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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 1-13783
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INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0542208
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 WEST LOOP SOUTH
SUITE 500
HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 860-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filings pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]
As of December 10, 2001, there were outstanding 39,694,095 shares of common
stock of the Registrant. The aggregate market value on such date of the voting
stock of the Registrant held by non-affiliates was an estimated $121.2 million.
DOCUMENT INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated by
reference from the Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held February 6, 2002.
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Explanatory Note
This Amendment No. 1 to Form 10-K for the fiscal year ended September 30, 2001
is being filed to correct a typographical error that occurred in two places in
the initial filing on December 14, 2001 due to a printer's error. The errors
were both in the "Integrated Electrical Services, Inc. and Subsidiaries
Consolidated Statements of Operations." The title "2000" referred to the
results of operations for the year ended September 30, 1999 and the title
"1999" referred to the results of operations for the year ended September 30,
2000. All other disclosure is unchanged.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
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Integrated Electrical Services, Inc. and Subsidiaries
Report of Independent Public Accountants.................. 24
Consolidated Balance Sheets............................... 25
Consolidated Statements of Operations..................... 26
Consolidated Statements of Stockholders' Equity........... 27
Consolidated Statements of Cash Flows..................... 28
Notes to Consolidated Financial Statements................ 29
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23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Electrical Services, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Electrical Services, Inc. (a Delaware corporation), and subsidiaries as of
September 30, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Electrical Services, Inc., and subsidiaries as of September 30, 2000 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended September 30, 2001, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
November 12, 2001
24
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
-----------------------
(In Thousands, Except Share Information) 2000 2001
-------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 770 $ 3,475
Accounts receivable:
Trade, net of allowance of $7,121 and $5,206
respectively........................................... 300,038 275,922
Retainage............................................... 67,851 64,933
Related party........................................... 256 222
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 51,119 62,249
Inventories............................................... 16,861 21,855
Prepaid expenses and other current assets................. 8,857 23,858
-----------------------
Total current assets................................ 445,752 452,514
-----------------------
PROPERTY AND EQUIPMENT, net................................. 61,367 70,343
GOODWILL, net............................................... 496,212 482,654
OTHER NONCURRENT ASSETS, net................................ 16,659 27,992
-----------------------
Total assets........................................ $1,019,990 $1,033,503
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term
debt.................................................... $ 93,903 $ 679
Accounts payable and accrued expenses..................... 202,047 164,272
Income taxes payable...................................... 1,166 700
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 56,993 50,234
-----------------------
Total current liabilities........................... 354,109 215,885
-----------------------
LONG-TERM BANK DEBT......................................... -- 12,000
OTHER LONG-TERM DEBT, net of current maturities............. 1,162 872
SENIOR SUBORDINATED NOTES, net.............................. 148,927 273,210
OTHER NONCURRENT LIABILITIES................................ 8,043 2,892
-----------------------
Total liabilities................................... 512,241 504,859
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 authorized,
none issued and outstanding............................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 38,099,079 and 38,331,672 shares issued,
respectively............................................ 381 383
Restricted voting common stock, $.01 par value, 2,655,709
and 2,605,709 shares issued, authorized and outstanding,
respectively............................................ 27 26
Additional paid-in capital................................ 427,332 428,640
Treasury stock, at cost, none and 1,245,879 shares,
respectively............................................ -- (9,181)
Retained earnings......................................... 80,009 108,719
Accumulated other comprehensive income.................... -- 57
-----------------------
