ESOA

Business Context and Reporting Period

Company: Energy Services of America Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2010
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 as a single segment following the 2008 acquisitions of S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc.

Key Financial Metrics

Liquidity and Balance Sheet Highlights (as of June 30, 2010)

• Cash and Cash Equivalents: $5.1 million (up from $2.8 million at Sept 30, 2009).
• Working Capital: $10.6 million.
• Total Assets: $136.6 million.
• Total Liabilities: $80.1 million.
• Stockholders' Equity: $56.5 million.
• Debt: Total debt obligations include $17.5 million drawn on lines of credit and short-term borrowings, plus $16.9 million in long-term debt (including $5.0 million payable to shareholders).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 207.4% for the quarter and 63.4% year-to-date compared to the prior year, driven by high utilization on several major pipeline projects.
• Profitability Turnaround: The Company returned to profitability, reporting a net income of $4.1 million for the quarter compared to a net loss of $0.6 million in the prior year quarter. Operating income improved from a loss of $6.3 million to a profit of $4.4 million year-to-date.
• Margin Expansion: Gross margins improved significantly to 13% for the quarter and 11% year-to-date, compared to 13% and 1% in the prior year periods. This was attributed to the absence of losses incurred on specific contracts in the prior year and improved productivity.
• Balance Sheet Expansion: Accounts receivable increased by $21.4 million and retainage receivables by $4.5 million, reflecting the higher volume of work in progress. Accounts payable increased by $15.1 million.

Outlook, Risks, and Management Commentary

Outlook and Guidance

• Backlog: Backlog stood at $87.7 million as of June 30, 2010, down from $144.0 million at September 30, 2009, due to the completion of large projects and a lack of new bids for the following year.
• 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.
• Seasonality: Management notes that the third and fourth quarters are typically the most productive due to favorable weather conditions.

Risks and Contingencies

• Covenant Compliance: The Company is currently in compliance with all loan covenants except for the "Debt to Tangible Net Worth" ratio, which was 4.45 against a limit of 3.5. Lenders have agreed to waive this covenant until January 31, 2011.
• Liquidity Constraints: While current cash and credit facilities are deemed sufficient, a prolonged restriction in borrowing capacity could limit growth. The Company relies on a $19.5 million line of credit, of which $17.5 million was drawn.
• Customer Concentration: Two customers accounted for 43.8% of revenue for the nine months ended June 30, 2010, and represented 78.8% of accounts receivable.
• Off-Balance Sheet Obligations: The Company had $167.2 million in performance bonds outstanding and $950,000 in letters of credit.
• Goodwill Impairment: While no impairment was recorded in the last annual test, management monitors stock price and fair value trends. Market capitalization remains below book value.

Investor Verification Checklist

• Covenant Waiver Status: Verify the status of the "Debt to Tangible Net Worth" waiver and ensure no new defaults have occurred since the filing date.
• Receivables Quality: Assess the collectability of the $38.1 million in trade receivables, given the high concentration (78.8%) in two customers.
• Backlog Replacement: Monitor the pipeline of new bids to replace the $87.7 million backlog, as management noted a lack of new projects for the upcoming year.
• Working Capital Needs: Evaluate the company's ability to fund operations if credit markets tighten further, given the reliance on the $19.5 million line of credit.
• Project Completion: Track the completion of the three major projects cited as drivers for current revenue to ensure they are delivered without cost overruns.