encouraged that the actions we have taken in the past year are showing progress and we continue to take steps to improve our financial performance. In our third-quarter call I discussed some of the actions we had taken, namely -- improving communication at home and in the field; refinancing our credit facility; focusing on improving the balance sheet and starting a process that we call successful projects which involves enhancing our best practices to improve our operations.

We're continuing to initiate successful projects throughout the Company which will provide our business units with proven practices to better manage these jobs. From initial bid to final execution and a result in better profitability. Since then we have taken the following steps. We have brought in new Board members who will be able to offer further perspective and advice on IES operations; we've reorganized our legal department and settled certain long-term litigation items which has freed our resources to be used elsewhere; we've identified excessive leases and terminated certain leases early where it made good business sense.

We have completed our previously announced divestiture program. As announced on November 2nd, we have hired the Gordian Group as a financial adviser to help strengthen our balance sheet. As of December 14, 2005 we have reached an agreement with principles of ad hoc committee which hold approximately 58% of IES' senior subordinated notes. The agreement is for those subordinated notes to be exchanged into 82% of the common stock of the reorganized company, with existing shareholders retaining 15% of the common stock and management receiving 3%.

This agreement in principle is subject to documentation of execution and delivery and customary closing conditions. This restructuring of the balance sheet would be implemented pursuant to a prepackaged Chapter 11 bankruptcy proceeding. This agreement constitutes substantial progress in our continual effort to reduce long-term debt the goal of which is to improve free cash flow, enhance credit ratings, strengthen the balance sheet and enhance surety bonding capacity for our business.

The agreement also contemplates that IES senior convertible note holders with a current aggregate principal amount outstanding of approximately $50 million would be reinstated or the holders otherwise provided the full value of their note claims. It is also contemplated that IES' senior bank credit facility would be reinstated or refinanced at the time of the restructuring. Discussions have already begun with our bank with respect to the proposed restructuring.

I want to emphasize that the intention of this agreement in principle is that our customers, our vendors and trade creditors would not be impaired by the restructuring and would be paid in full in ordinary course of business. We're pleased with the faith and support that our customers and suppliers continue to show us, but I'd like to repeat that the intention of this agreement in principle is that our customers, vendors and trade creditors would not be impaired by this restructuring.

To sum it up, 2005 was definitely a transition year for IES and we expect a significantly better 2006 as a result of the actions we have taken thus far. Now I will turn the call over to David Miller for a review of the financials.

Thank you, Byron. Our fourth-quarter revenues from continuing operations were 269.9 million, down 8% from revenues of 294.5 million for the same companies in the fourth quarter a year ago. Revenue decline is primarily the result of a decrease in the amount of bonded work because of increased bonding costs and decreased bonding availability.

Let's take a look at our business segments for the fourth quarter. Fourth-quarter segment revenues for commercial and industrial continuing operations were 180.9 million versus 219.3 million in last year's fourth quarter primarily due to less bonded work and the shutdown of plant and utility work at one of our subsidiaries. Commercial and industrial gross profit margin in the quarter decreased to 4.5% from 7.7% in our fourth quarter last year. This decline is related primarily to the previously mentioned units, all of which operate the commercial industrial segment.

Fourth-quarter residential revenues were 88.9 million compared to 75.2 million a year ago, 18% increase demonstrating continued success within our residential companies. Residential gross profit margins in the fourth quarter were 19.3% compared to 19.5% in the fourth quarter a year ago. The majority of our residential companies are located in solid markets in the sunbelt. We expect our performance in these markets to remain strong for the foreseeable future.

Gross profit margin decreased to 9.4% from 13.2% in this year's third quarter and from 10.7% in the fourth quarter of 2004. The gross margin decline was due to increased competition and cost of material that could not be passed on to our customers in our residential business segment; the impact on margins and profit of the previously mentioned 25 jobs; and decreased profitability due to the closing of utility and plant work at one of our business units. The above-mentioned utility projects lost 2.8 million in the fourth quarter of fiscal '05.

Adding these gross margins back would have been 10.4% for the fourth quarter. SG&A expenses as a percent of revenue were 16.8% in the fourth quarter compared to 14.9% a year ago and to 13.5% from this year's third quarter. The increase is due to higher than normal professional fees including accounting related to Sarbanes-Oxley implementation, audit costs and higher legal fees and settlements.