Total stockholders' equity.......................... 507,749 528,644
-----------------------
Total liabilities and stockholders' equity.......... $1,019,990 $1,033,503
-------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
------------------------------------
(In Thousands, Except Share Information) 1999 2000 2001
--------------------------------------------------------------------------------------------------
REVENUES.................................................... $1,035,888 $1,672,288 $1,693,213
COST OF SERVICES (including depreciation)................... 816,715 1,372,537 1,385,589
------------------------------------
Gross profit.............................................. 219,173 299,751 307,624
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 113,871 221,519 214,073
GOODWILL AMORTIZATION....................................... 9,305 13,211 12,983
------------------------------------
Income from operations.................................... 95,997 65,021 80,568
------------------------------------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (13,145) (23,230) (26,053)
Other, net................................................ 603 1,008 (134)
------------------------------------
Other expense, net.................................. (12,542) (22,222) (26,187)
------------------------------------
INCOME BEFORE INCOME TAXES.................................. 83,455 42,799 54,381
PROVISION FOR INCOME TAXES.................................. 35,348 21,643 25,671
------------------------------------
NET INCOME.................................................. $ 48,107 $ 21,156 $ 28,710
====================================
EARNINGS PER SHARE:
Basic..................................................... $ 1.41 $ 0.53 $ 0.71
====================================
Diluted................................................... $ 1.39 $ 0.52 $ 0.70
====================================
SHARES USED IN THE COMPUTATION OF EARNINGS PER SHARE:
Basic..................................................... 34,200,532 40,207,940 40,402,533
====================================
Diluted................................................... 34,613,644 40,410,400 40,899,790
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
26
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Restricted Voting
Compre- Common Stock Common Stock Treasury Stock Additional
(In Thousands, Except Share hensive ------------------- ------------------ ---------------------- Paid-In Retained
Information) Income Shares Amount Shares Amount Shares Amount Capital Earnings
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, September 30,
1998.................... 28,105,363 $281 2,655,709 $27 -- $ -- $ 291,650 $ 10,746
Issuance of stock for
acquisitions............ 7,755,586 78 -- -- -- -- 115,074 --
Exercise of stock options 124,889 1 -- -- -- -- 1,202 --
Net income............... $ 48,107 -- -- -- -- -- -- -- 48,107
--------
Comprehensive income..... $ 48,107
======== ------------------------------------------------------------------------------------------
BALANCE, September 30,
1999.................... 35,985,838 360 2,655,709 27 -- -- 407,926 58,853
Issuance of stock for
acquisitions............ 1,737,522 17 -- -- -- -- 17,045 --
Issuance of stock........ 375,499 4 -- -- -- -- 2,358 --
Exercise of stock options 220 -- -- -- -- -- 3 --
Net income............... $ 21,156 -- -- -- -- -- -- -- 21,156
--------
Comprehensive income..... $ 21,156
======== ------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30,
2000.................... 38,099,079 381 2,655,709 27 -- -- 427,332 80,009
ISSUANCE OF STOCK........ 225,424 2 (50,000) (1) -- -- 1,037 --
PURCHASE OF TREASURY
STOCK................... -- -- -- -- (1,459,573) (10,376) -- --
ISSUANCE OF STOCK UNDER
EMPLOYEE STOCK PURCHASE
PLAN.................... -- -- -- -- 207,642 1,173 (193) --
EXERCISE OF STOCK
OPTIONS................. 7,169 -- -- -- 6,052 22 464 --
UNREALIZED HOLDING GAIN
ON SECURITIES, NET OF
TAX..................... $ 57 -- -- -- -- -- -- -- --
NET INCOME............... 28,710 -- -- -- -- -- -- -- 28,710
--------
COMPREHENSIVE INCOME..... $ 28,767
======== ------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30,
2001.................... 38,331,672 $383 2,605,709 $26 (1,245,879) $ (9,181) $ 428,640 $ 108,719
----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
(In Thousands, Except Share Comprehensive Stockholders'
Information) Income Equity
--------------------------- ------------------------------
BALANCE, September 30,
1998.................... $-- $ 302,704
Issuance of stock for
acquisitions............ -- 115,152
Exercise of stock options -- 1,203
Net income............... -- 48,107
Comprehensive income.....
------------------------------
BALANCE, September 30,
1999.................... -- 467,166
Issuance of stock for
acquisitions............ -- 17,062
Issuance of stock........ -- 2,362
Exercise of stock options -- 3
Net income............... -- 21,156
Comprehensive income.....
------------------------------
BALANCE, SEPTEMBER 30,
2000.................... -- 507,749
ISSUANCE OF STOCK........ -- 1,038
PURCHASE OF TREASURY
STOCK................... -- (10,376)
ISSUANCE OF STOCK UNDER
EMPLOYEE STOCK PURCHASE
PLAN.................... -- 980
EXERCISE OF STOCK
OPTIONS................. -- 486
UNREALIZED HOLDING GAIN
ON SECURITIES, NET OF
TAX..................... 57 57
NET INCOME............... -- 28,710
COMPREHENSIVE INCOME.....
