Business Context and Reporting Period
Company: Energy Services of America Corporation (ESA)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 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 entity in 2006 and acquired operating subsidiaries S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. on August 15, 2008. The second quarter is historically a slow period due to seasonal weather conditions, a trend exacerbated by the 2009 recession.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2009 |
Six Months Ended Mar 31, 2009 |
Balance Sheet Mar 31, 2009 |
|---|---|---|---|
| Revenue | $18.9 million | $52.6 million | - |
| Cost of Revenues | $21.2 million | $56.5 million | - |
| Gross Profit (Loss) | $(2.3) million | $(3.9) million | - |
| Net Income (Loss) | $(2.9) million | $(5.1) million | - |
| Diluted EPS | $(0.24) | $(0.42) | - |
| Cash and Equivalents | - | - | $10.4 million |
| Working Capital | - | - | $8.3 million |
| Total Debt | - | - | $29.4 million |
| Operating Cash Flow | - | $10.7 million | - |
Material Changes vs. Prior Period
Comparisons are made against pro-forma results for the same periods in 2008, as the company had no operating revenue prior to the August 2008 acquisitions.
- Revenue Decline: Revenue decreased 42.1% ($13.8 million) for the quarter and 44.9% ($42.9 million) for the six months compared to 2008 pro-forma figures. This was driven by the completion of major projects in 2008 that did not recur and the cancellation or delay of new projects due to economic conditions.
- Gross Margin Collapse: The company reported a gross loss of $2.3 million for the quarter and $3.9 million for the six months, compared to pro-forma gross profits of $3.1 million and $20.7 million, respectively. Key drivers included:
- Adjustments to estimated profit on three projects reducing profits by $1.5 million.
- Excessive equipment downtime for maintenance, which reduced gross margins by approximately $800,000 as fixed costs could not be allocated to active jobs.
- Losses on two specific projects totaling $3.2 million due to customer delays and unplanned holiday work stoppages.
- Balance Sheet Contraction: Total assets decreased from $133.7 million to $102.4 million. Accounts receivable dropped significantly from $38.6 million to $14.1 million due to collections on completed projects. Total liabilities decreased from $73.4 million to $47.2 million, primarily due to debt reduction.
Outlook, Risks, and Management Commentary
- Outlook: Management expects customer spending on transmission and distribution systems to increase over the next few years as natural gas demand returns. However, growth is contingent on economic stability. The company's backlog as of March 31, 2009, was $34.8 million.
- Capital Expenditures: Anticipated capital expenditures for fiscal 2009 are between $2.0 million and $4.0 million, though this could rise significantly if customer demand increases.
- Liquidity: The company holds $10.4 million in cash and has credit facilities available. Management believes this is sufficient for current needs but notes that credit tightening in the broader economy could impair future borrowing capacity.
- Risks:
- Customer Concentration: Two customers (Equitable Resources and Markwest) accounted for 43% of revenues for the six months ended March 31, 2009.
- Seasonality: Operations are heavily impacted by weather, with the second quarter typically being the slowest.
- Market Risk: Exposure to fuel price increases and variable interest rates on borrowings.
- Off-Balance Sheet: The company has $43.4 million in performance bonds outstanding and $950,000 in letters of credit.
Investor Verification Checklist
- Project Losses: Verify the details of the $3.2 million loss on two specific projects and the likelihood of recovery or future recurrence.
- Backlog Quality: Assess the stability of the $34.8 million backlog given the current economic environment and customer concentration risks.
- Debt Structure: Review the $11.8 million in related-party debt payable to directors and former owners, including repayment terms and interest rates.
- Seasonal Recovery: Monitor Q3 and Q4 results to confirm if the company can return to profitability as weather improves and project volume increases.
- Goodwill Impairment: Note that management determined no goodwill impairment test was needed despite stock price volatility; verify the assumptions used in this assessment.