IES recorded a loss from continuing operations of 84 million in the fourth quarter of 2005 compared to last year's loss of 123 million from continuing operations. The reported 2005 fourth-quarter loss was 84.9 or 216 per share. 2004 it was a net loss of 134.4 million or $3.46 per share. For the full year of fiscal 2005 revenues were 1.1 billion compared to 1.2 billion in fiscal 2004. Fiscal 2005 gross margin declined year-over-year, gross profit margin declined to 11.5% from 12.3% is fiscal 2004. The gross margin decline was primarily the result of increased competition and cost of materials that could not be passed on to customers in our residential segment.

Decreased profitability due to the closing plant work at one business unit in our commercial industrial segment and fewer bonded projects in our commercial industrial segment. The above-mentioned utility and plant projects lost 7.4 million on 15.4 million in revenues during fiscal '05 as compared to losses on these same projects in fiscal '04 of 0.3 million on revenues of 34.3. For segment information for fiscal 2005 revenues for commercial industrial continuing operations were 785.3 million versus 899.6 million in last year's fourth quarter primarily due to a decrease in bonded projects.

Commercial industrial gross profit margin for the year decreased to 7.8% from 9.4% last year. As previously mentioned, we've had significant losses in one of our commercial industrial units related to projects in its utility and plant division throughout fiscal 2005. All but one of these projects are now complete. Fiscal 2005 residential revenues were 317.5 million compared to 282.7 million a year ago, a 12% increase primarily due to continued high demand for new single-family housing. Residential gross profit margins for fiscal 2005 were 20.6% compared to 21.5% a year ago. This performance is indicative of the continued success we expect from the residential segment going forward.

In fiscal 2005 SG&A expenses as a percent of revenue were 13.9% compared to 11.8% a year ago. This increase is due to higher legal fees and to settle legal litigation, increased accounting fees related to Sarbanes-Oxley and increased audit costs in fiscal 2005. Additionally, we recognized an additional accumulated amortization in SG&A for leasehold improvements as well as lease exit costs. IES reported a net loss for the year of 129.6 million, $3.31 per share, compared to a net loss of 124.9 million on $3.23 a share for fiscal 2004.

The fourth-quarter and full-year net losses included the following items -- non-cash charges of 65 million or $1.66 a share for the quarter and 72.5 million or $1.85 a share for the year related to goodwill impairment; non-cash related to FAS 142 annual impairment testing; a non-cash write-down; certain long lived assets as per FAS 144; equity and losses in an impairment to one of our investments; a write-off in accelerated amortization of deferred financing costs due to the reduced size and shortened maturity at the Company's prior credit facility; establishing valuation allowances against deferred tax benefits created by the Company's first- and second-quarter loss and writing off certain leasehold improvements; charges of 2.7 million or $0.07 per share for the quarter and 3.8 million or $0.10 per share for the year related to the strengthening of insurance reserves for the Company's worker's compensation; general liability and automobile insurance programs and early termination of certain leases; an increase in professional fees from Sarbanes-Oxley compliance; audit and legal of 2.8 million or $0.07 per share for the fourth quarter; and 7.2 million or $0.19 per share for the year; gross profit losses in the plant and utility division, one business unit of 2.8 million or $0.07 per share in the fourth quarter; 7.4 million or $0.19 per share in fiscal 2005. As I previously mentioned, this unit -- we were shutting down this division and there's currently only one open job.

And then lastly, a loss on discontinued operations of 0.9 million or $0.02 per share for the fourth quarter and 15.1 million or $0.39 per share for fiscal 2005. The above items total 74.2 million or $1.89 per share in the fourth quarter and 106 million or $2.71 per share in fiscal 2005. Excluding these items the net loss in the fourth fiscal quarter of 2005 would have been 10.6 million or $0.27 per share. Net loss in fiscal '05 would have been 23.6 million or $0.60 per share.