------------------------------
BALANCE, SEPTEMBER 30,
2001.................... $57 $ 528,644
-----------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
27
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
--------------------------------
(In Thousands) 1999 2000 2001
----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 48,107 $ 21,156 $ 28,710
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Non-cash compensation charge............................ -- 5,378 568
Depreciation and amortization........................... 16,947 32,656 30,345
Allowance for doubtful accounts......................... 871 1,768 912
Deferred income tax benefit............................. (2,788) (177) (4,938)
Gain on sale of property and equipment.................. (198) (145) (287)
Changes in operating assets and liabilities, net of
non-cash transactions:
(Increase) decrease in:
Accounts receivable..................................... (54,456) (82,917) 26,163
Inventories............................................. (472) (2,900) (4,979)
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. (12,656) (11,489) (10,785)
Prepaid expenses and other current assets............... (2,333) (1,096) (15,640)
Increase (decrease) in:
Accounts payable and accrued expenses................... 6,585 72,763 (37,831)
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (1,575) 15,131 (6,414)
Income taxes payable and other current liabilities...... (8,087) (2,880) (250)
Other, net.............................................. 3,789 (4,034) 3,060
--------------------------------
Net cash provided by (used in) operating
activities.......................................... (6,266) 43,214 8,634
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 753 2,742 1,467
Additions of property and equipment....................... (12,888) (28,381) (25,801)
Purchase of businesses, net of cash acquired.............. (106,476) (33,225) (233)
Investments in marketable securities and other............ -- (1,670) (5,599)
Additions to notes receivable from affiliate.............. -- -- (1,250)
--------------------------------
Net cash used in investing activities............... (118,611) (60,534) (31,416)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt........................................ 270,388 63,434 231,744
Repayments of debt........................................ (152,070) (48,278) (192,811)
Purchase of treasury stock................................ -- -- (10,376)
Payments for debt issuance costs.......................... (5,554) -- (5,358)
Proceeds from exercise of stock options................... 461 3 270
Proceeds from issuance of stock........................... -- -- 1,038
Proceeds from issuance of stock under employee stock
purchase plan........................................... -- -- 980
--------------------------------
Net cash provided by financing activities........... 113,225 15,159 25,487
--------------------------------
NET INCREASE (DECREASE) IN CASH............................. (11,652) (2,161) 2,705
CASH AND CASH EQUIVALENTS, beginning of period.............. 14,583 2,931 770
--------------------------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 2,931 $ 770 $ 3,475
================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 11,432 $ 23,151 $ 23,793
Income taxes............................................ 38,214 24,832 30,667
----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
28
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Integrated Electrical Services, Inc. (the "Company" or "IES"), a Delaware
corporation, was founded in June 1997 to create a leading national provider of
electrical services, focusing primarily on the commercial and industrial,
residential, communications solutions and service and maintenance markets.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: exposure to downturns in the economy,
risks related to its acquisition strategy, risks related to management of
internal growth and execution of strategy, management of external growth,
availability of qualified employees, competition, seasonality, risks associated
with contracts, significant fluctuations in quarterly results, recoverability of
goodwill, collectibility of receivables, dependence on key personnel and risks
associated with the availability of capital and with debt service.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
IES, its wholly owned subsidiaries, and certain investments. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the presentation used in 2001.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
generally using the first-in, first-out (FIFO) method.
Marketable Securities and Equity Investment
At September 30, 2001, the Company has a 20.6% equity interest in Energy
Photovoltaics, Inc. (EPV) of $4.9 million which is included in other noncurrent
assets. The Company accounts for this investment under the equity method of
accounting in accordance with Accounting Principles Board Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock." In the year ended
September 30, 2001, the Company recognized a $0.4 million loss as its portion of
this investment's losses. This amount is included as a component of other
income/expense in the Company's consolidated statement of operations. None of
the Company's investments qualified for accounting treatment under the equity
method of accounting as of September 30, 2000. Additionally, the Company has
notes receivable totaling approximately $1.3 million with EPV at September 30,
2001. See Note 13 for further commitments.
The Company accounts for all other marketable securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation at each
balance sheet date. The Company has certain marketable securities that are
categorized as "available for sale" and are carried at fair value and included
in other noncurrent assets. Unrealized holding gains and losses, net of taxes,
are reflected in accumulated other comprehensive income (loss) included in
stockholders' equity until realized. During the year ended September 30, 2001,
the Company disposed of one of its' available for sale investments for
approximately $0.3 million and realized a loss of $0.7 million. Such loss is
included as a component of other income/expense in the Company's consolidated
statement of operations for the year ended September 30, 2001. At September 30,
2000 and 2001, the Company's investments in marketable securities have fair
values of $1.7 million and $1.5 million (cost of $1.7 million and $1.4 million),
respectively.
29
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Additions of property and equipment are stated at cost, and depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset. Depreciation
expense was approximately $6,728,000, $17,970,000 and $15,757,000 for the years
ended September 30, 1999, 2000 and 2001, respectively.
In accordance with its ongoing review of capitalized software, during 2000,
the Company curtailed the development of a complex and proprietary information
system. This comprehensive information system had been under development for
approximately one year. After a period of field-testing, the Company determined
that it was necessary to significantly alter the technological architecture of
the system in order to reduce ongoing support, maintenance and communications
costs. Accordingly, the Company recorded a pretax charge of approximately $6.8
million, of which $5.7 million was included in depreciation expense for the
year, to write-off the carrying value of the software costs, development costs
and certain hardware and network infrastructure costs.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
Goodwill
Goodwill represents the excess of the aggregate of purchase price paid by
the Company in the acquisition of businesses accounted for as purchases over the
estimated fair market value of the net assets acquired. Goodwill is amortized on
a straight-line basis over 40 years. As of September 30, 2000 and 2001,
accumulated amortization was approximately $25,761,000 and $38,744,000,
respectively.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset will be compared to the asset's carrying amount
to determine if such an impairment exists.
