Energy Services of America Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011; comparisons are with the year ended September 30, 2010. The company provides pipeline construction and repair, electrical contracting, and water/sewer services, primarily in the Mid-Atlantic region. The filing reports annual results, not separate fourth-quarter results.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $143.4 million | $218.3 million |
| Gross profit / margin | $6.8 million / 4.8% | $24.4 million / 11.2% |
| Operating income (loss) | $(6.4) million / (4.5%) | $11.6 million / 5.3% |
| Net income (loss) | $(5.3) million; $(0.44) per share | $5.8 million; $0.48 per share |
| Cash from operations | $4.0 million | $4.2 million |
| Cash and cash equivalents at year-end | $3.0 million | $2.6 million |
Revenue fell 34.3%. Cost of revenue declined 29.6% to $136.6 million, but remained 95.2% of revenue. SG&A increased 4.2% to $13.3 million. Interest expense was $1.8 million. The $2.9 million income tax benefit was primarily deferred; the company reported a 35.8% effective tax benefit rate.
FY2011 operating cash flow included substantial working-capital releases, including lower trade receivables, retainage, and unbilled contract balances. Investing cash flow was a $1.1 million use, including $1.13 million of property and equipment investment. Financing cash flow was a $2.5 million use; the company received $11.3 million in long-term debt proceeds and repaid $11.1 million of long-term principal.
Balance sheet and liquidity
At September 30, 2011, total assets were $111.0 million, total liabilities $56.1 million, and shareholders’ equity $54.9 million. Working capital was $14.9 million. Debt included $13.9 million of lines of credit and short-term borrowings and $18.4 million of long-term debt including current maturities. The latter included $3.1 million payable to directors, officers, or former owners. Long-term debt maturities were $4.8 million in FY2012 and $5.6 million in FY2013.
The company had an $18 million asset-based line of credit, with $4.1 million available at year-end. Its current ratio was 1.42, below the 1.5 covenant minimum; the bank waived the covenant for 90 days. The filing states that the company had complied with, or obtained waivers for, all covenants. Management expected cash, available credit, and operating cash flows to cover needs, while also warning that growth could require additional working capital.
Material changes and operating context
- Severe rainfall and weather delays slowed or cancelled projects, increased costs, and caused losses on some jobs; one major project was deferred to 2012.
- FY2010 included two major projects that were not replaced in FY2011.
- Backlog rose to $128.5 million from $47.8 million at September 30, 2010. Backlog is not guaranteed revenue and may extend beyond the next fiscal year.
- Revenue mix was 74% gas, 18% electrical, and 8% water/sewer and ancillary work, versus 74%, 20%, and 6%, respectively, in FY2010.
- Goodwill was $36.9 million; annual testing as of July 1, 2011 found no impairment. The filing says fair value exceeded carrying value by at least 10% at the test date.
- The September 2011 warrant exchange issued 2,337,529 common shares for warrants. Remaining warrants expired October 12, 2011; the company subsequently had 14,446,836 shares outstanding and no warrants or units.
Outlook, risks, and contingencies
Management said customer demand and expected spending on transmission and distribution systems appeared to be improving and that sustained demand could improve revenue and margins. It cautioned that economic uncertainty could delay projects or constrain customers’ funding, and offered no assurance that bids would become awarded or that projects would proceed. Planned FY2012 capital expenditures were estimated at $2 million to $4 million, potentially higher if demand grows.
Key risks include weather and seasonality, energy-industry capital spending, competitive pricing, project execution and fixed-price cost overruns, cancellations and delays, customer credit and concentration, skilled labor and union matters, access to credit and surety bonds, and environmental, safety, and insurance exposures. Two customers represented 12.8% and 11.5% of FY2011 revenue; major-customer receivables were 31.6% of total receivables. The company had $111 million in performance bonds outstanding and no outstanding letters of credit. Its captive insurance arrangement held $1.4 million in restricted cash and required an additional approximately $554,000 by December 31, 2011.
The filing reports no material legal proceedings at year-end. A $1.5 million claim settlement was agreed on November 2, 2011, with an immaterial revenue adjustment expected in 2012. Management reported effective disclosure controls and internal control over financial reporting, with no material weakness identified; the auditor did not attest to internal-control effectiveness. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether the substantial backlog converts into completed, profitable work, and how much carries into FY2012.
- Whether weather-related project losses and lower gross margins persist, including cost estimates on fixed-price contracts.
- Availability and borrowing-base capacity under the credit line, the status of the 90-day covenant waiver, and near-term debt maturities.
- Cash conversion and working-capital needs as activity grows, including collection of retainage, unbilled work, and concentrated customer receivables.
- Progress on the $1.5 million claim settlement and any other claims, bonding obligations, or insurance-captive funding requirements.
- Whether management’s demand outlook and $2 million–$4 million FY2012 capital-expenditure estimate remain appropriate.