Business Context and Reporting Period
Company: Energy Services of America Corporation (Energy Services)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended December 31, 2010 (First Quarter of Fiscal Year 2011)
Business Overview: The Company provides contracting services for energy-related companies, primarily in the gas, oil, and electrical industries. Operations include the construction, replacement, and repair of natural gas pipelines, storage facilities, and electrical installations. The Company operates through wholly-owned subsidiaries S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc.
Key Financial Metrics
| Metric | Q1 2011 (Dec 31, 2010) | Q1 2010 (Dec 31, 2009) |
|---|---|---|
| Revenue | $33,955,121 | $29,951,737 |
| Gross Profit | $3,601,008 | $4,765,726 |
| Gross Margin | 10.6% | 15.9% |
| Operating Income | $420,707 | $1,348,335 |
| Net Income (Loss) | $(54,553) | $637,563 |
| Diluted EPS | $(0.005) | $0.053 |
| Cash and Equivalents | $10,111,258 | $6,459,532 |
| Working Capital | $15,482,010 | N/A |
| Total Debt (Current + Long-term) | $34,831,480 | N/A |
| Net Cash from Operations | $5,857,893 | $6,376,657 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased by $4.0 million (13.4%) driven by a large project carrying over into the quarter.
- Margin Compression: Gross profit decreased by $1.2 million (24.4%) due to two projects underperforming on productivity expectations. Cost of revenues rose 20.5% to $30.4 million.
- Operating Expenses: Selling and administrative expenses decreased by $237,000 (6.9%) primarily due to reduced franchise taxes.
- Net Loss: The Company reported a net loss of $55,000 compared to net income of $638,000 in the prior year, attributed to lower gross profit and higher interest expense ($522,000 vs. $422,000).
- Liquidity Improvement: Cash and cash equivalents increased by $7.5 million to $10.1 million. Accounts receivable and retainage receivables decreased by $13.2 million due to substantial collections.
- Debt Reduction: Long-term debt was reduced by approximately $2.0 million (14%) during the quarter.
Outlook, Risks, and Management Commentary
- Seasonality: Management expects second-quarter sales to be lower than the first quarter due to inclement weather and the seasonal nature of the work.
- Backlog: Backlog stood at $41.4 million as of December 31, 2010, down from $47.8 million at the end of the prior fiscal year.
- Capital Expenditures: Anticipated capital expenditures for fiscal 2011 are between $2.0 million and $4.0 million, though this could rise significantly if customer demand exceeds expectations.
- Liquidity Position: The Company maintains a $19.5 million line of credit, with $18.0 million drawn as of period end. Management believes current cash and credit facilities are sufficient for operating needs.
- Claims: The Company recorded $3.5 million in claims revenue for the prior fiscal year related to customer delays and errors. These claims are currently in the initial resolution phase (meetings with customers).
- Concentration Risk: Two customers accounted for 39% of revenues for the quarter ended December 31, 2010.
- Goodwill: Annual impairment testing indicated fair value was at least 10% higher than carrying value; no impairment was recorded.
Investor Verification Checklist
- Project Productivity: Verify the status of the two underperforming projects cited as the cause for gross margin compression.
- Claims Resolution: Monitor the progress of the $3.5 million in recorded claims revenue to ensure collection probability remains high.
- Customer Concentration: Assess the financial health of the two customers representing 39% of quarterly revenue.
- Debt Covenants: Confirm continued compliance with loan covenants, specifically the current ratio (1.48 vs. 1.1 required) and debt-to-tangible net worth (2.20 vs. 3.5 required).
- Seasonal Impact: Validate the expectation of lower Q2 sales due to weather conditions against actual Q2 performance.