Debt Issuance Costs
Debt issuance costs related to the Company's credit facility and the senior
subordinated notes are included in other noncurrent assets and are amortized to
interest expense over the scheduled maturity of the debt. As of September 30,
2000 and 2001, accumulated amortization of debt issuance costs were
approximately $2,458,000 and $1,871,000, respectively. Debt issuance costs of
$1,918,000 associated with the Company's previous credit facility, as amended,
were fully amortized during the year ended September 30, 2001. During the year
ended September 30, 2001, the Company capitalized $5.4 million of offering costs
incurred in connection with the issuance of the senior subordinated notes and
obtaining its new credit facility.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Such contracts generally
provide that the customers accept completion of progress to date and compensate
the Company for services rendered measured in terms of units installed, hours
expended or some other measure of progress. Revenues from construction contracts
are recognized on the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants Statement of Position (SOP)
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Percentage-of-completion for construction contracts
is measured principally by the percentage of costs incurred and accrued to date
for each contract to the estimated total costs for each contract at completion.
The Company generally considers contracts to be substantially complete upon
departure from the work site and acceptance by the customer. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Changes in job performance, job conditions, estimated
contract costs
30
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and profitability and final contract settlements may result in revisions to
costs and income and the effects of these revisions are recognized in the period
in which the revisions are determined. Provisions for total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed which management believes will be billed and collected within the
subsequent year. The current liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in excess of
revenues recognized.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts for unknown
collection issues in addition to reserves for specific accounts receivable where
collection is considered doubtful.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Under this method, deferred income tax assets and
liabilities are recorded for the future income tax consequences of temporary
differences between the financial reporting and income tax bases of assets and
liabilities, and are measured using enacted tax rates and laws.
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to their
respective acquisition dates. The acquired businesses file "short period"
federal income tax returns for the period from their last fiscal year through
their respective acquisition dates.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used in the Company's revenue recognition of construction in progress,
allowance for doubtful accounts and self insured claims liability.
Self-Insurance
The Company retains the risk for worker's compensation, employer's
liability, auto liability, general liability and employee group health claims,
resulting from uninsured deductibles per accident or occurrence which are
subject to annual aggregate limits. Losses up to the deductible amounts are
accrued based upon the Company's known claims incurred and an estimate of claims
incurred but not reported. The accruals are based upon known facts and
historical trends and management believes such accruals to be adequate.
Realization of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Company
evaluates the recoverability of property and equipment or other assets, if facts
and circumstances indicate that any of those assets might be impaired. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if an
impairment of such property has occurred. The effect of any impairment would be
to expense the difference between the fair value of such property and its
carrying value. To date, the Company has not recorded any such impairments.
31
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Risk Concentration
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash deposits and trade
accounts receivable. The Company grants credit, generally without collateral, to
its customers, which are generally contractors and homebuilders throughout the
United States. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors throughout the United States
within the construction and home-building market. However, the Company generally
is entitled to payment for work performed and has certain lien rights in that
work. Further, management believes that its contract acceptance, billing and
collection policies are adequate to manage potential credit risk. The Company
routinely maintains cash balances in financial institutions in excess of
federally insured limits.
The Company had no single customer accounting for more than 5% of its
revenues for the year ended September 30, 2001. During the year ended September
30, 2000, the Company had one customer that represented 11% of its revenues.
Excluding that customer, the Company had no single customer accounting for more
than 5% of its revenues. During the year ended September 30, 1999, the Company
had no single customer accounting for more than 5% of its revenues.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, retainage receivables,
notes receivable, accounts payable, a line of credit, notes and bonds payable,
long-term debt and an interest rate swap agreement. The Company's senior
subordinated notes had a carrying value, excluding unamortized discount, at
September 30, 2000 and 2001 of $150.0 million and $275.0 million, respectively.
The fair value of the Company's senior subordinated notes at September 30, 2000
and 2001 was $132.4 million and $242.1 million, respectively. The fair value of
the Company's interest rate swap at September 30, 2001 was $3.2 million. Other
than the senior subordinated notes and the interest rate swap agreement, the
Company believes that the carrying value of financial instruments on the
accompanying consolidated balance sheets approximates their fair value.
Subsidiary Guaranties
All of the Company's operating income and cash flows are generated by its
wholly owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding 9 3/8% Senior Subordinated Notes due 2009 (the "Senior Subordinated
Notes"). The Company is structured as a holding company and substantially all of
its assets and operations are held by its subsidiaries. There are currently no
significant restrictions on the Company's ability to obtain funds from its
subsidiaries by dividend or loan. The separate financial statements of the
subsidiary guarantors are not included herein because (i) the subsidiary
guarantors are all of the direct and indirect subsidiaries of the Company; (ii)
the subsidiary guarantors have fully and unconditionally, jointly and severally
guaranteed the Senior Subordinated Notes; and (iii) the aggregate assets,
liabilities, earnings, and equity of the subsidiary guarantors is substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. As a result, the presentation of separate financial
statements and other disclosures concerning the subsidiary guarantors is not
deemed material.
