Energy Services of America Corporation — Form 10-Q
Business context and reporting period. The filing covers the fiscal third quarter and nine months ended June 30, 2011; it was filed August 11, 2011. The company provides pipeline, utility, oil and electrical construction services, primarily in the Mid-Atlantic region. Its unaudited financial statements consolidate S.T. Pipeline and C.J. Hughes.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 |
|---|---|---|
| Revenue | $46.0 million | $93.8 million |
| Gross profit / margin | $2.4 million / 5.2% | $4.4 million / 4.7% |
| Operating income (loss) | ($0.6 million) | ($5.3 million) |
| Net income (loss) | ($0.7 million); ($0.06) per share | ($4.1 million); ($0.34) per share |
| Operating cash flow | Not separately presented for the quarter | $4.4 million |
For the nine months, investing cash use was $1.0 million and financing cash use was $1.0 million. Cash increased $2.4 million to $5.0 million. Capital expenditures were $1.0 million in cash purchases, with another $1.1 million of equipment acquired under financing agreements.
At June 30, 2011, total assets were $110.7 million, current assets $49.0 million, and current liabilities $37.9 million. Working capital was $11.1 million and the current ratio was 1.29. Total liabilities were $54.7 million. Debt included $18.3 million of lines of credit and short-term borrowings, $4.6 million of current maturities, $5.9 million of long-term debt, and $3.9 million payable to a shareholder. Cash was $5.0 million. Stockholders’ equity was $56.0 million.
Changes versus comparable periods
- Revenue fell 39.6% for the quarter and 25.9% year to date versus 2010. Management attributed the quarterly decline to unusually heavy Mid-Atlantic rainfall and delays; the year-to-date decline also reflected completion of a large 2010 project without replacement revenue.
- Gross profit fell 76% for the quarter and 67.2% year to date. Gross margin was about 5.2% for the quarter versus 13.0% in 2010, and 4.7% year to date versus 10.7%.
- The company moved from net income of $4.1 million in the prior-year quarter and $2.1 million for the prior-year nine months to losses in both 2011 periods. Two current projects incurred combined losses of $2.03 million, according to management.
- Compared with September 30, 2010, cash increased $2.4 million, total assets decreased $18.3 million, and total liabilities decreased $14.2 million. Retained earnings fell from $4.1 million to a deficit of $18,720 after the year-to-date loss.
Outlook, risks and notable items
- Management expected customer spending on transmission and distribution systems to increase as demand normalized, and cited backlog of $134.8 million at June 30, up from $47.8 million at September 30, 2010. It cautioned that future project awards and revenue growth were not assured.
- Fiscal 2011 capital expenditures were expected to be $2.0 million to $4.0 million, potentially higher if customer demand exceeded expectations; higher spending could pressure cash flow and require borrowing.
- Management said June 30 cash, available credit and expected operating cash flows should meet operating needs, while noting increased activity could require significant additional working capital. The existing $19.5 million credit line had only $481,000 available at June 30, after $18.1 million drawn and a $922,000 letter of credit.
- On July 27, 2011, after quarter-end, the company restructured its credit facilities: an $18.0 million line and an $11.3 million term loan. The term-loan proceeds were to repay $6.3 million of existing debt and reduce the line by $5.0 million; management said the transaction would provide $5.0 million of additional operating capital. The letter of credit was expected to expire August 21, 2011.
- At June 30, $109 million of performance bonds were outstanding and one $922,000 letter of credit was outstanding. Two customers represented 26% of nine-month revenue. A previously recorded $3.5 million of claim revenue remained in the initial customer-resolution phase; collection was considered highly probable by management.
- Risks noted include weather and project execution, customer concentration and collectability, dependence on working capital and credit availability, variable-rate borrowing costs, fuel prices, performance-bond obligations, and the company’s captive insurance arrangement. Restricted cash for the insurance captive was $1.391 million. Management reported no material adverse effect expected from ordinary-course legal proceedings and no changes to the risk factors in its latest annual report.
- Management reported effective disclosure controls and compliance with loan covenants at June 30; the debt-to-tangible-net-worth covenant had been waived until July 27. No dividends or share repurchases were reported. An exchange offer for legacy warrants began June 1; further details were to be provided with the proxy statement.
Investor verification priorities
- Verify whether the July 27 credit restructuring closed as described, its final terms, borrowing availability, and compliance with the revised covenants.
- Track backlog conversion, project margins, and whether weather-related delays and losses persist.
- Assess collectability and timing of the $3.5 million claims and the concentration represented by the two largest customers.
- Reconcile cash availability with the restricted insurance cash, performance-bond collateral needs, and working-capital requirements as activity changes.
- Review the next goodwill impairment assessment: goodwill was $36.9 million, and management reported market capitalization at 74% of book value at June 30.