Business Context and Reporting Period
Company: Energy Services of America Corporation (Energy Services)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended March 31, 2011
Business Overview: The Company provides contracting services for energy-related companies, primarily in the gas, oil, and electrical industries. Operations include construction, replacement, and repair of natural gas pipelines, storage facilities, and electrical installations. The Company operates as a single segment with subsidiaries S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 |
Six Months Ended Mar 31, 2011 |
Six Months Ended Mar 31, 2010 |
|---|---|---|---|
| Revenue | $13.78 million | $47.74 million | $50.25 million |
| Cost of Revenues | $15.33 million | $45.68 million | $46.65 million |
| Gross Profit (Loss) | $(1.55) million | $2.06 million | $3.59 million |
| Operating Loss | $(5.10) million | $(4.68) million | $(2.59) million |
| Net Loss | $(3.37) million | $(3.42) million | $(1.96) million |
| Net Loss Per Share (Basic/Diluted) | $(0.28) | $(0.28) | $(0.16) |
Balance Sheet and Liquidity (as of March 31, 2011)
- Cash and Cash Equivalents: $1.85 million (Decreased from $2.58 million at Sept 30, 2010)
- Working Capital: $11.74 million (Current Assets: $38.91M; Current Liabilities: $27.17M)
- Total Debt: $22.28 million (Current maturities: $5.01M; Long-term debt: $10.69M; Related party debt: $4.10M)
- Lines of Credit: $12.76 million outstanding; $3.6 million available under a $19.5 million facility.
- Backlog: $159.2 million (Increased from $47.8 million at Sept 30, 2010)
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 32.1% ($6.5M) for the quarter and 5% ($2.5M) for the six months compared to the prior year. Management attributes the quarterly decline to extreme weather conditions (heavy rains) in the Mid-Atlantic region causing project delays.
- Operating Loss Expansion: Operating loss widened to $5.10 million for the quarter from $3.94 million in the prior year quarter. This was driven by reduced revenue while certain fixed costs (including $1.7 million in unallocated equipment costs) remained constant.
- Asset Reduction: Total assets decreased by $27.5 million to $101.5 million, primarily due to a $13.5 million reduction in accounts receivable resulting from substantial collections.
- Debt Reduction: Long-term debt was reduced by $730,000 (6%) during the quarter.
Outlook, Risks, and Management Commentary
Management Commentary
Management notes that the second quarter is typically slow due to weather. The extreme weather in 2010-2011 caused larger-than-expected losses. Despite the net loss, the Company maintains a strong backlog of $159.2 million. Management expects customer spending on transmission and distribution systems to increase as demand normalizes.
Guidance and Capital Needs
- Capital Expenditures: Anticipated to be between $2.0 million and $4.0 million for fiscal 2011, though this could rise significantly if customer demand exceeds expectations.
- Liquidity: Management believes current cash ($1.85M), available credit ($3.6M), and anticipated cash flows are sufficient for operating needs. However, significant growth could require additional working capital.
Risks and Contingencies
- Weather Dependency: Operations are heavily impacted by weather conditions in the Mid-Atlantic states.
- Customer Concentration: Two customers accounted for 29% of revenues for the six months ended March 31, 2011.
- Claims: The Company recorded $3.5 million in claims revenue in the prior fiscal year. These claims are in the early stages of resolution (negotiation phase) and are considered highly probable for collection, but resolution is not guaranteed.
- Goodwill Impairment: Market capitalization is currently below book value (89% of book value). While no impairment was indicated in the July 2010 test, management will continue to assess the need for testing if circumstances change.
- Off-Balance Sheet: $107 million in performance bonds outstanding; $1.4 million in letters of credit.
Investor Verification Checklist
- Weather Impact: Verify the extent of project delays caused by the reported extreme weather and the timeline for resumption of work.
- Claims Resolution: Monitor the status of the $3.5 million in claims revenue recorded in the prior year to ensure collection.
- Customer Concentration: Assess the financial health of the two customers representing 29% of revenue.
- Debt Covenants: Confirm continued compliance with loan covenants, specifically the current ratio (1.43) and debt-to-tangible-net-worth (2.26).
- Backlog Conversion: Track the conversion rate of the $159.2 million backlog into recognized revenue to offset the current period losses.