32
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per Share
The following table reconciles the components of the basic and diluted
earnings per share for the three years ended September 30, 1999, 2000 and 2001
(in thousands, except share information):
Year Ended September 30,
---------------------------------------
1999 2000 2001
-----------------------------------------------------------------------------------------------------
Numerator:
Net income................................................ $ 48,107 $ 21,156 $ 28,710
=======================================
Denominator:
Weighted average common shares outstanding -- basic....... 34,200,532 40,207,940 40,402,533
Effect of dilutive stock options.......................... 413,112 202,460 497,257
---------------------------------------
Weighted average common and common equivalent shares
outstanding -- diluted.................................. 34,613,644 40,410,400 40,899,790
=======================================
Earnings per share:
Basic..................................................... $ 1.41 $ 0.53 $ 0.71
Diluted................................................... $ 1.39 $ 0.52 $ 0.70
-----------------------------------------------------------------------------------------------------
For the years ended September 30, 1999, 2000 and 2001, exercisable stock
options of 1.0 million, 4.4 million and 4.4 million, respectively, were excluded
from the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the Company's common stock.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101). SAB 101 reflects the basic principles of
revenue recognition in existing accounting principles generally accepted in the
United States. SAB 101 does not supersede any existing authoritative literature.
The Company recognizes revenue from construction contracts on the
percentage-of-completion method in accordance with the American Institute of
Certified Public Accountants Statement of Position 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts". The
adoption of SAB 101 did not have an impact on the results of operations of the
Company.
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and
138, was effective for the Company on October 1, 2000. These statements require
that all derivative instruments (such as an interest rate swap contract), be
recorded as either assets or liabilities measured at fair value. Changes in the
derivative's fair value are to be recognized currently in earnings unless
specific hedge accounting criteria are met. The criteria for cash flow and fair
value hedges require that hedging relationships must be designated and
documented upon inception. The documentation must include the consideration of
the hedged item, the specific risk being hedged, identification of the hedging
instrument, the Company's risk management strategy, and how effectiveness will
be assessed. The effectiveness assessment must have a historical basis that
supports the assertion that the hedge will be effective prospectively. At the
date of adoption, there was no financial impact on the Company's consolidated
financial statements as the Company was not a party to any derivative
instruments. In August 2001, the Company entered into an interest rate swap
contract to manage specific interest rate risks. See Note 6.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 141
also requires that acquired intangible assets be recognized as assets apart from
goodwill if they meet one of two specified criteria. Additionally, the statement
adds certain disclosure requirements to those required by APB 16, including
disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. This statement is required to be applied
to all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method
33
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for which the date of acquisition is July 1, 2001 or later. Use of the
pooling-of-interests method is prohibited. The adoption of SFAS No. 141 did not
have an impact on the Company's financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which must be applied to fiscal years beginning after
December 15, 2001, modifies the accounting and reporting of goodwill and
intangible assets. The pronouncement requires entities to discontinue the
amortization of goodwill, reallocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Any impairment at the initial adoption date shall be recognized as the
effect of a change in accounting principle. Subsequent to the initial adoption,
goodwill shall be tested for impairment annually or more frequently if
circumstances indicate a possible impairment.
Under SFAS No. 142, entities are required to determine the useful life of
other intangible assets and amortize the value over the useful life. If the
useful life is determined to be indefinite, no amortization will be recorded.
For intangible assets recognized prior to the adoption of SFAS No. 142, the
useful life should be reassessed. Other intangible assets are required to be
tested for impairment in a manner similar to goodwill. At September 30, 2001,
the Company's net goodwill was approximately $482.7 million, and annual
amortization of such goodwill was approximately $13.0 million. The Company
expects to adopt SFAS No. 142 during its first fiscal quarter of 2002. The
Company believes the impairment charge upon adoption will be material, and based
on current market capitalization could equate to a substantial amount of its
recorded goodwill. The Company does not believe this adoption will impact its
free cash flows, its operating income or compliance with its debt instruments.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company is in the process of assessing the impact that the
adoption of this standard will have on its financial position and results of
operations.
3. BUSINESS COMBINATIONS:
Purchases
Subsequent to the IPO, and through September 30, 2001, IES has acquired 70
businesses in transactions accounted for as purchases. The total consideration
paid in these transactions was approximately $232.9 million in cash and 14.7
million shares of common stock.