Excluding the goodwill impairment 99.8 million, a litigation settlement charge of 8 million, tax valuation allowances of 16.5 million and a loss on discontinued operations of 11.4 million for the fourth quarter of 2004 to be comparable and 5.6 million for fiscal 2004. Net income for the fourth quarter of 2004 would have been 1.3 million or $0.03 per share. Excluding those same charges the net income in fiscal 2004 would have been 5.1 million or $0.13 per share. Interest expense for the fourth fiscal quarter was 7.4 million and interest expense for the full year increased to 28.3 million from the year-ago level of 23.2 million primarily due to increased charges from deferred financing cost amortization.

We continue to focus on improving our cash collections in all our units and have seen improvements in days sales outstanding. At the end of fiscal '05 days sales outstanding were 76 days from continuing operations, an improvement of five days from the end of fiscal 2004 for the same companies. Total debt at the end of fiscal 2005 was 223 million compared to the 231 million at the end of fiscal 2004. As of December 22, 2005 total debt was 223 million and as of December 21, 2005 unrestricted cash totaled approximately 23 million. We had an additional 17.5 million cash posted as collateral with our senior lender and recorded as restricted cash making our total cash approximately 40 million.

On August 1, 2005 we closed on a new three-year $80 million asset based senior secured lending facility which is being used to issue standby and commercial letters of credit as well as it's available, although not currently used, to finance the Company's ongoing working capital (technical difficulty). The Company is seeking an amendment to the credit facility before December 31, 2005 for the purpose of amending the applicability of the fixed charge coverage ratio. IES expects to obtain this amendment prior to December 31, 2005.

And as of today, IES was in compliance with the terms of its credit agreement and availability under the facility of 2.6 million. Our independent registered public accounting firm, Ernst & Young, included a going concern modification in its unqualified audit opinion on our consolidated financial statements for the fiscal year ended September 30, 2005 included in IES' Form 10-K as a result of the operating losses incurred during fiscal 2005 and our potential noncompliance for certain debt covenants subsequent to September 30, 2005.

We did not include any adjustments in the financial statements included in the Form 10-K or the results in our press release to reflect that possible future events may result from the uncertainty in the Company's ability to continue as a going concern. We're currently undertaking the following efforts to address this uncertainty. We're in the process of negotiating a financial restructuring with the holders of our senior subordinated notes and have reached an nonbinding agreement in principle with the holders of approximately 58% of those notes.

We're negotiating an amendment to our credit facility which we expect to obtain prior to December 31st, modified applicability of the fixed charge coverage ratio and we're working to improve profitability and consistency of earnings for the initiation of a process known to the Company as successful projects. We're moving forward with the strengthening of our balance sheet and operational performance and are confident we can significantly improve both.

We received notice from the New York Stock Exchange on December 15th that trading of our common stock had been suspended on December 16th. The NYC intends to recommend delisting of our common stock pending the completion of applicable procedures including any appeal by IES at the NYSE staff's decision. We intend to appeal that decision to delist our stock and expect that process to take several months before a delisting is made or a decision is made on our listings status.

Our common stock is currently trading on the pink sheets under the ticker symbol IESR. On December 15th and 16th our stock was erroneously listed under the symbol IESRQ; that mistake has since been corrected and the "Q" at the end of our symbol has been removed. We've completed our previously announced divestiture program. Since its start in October 2004 we've sold 14 business units primarily operating in the commercial/industrial market for total cash proceeds of 56.7 million and retained assets and receivables of 4.4 million. And we've closed two units. These 16 units had combined net revenues of 294.9 million and operating income of 10.9 million in fiscal 2004.

Backlog from continuing operations was 386 million as of quarter end compared to 382 million at the end of the third quarter. Because we are seeking smaller, shorter term, higher margin projects as well as reducing our amount of bonded projects our backlog has declined from the year ago level of 528 million for the same unit.

During the quarter we added approximately $130 million of new contract work to backlog at margins of 13.9%. Total backlog in the fourth quarter had gross margins that were 150 basis points higher than a year ago, 12.9% versus 11.4%, and 40 basis points above the third-quarter's 12.5% backlog margin. This includes all work that has entered into our backlog we typically do not include single-family residential service work in our backlog. Thank you for your time and now I'll turn the call back over to Byron for some closing comments.

