Business Context and Reporting Period
Company: Energy Services of America Corporation (ESA)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009 (Third Quarter of Fiscal Year 2009)
Business Overview: ESA operates as a single-segment contractor providing services to the gas, oil, and electrical industries, primarily in West Virginia, Virginia, Ohio, Kentucky, and North Carolina. The company was formed as a "blank check" company in 2006 and acquired S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. on August 15, 2008. Consequently, comparative data for 2008 is presented on a pro forma basis to reflect these acquisitions.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Nine Months Ended June 30, 2009 |
Nine Months Ended June 30, 2008 (Pro Forma) |
|---|---|---|---|
| Revenue | $24.8 million | $77.4 million | $149.8 million |
| Cost of Revenues | $22.1 million | $78.5 million | $123.0 million |
| Gross Profit (Loss) | $2.7 million | $(1.1) million | $26.8 million |
| Gross Margin | 11.0% | -1.4% | 17.9% |
| Net Income (Loss) | $0.6 million | $(4.5) million | $12.7 million |
| Diluted EPS | $0.05 | $(0.37) | $0.88 |
| Cash and Equivalents | $4.0 million | (Balance Sheet Data as of June 30, 2009) | |
| Working Capital | $8.8 million | ||
| Total Debt (Current + Long-term) | $25.9 million | (Includes $9.9M related party debt) | |
| Current Ratio | 1.40 |
Cash Flow (Nine Months Ended June 30, 2009):
- Net cash provided by operating activities: $9.9 million
- Net cash used in investing activities: $(1.1) million
- Net cash used in financing activities: $(18.6) million
Material Changes vs. Prior Period
Revenue Decline: Revenue decreased 54.4% for the quarter and 48.3% for the nine-month period compared to 2008 pro forma results. This was primarily due to the completion of major projects in 2008 that did not recur in 2009, alongside delays and cancellations of new projects attributed to economic conditions.
Profitability Shift: While the company reported a net profit of $0.6 million for the quarter, it incurred a net loss of $4.5 million for the nine-month period. The nine-month gross loss of $1.1 million was driven by a $3.2 million loss on two specific projects at one subsidiary. Management attributes this loss to customer-initiated delays, unplanned work stoppages during holidays, and the inability to spread fixed costs over anticipated additional work.
Balance Sheet Contraction: Total assets decreased from $133.7 million (Sept 30, 2008) to $96.6 million (June 30, 2009). Accounts receivable dropped significantly from $38.6 million to $12.9 million due to collections on prior year contracts. Total liabilities decreased from $73.4 million to $40.8 million, driven by debt repayments funded by receivable collections.
Outlook, Risks, and Management Commentary
Outlook: Management expects customer spending on transmission and distribution systems to increase as demand normalizes. The company reported a backlog of $49.6 million as of June 30, 2009. Capital expenditures for fiscal 2009 are anticipated to be between $2.0 million and $4.0 million, though this could rise significantly if customer demand grows.
Liquidity and Debt: The company maintains $4.0 million in cash and $8.8 million in working capital. However, credit tightening has impaired the availability of facilities. Management is actively negotiating debt restructuring and pursuing collections to ensure adequate cash flow. Two subsidiaries have lines of credit with covenants requiring a minimum working capital of $100,000 and a current ratio of 1.00; the company is currently in compliance.
Risks and Contingencies:
- Customer Concentration: Two customers (Spectra Texas Eastern and Markwest) accounted for 33% of revenues for the nine months ended June 30, 2009.
- Off-Balance Sheet Obligations: The company has $43.4 million in outstanding performance bonds and a $950,000 letter of credit for insurance premiums.
- Related Party Debt: $9.9 million of the total $25.9 million debt is payable to directors, officers, and former owners of acquired companies.
- Seasonality: Operations are subject to weather delays and seasonal bidding patterns, with the second fiscal quarter typically being the slowest.
Investor Verification Checklist
- Project Losses: Verify the status of the two specific projects that generated a $3.2 million loss and confirm management's assertion that these were unusual occurrences.
- Backlog Quality: Assess the stability of the $49.6 million backlog given the reported delays and cancellations in the energy sector.
- Debt Covenants: Monitor compliance with loan covenants, specifically the "Borrowing Base" calculation (80% of receivables < 90 days) and working capital requirements.
- Related Party Transactions: Review the terms of the $9.9 million debt owed to insiders and the potential impact on liquidity if repayment schedules tighten.
- Customer Concentration: Evaluate the financial health of Spectra Texas Eastern and Markwest, which represent a significant portion of revenue.