In connection with the acquisitions discussed above, goodwill was
determined as follows for each of the years ending September 30, 1999, 2000 and
2001 (in thousands):
1999 2000 2001
------------------------------------------------------------------------------------------
Fair value of assets acquired, net of cash acquired......... $115,645 $ 23,726 $ 239
Liabilities assumed......................................... (77,641) (15,477) (159)
---------------------------
Net assets acquired, net of cash.................... 38,004 8,249 80
---------------------------
Cash paid, net of cash acquired............................. 106,476 33,225 233
Issuance of common stock.................................... 115,152 17,062 --
---------------------------
Total consideration paid............................ 221,628 50,287 233
---------------------------
Goodwill.................................................... $183,624 $ 42,038 $ 153
------------------------------------------------------------------------------------------
34
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Presentation
The unaudited pro forma data presented below reflect the results of
operations of IES and the businesses acquired during fiscal 1999 and 2000
assuming the transactions were completed on October 1, 1998 (in thousands):
Year Ended
September 30,
-----------------------
(Unaudited) 1999 2000
-------------------------------------------------------------------------------------
Revenues.................................................... $1,376,763 $1,687,650
=======================
Net income.................................................. $ 65,164 $ 22,440
=======================
Basic earnings per share.................................... $ 1.91 $ 0.57
=======================
Diluted earnings per share.................................. $ 1.88 $ 0.56
-------------------------------------------------------------------------------------
The unaudited pro forma data summarized above also reflects pro forma
adjustments primarily related to: reductions in general and administrative
expenses for contractually agreed reductions in owners' compensation, estimated
goodwill amortization for the excess of consideration paid over the net assets
acquired assuming a 40-year amortization period, interest expense on borrowings
incurred to fund acquisitions, elimination of interest income, and additional
income tax expense based on the Company's effective income tax rate. The
unaudited pro forma financial data does not purport to represent what the
Company's combined results of operations would actually have been if such
transactions had in fact occurred on October 1, 1998, and are not necessarily
representative of the Company's results of operations for any future period.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
Estimated September 30,
Useful Lives -------------------
in Years 2000 2001
------------------------------------------------------------------------------------------------
Land........................................................ N/A $ 1,621 $ 1,621
Buildings................................................... 5-32 6,876 7,153
Transportation equipment.................................... 3-5 30,119 33,109
Machinery and equipment..................................... 3-10 33,442 46,985
Leasehold improvements...................................... 5-32 8,231 12,992
Furniture and fixtures...................................... 5-7 7,390 9,182
-------------------
87,679 111,042
Less -- Accumulated depreciation and amortization........... (26,312) (40,699)
-------------------
Property and equipment, net......................... $ 61,367 $ 70,343
------------------------------------------------------------------------------------------------
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
September 30,
-----------------
2000 2001
--------------------------------------------------------------------------------
Balance at beginning of period.............................. $ 5,709 $ 7,121
Additions from acquisitions................................. 948 --
Additions to costs and expenses............................. 1,768 912
Deductions for uncollectible receivables written off, net of
recoveries................................................ (1,304) (2,827)
-----------------
Balance at end of period.................................... $ 7,121 $ 5,206
--------------------------------------------------------------------------------
35
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued liabilities consist of the following (in
thousands):
September 30,
-------------------
2000 2001
----------------------------------------------------------------------------------
Accounts payable, trade..................................... $105,814 $ 78,948
Accrued compensation and benefits........................... 57,561 53,057
Other accrued liabilities................................... 38,672 32,267
-------------------
$202,047 $164,272
----------------------------------------------------------------------------------
Contracts in progress are as follows (in thousands):
September 30,
-------------------------
2000 2001
----------------------------------------------------------------------------------------
Costs incurred on contracts in progress..................... $ 1,163,463 $ 1,297,850
Estimated earnings.......................................... 220,411 254,981
-------------------------
1,383,874 1,552,831
Less -- Billings to date.................................... (1,389,748) (1,540,816)
-------------------------
$ (5,874) $ 12,015
=========================
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 51,119 $ 62,249
Less -- Billings in excess of costs and estimated earnings
on uncompleted contracts.................................. (56,993) (50,234)
-------------------------
$ (5,874) $ 12,015
----------------------------------------------------------------------------------------
6. DEBT:
Debt consists of the following (in thousands):
September 30,
-------------------
2000 2001
----------------------------------------------------------------------------------
Secured credit facility with a bank group, due July 30,
2001, at a weighted average interest rate of 8.00%........ $ 93,000 $ --
Secured credit facility with a group of lending
institutions, due May 22, 2004, at a weighted average
interest rate of 7.56%.................................... -- 12,000
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of
9.50%..................................................... 150,000 150,000
Senior Subordinated Notes, due February 1, 2009, bearing
interest at 9.375% with an effective interest rate of
10.00%.................................................... -- 125,000
Other....................................................... 2,065 1,551
-------------------
245,065 288,551
Less -- short-term debt and current maturities of long-term
debt...................................................... (93,903) (679)
Less -- unamortized discount on Senior Subordinated Notes... (1,073) (4,949)
-------------------
Total long-term debt................................ $150,089 $282,923
----------------------------------------------------------------------------------
Future payments due on debt at September 30, 2001 are as follows (in
thousands):
2002........................................................ $ 679
2003........................................................ 614
2004........................................................ 12,170
2005........................................................ 73
2006........................................................ 15
Thereafter.................................................. 275,000
--------
Total..................................................... $288,551
-----------------------------------------------------------------------
36
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility
On May 22, 2001, the Company replaced its $175.0 million credit facility
with a bank group, with a new $150.0 million revolving credit facility with a
group of lending institutions to be used for working capital, capital
expenditure, acquisitions and other corporate purposes, that matures May 22,
2004 (the "Credit Facility"). Amounts borrowed under the Credit Facility bear
interest at an annual rate equal to either (a) the London interbank offered rate
(LIBOR) plus 1.75 percent to 2.75 percent, as determined by the ratio of the
Company's total funded debt to EBITDA (as defined in the Credit Facility) or (b)
the higher of (i) the bank's prime rate or (ii) the Federal funds rate plus 0.50
percent plus an additional 0.25 percent to 1.25 percent, as determined by the
ratio of the Company's total funded debt to EBITDA. Commitment fees of 0.50
percent are assessed on any unused borrowing capacity under the Credit Facility.
