Business Context and Reporting Period
Company: Energy Services of America Corporation (ESAM)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended December 31, 2009
Business Overview: ESAM provides contracting services for the energy sector, including natural gas pipeline construction, oil field services, and electrical installations. The company operates through wholly-owned subsidiaries S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc., acquired in August 2008.
Key Financial Metrics
| Metric | Q1 2010 (Ended Dec 31, 2009) | Q1 2009 (Ended Dec 31, 2008) |
|---|---|---|
| Revenue | $29,951,737 | $33,679,046 |
| Gross Profit | $4,765,726 (15.9% Margin) | $(1,596,075) (Loss) |
| Operating Income | $1,348,335 | $(3,310,825) |
| Net Income | $637,563 | $(2,194,509) |
| Diluted EPS | $0.05 | $(0.18) |
| Cash and Equivalents | $6,459,532 | $13,436,297 (End of Period) |
| Working Capital | $9,906,683 | N/A |
| Total Debt (Current + Long-term) | $21,908,318 | N/A |
| Backlog | $146.0 million | N/A |
Material Changes vs. Prior Period
- Revenue: Decreased 11% ($3.7 million) compared to the prior year quarter due to fewer active projects.
- Gross Profit: Improved significantly by $6.4 million, turning from a loss to a profit. The prior year loss was driven by two specific projects that incurred $3.2 million in losses due to customer delays and holiday work stoppages. These issues did not recur in the current period.
- Selling & Administrative Expenses: Increased 99% ($1.7 million) to $3.4 million, primarily due to higher accounting, professional fees, taxes, and insurance costs required for regulatory compliance.
- Liquidity: Cash and cash equivalents increased by $3.6 million during the quarter, driven by strong operating cash flows of $6.4 million.
- Debt Reduction: Long-term debt was reduced by approximately $1.5 million, and lines of credit were reduced by $0.8 million.
Outlook, Risks, and Management Commentary
- Seasonality: Management expects second-quarter sales to be weaker than the first quarter due to inclement weather and the seasonal nature of the work.
- Capital Expenditures: Anticipated CAPEX for fiscal 2010 is between $2.0 million and $4.0 million, though this could rise significantly if customer demand increases.
- Liquidity Risks: The company was overdrawn by $370,000 on its $15 million line of credit as of December 31, 2009. A $500,000 payment was made on January 13, 2010, to restore compliance. Management is negotiating with the bank to revise borrowing base calculations to improve access to funds.
- Market Conditions: While customer demand has recently been reduced, management expects spending on transmission and distribution systems to increase as demand normalizes. However, further economic deterioration could limit growth.
- Goodwill: The company's market capitalization remains below book value (87.8% at period end). Management performed an impairment test as of July 1, 2009, and found no impairment, noting that a 10% decline in fair value would not alter this conclusion.
Investor Verification Checklist
- Credit Facility Compliance: Verify the status of the $15 million line of credit and the outcome of negotiations to revise borrowing base exclusions (bonded jobs/retainage).
- Customer Concentration: Confirm the stability of the top customer, Markwest, which accounted for 20% of revenues in the quarter.
- Deferred Tax Assets: Monitor the realization of the $2.7 million deferred tax asset, which relies on future profitability to offset a $5.7 million net operating loss carryforward.
- Performance Bonds: Review the $81.1 million in outstanding performance bonds and potential collateral requirements that could impact borrowing capacity.
- Related Party Debt: Note that $8.5 million of the total debt is payable to directors, officers, and former owners of acquired companies.