In my earlier comments I said that we expect a better 2006 and it's for the following reasons. We've refocused IES in the following areas -- our credit facility, leases, litigation, strengthening the balance sheet, improving our operations with successful projects. We have limited the size of the jobs we pursue thus limiting their risk. Our renewed focus has been reflected in the kind of work we acquire during the year. We've been working through the lower margin business in our backlog and now our backlog margins are rising.

Our bank continues to support us. We have a solid relationship with our vendors and customers. We expect operating cash flow to continue to be strong. With successful projects we expect that our business units will manage their jobs better and profitability will improve. Our operations are improving and most of our companies continue to perform very well.

We have successfully completed our previously announced divesture program. We had a unique opportunity exclusive to contractors of our size, the ability to share ideas and best practices throughout the organization. Our units are varied in type of work performed -- geographics served and employees background and death. These units together comprise a wide base of knowledge and electrical contracting. The valuable communication process helps units learn from other units within IES on several fronts, from job referrals to project management.

In addition, with the divestiture program complete our core units are focused on producing successful results and working as a team. With a leaner more motivated corporate office able to support these operations. We have made a shift to realign IES' revenue mix with the burgeoning residential and service markets we consistently earn higher margins in commercial and industrial work, IES has worked to win residential contracts. By increasing our market diversity IES is working toward stable results in what is often an unstable industry.

Residential business now makes up more of IES' revenue comprising 33% of total revenue in the most recent quarter and 29% of revenue for the full year. We also expect our markets to remain strong. We primarily operate in the Sunbelt with most of our business coming from the southern portion of the United States -- the states of California, Arizona, Texas, Louisiana, Mississippi, Alabama, Georgia, Florida, Tennessee and North Carolina.

Based on industry data when comparing the projected growth for the country as a whole and for the states that we do the most work in, for the years 2006 through 2009 these states show a projected compounded annual growth rate of 3.5% while the country as a whole shows 1%. Examples of what we're seeing in some of the markets include Miami is seeing tremendous growth in high-rise. The Miami Herald reported in May of this year that there are 114 major high-rise projects either being planned or under construction in the area. There are 61,000 new units planned currently which is eight times the number of units built in the last decade. Our business in the Miami market has been in that region for 19 years and it is one of a small number of competitors in this specialized market.

The housing market is booming in Arizona; the economy there is very strong and the relatively expensive cost of housing in California makes Arizona especially attractive. The Arizona State University housing forecast is very positive and indicates strong long-term growth in the local housing market. Our business there is one of the two largest residential contractors in the region.

One of our Houston based companies is our largest residential contractor and does exclusive work within the Houston, Dallas-Fort Worth, Austin, San Antonio and McAllen markets. These regions are experiencing population growth and the general economic conditions are favorable. After the recent storms the people who relocated to the Houston area and to other areas across Texas are expected to have a positive impact on the housing market. In the I-35 corridor between San Antonio and Austin it's very strong with high demand for housing. Austin and many of the smaller cities between Austin and San Antonio are growing rapidly and the local economies are strong.

Our Company in the region is the largest residential electrical contractor in the market. In California we have one of the top electrical contractors in the Southern California, Orange County, LA market. Despite some reports that the California housing market has cooled off, the residential markets of Southern California are still strong based on what we're seeing. The national contractors that we work with in that area have indicated that they expect to build at least the same number of houses in 2006 that they built in 2005.

Regarding the rebuilding effort in the Gulf Coast, we're committed to helping rebuild those areas affected by the tragic recent events. As previously disclosed, we've detained (ph) some work already related to those storms and are only in the beginning stages of the rebuilding efforts in the damaged areas. We believe he will continue to attain business related to these efforts.

While we are still not giving quarterly guidance, we will provide some annual guidance that can also be found in our press release. Based on current trends we expect revenues of 950 million to 1.01 billion, operating income of 13 to 16 million and EBITDA of 22 to 25 million in fiscal 2006. Finally I'd like to thank our outside partners that have expressed confidence in IES. I'd like to thank Bank of America and our bonding companies.

We also want to thank our alliance vendors; profitable work has come from these relationships as they have directed it to us and we appreciate it. Finally, we thank our vendors, customers and all of the stakeholders as well as a special appreciation to our employees for there support, their dedication and their focus over the past year an in years to come. We wish everyone a happy holiday and look forward to a successful 2006 for IES. Thank you.

That concludes our call. You may now disconnect now.