The Company's existing and future subsidiaries guarantee the repayment of all
amounts due under the facility, and the facility is secured by the capital stock
of those subsidiaries and the accounts receivable of the Company and those
subsidiaries. Borrowings under the Credit Facility are limited to 66 2/3% of
outstanding receivables (as defined in the Agreement). The Credit Facility
requires the consent of the lenders for acquisitions exceeding a certain level
of cash consideration, prohibits the payment of cash dividends on the common
stock, restricts the ability of the Company to repurchase shares of common
stock, to incur other indebtedness and requires the Company to comply with
various affirmative and negative covenants including certain financial
covenants. Among other restrictions, the financial covenants include minimum net
worth requirements, a maximum total consolidated funded debt to EBITDA ratio, a
maximum senior consolidated debt to EBITDA ratio, and a minimum interest
coverage ratio. The Company was in compliance with the financial covenants at
September 30, 2001. As of September 30, 2001, the Company had borrowings
outstanding under its Credit Facility of $12.0 million, letters of credit
outstanding under its Credit Facility of $0.9 million, $1.6 million of other
borrowings and available borrowing capacity under its Credit Facility of $137.1
million.
Senior Subordinated Notes
On January 25, 1999 and May 29, 2001, the Company completed offerings of
$150.0 million and $125.0 million Senior Subordinated Notes, respectively. The
offering completed on May 29, 2001, yielded $117.0 million in proceeds to the
Company, net of a $4.2 million discount and $3.8 million in offering costs. The
proceeds from the May 29, 2001, offering were used primarily to repay amounts
outstanding under the Credit Facility. The Senior Subordinated Notes bear
interest at 9 3/8% and mature on February 1, 2009. The Company pays interest on
the Senior Subordinated Notes on February 1 and August 1 of each year. The
Senior Subordinated Notes are unsecured obligations and are subordinated to all
existing and future senior indebtedness. The Senior Subordinated Notes are
guaranteed on a senior subordinated basis by all of the Company's subsidiaries.
Under the terms of the Senior Subordinated Notes, the Company is required to
comply with various affirmative and negative covenants including: (i)
restrictions on additional indebtedness, and (ii) restrictions on liens,
guarantees and dividends.
Interest Rate Swap
The Company entered into an interest rate swap agreement in August 2001,
designated as a fair value hedge, in order to minimize the risks and cost
associated with its financing activities. The interest rate swap agreement has a
notional amount of $100.0 million and was established to manage the interest
rate risk of the senior subordinated note obligations. Under the swap agreement,
the Company pays the counterparty variable rate interest (3-month LIBOR plus
3.49%) and the counterparty pays the Company fixed rate interest of 9.375% on a
semiannual basis over the life of the instrument. Pursuant to SFAS No. 133, as
amended, such interest rate swap contract is reflected at fair value on the
Company's consolidated balance sheet and the related portion of fixed-rate debt
being hedged is reflected at an amount equal to the sum of its carrying value
plus an adjustment representing the change in fair value of the debt obligation
attributable to the interest rate being hedged. The net effect of this
accounting on the Company's operating results is that interest expense on the
portion of fixed-rate debt being hedged is generally recorded based on variable
interest rates. The interest rate swap is considered to be perfectly effective
because it qualifies for the "short-cut" method under SFAS No. 133 and therefore
there is no net change in fair value to be recognized in income. At September
30, 2001, the interest rate swap had a notional value of $100.0 million and a
fair value of $3.2 million.
37
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of this contract is included in the balance sheet in other
noncurrent assets. The following table presents the balance sheet effect on the
Senior Subordinated Notes (in thousands):
September 30,
-------------------
2000 2001
----------------------------------------------------------------------------------
Senior Subordinated Notes, due February 1, 2009............. $150,000 $275,000
Less-unamortized discount on Senior Subordinated Notes...... (1,073) (4,949)
Add: Fair value of interest rate hedge...................... -- 3,159
-------------------
$148,927 $273,210
----------------------------------------------------------------------------------
7. LEASES:
The Company leases various facilities under noncancelable operating leases.
For a discussion of leases with certain related parties see Note 11. Rental
expense for the years ended September 30, 1999, 2000 and 2001 was approximately
$4,849,000, $7,543,000 and $9,724,000, respectively. Future minimum lease
payments under these noncancelable operating leases with terms in excess of one
year are as follows (in thousands):
YEAR ENDED SEPTEMBER 30
----------------------------------------------------------------------
2002........................................................ $10,385
2003........................................................ 7,871
2004........................................................ 6,196
2005........................................................ 4,015
2006........................................................ 1,793
Thereafter.................................................. 2,830
-------
Total............................................... $33,090
----------------------------------------------------------------------
8. INCOME TAXES:
Federal and state income tax provisions are as follows (in thousands):
Year Ended September 30,
---------------------------
1999 2000 2001
------------------------------------------------------------------------------------------
Federal:
Current................................................... $33,317 $19,345 $24,592
Deferred.................................................. (2,558) (157) (2,025)
State:
Current................................................... 4,819 2,475 6,017
Deferred.................................................. (230) (20) (2,913)
---------------------------
$35,348 $21,643 $25,671
------------------------------------------------------------------------------------------
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):
Year Ended September 30,
---------------------------
1999 2000 2001
------------------------------------------------------------------------------------------
Provision at the statutory rate............................. $29,209 $14,980 $19,033
Increase resulting from:
Non-cash restricted stock compensation charge............. -- 611 88
Non-deductible goodwill................................... 2,838 4,070 4,208
State income taxes, net of benefit for federal
deduction............................................... 2,983 1,596 2,018
Non-deductible expenses................................... 318 386 324
---------------------------
$35,348 $21,643 $25,671
------------------------------------------------------------------------------------------
38
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for
income tax purposes. The income tax effects of these temporary differences,
representing deferred income tax assets and liabilities, result principally from
the following (in thousands):
Year Ended
September 30,
------------------
2000 2001
---------------------------------------------------------------------------------
Deferred income tax assets:
Allowance for doubtful accounts........................... $ 2,492 $ 2,010
Accrued expenses.......................................... 9,507 6,805
Other..................................................... 2,626 2,824
------------------
Total deferred income tax assets.................... 14,625 11,639
------------------
Deferred income tax liabilities:
Property, equipment and goodwill.......................... (8,559) (3,562)
Deferred contract revenue and other....................... (5,618) (2,691)
------------------
Total deferred income tax liabilities............... (14,177) (6,253)
------------------
Net deferred income tax assets...................... $ 448 $ 5,386
---------------------------------------------------------------------------------
The Company does not believe that a valuation allowance against the
deferred income tax assets is necessary as it believes the assets will be fully
realized.
The net deferred income tax assets and liabilities are comprised of the
following (in thousands):
September 30,
-----------------
2000 2001
--------------------------------------------------------------------------------
Current deferred income taxes:
Assets.................................................... $13,567 $ 9,075
Liabilities............................................... (5,664) (1,960)
-----------------
7,903 7,115
-----------------
Long-term deferred income taxes:
Assets.................................................... $ 1,059 $ 2,564
Liabilities............................................... (8,514) (4,293)
-----------------
(7,455) (1,729)
-----------------
Net deferred income tax assets.............................. $ 448 $ 5,386
--------------------------------------------------------------------------------
9. OPERATING SEGMENTS
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Certain information is disclosed, per SFAS
No. 131, based on the way management organizes financial information for making
operating decisions and assessing performance. The Company's reportable segments
are strategic business units that offer products and services to four distinct
customer groups. They are managed separately because each business requires
different operating and marketing strategies.
Prior to October 1, 2000, the Company was organized in a single segment.
During fiscal 2000, the Company aligned its operations among two complementary
core businesses: electrical contracting and communications solutions. Within the
electrical contracting business, the Company has three reportable segments:
commercial/industrial, residential and service and maintenance markets. The
commercial/industrial segment provides installations, renovations and upgrades
and replacement services in office buildings, high-rise apartments and
condominiums, theaters, restaurants, hotels, hospitals and critical-care
facilities, school districts, manufacturing and processing facilities, military
installations, airports, refineries and petrochemical and power plants. The
residential segment consists of installations, replacements and renovation
services in single family and low-rise multifamily housing units. The service
and maintenance segment provides maintenance and replacement services from
service calls and routine
39
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maintenance contracts. The communications solutions business provides
installation, service and maintenance, design, engineering and support services
to infrastructure services customers.
The accounting policies of these reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on income from operations of the respective business
units prior to unallocated home office expenses. No significant transactions
have occurred between the Company's business segments. Management intends to
continue to focus on its internal allocation methods for allocating results to
business segments.
Segment information for the years ended September 30, 1999, 2000 and 2001
are as follows (in thousands):
Fiscal Year Ended September 30, 1999
----------------------------------------------------------------------------------------------
Electrical Contracting
----------------------------------------------------
Service Corporate
Commercial/ And Communications And
Industrial Residential Maintenance Subtotal Solutions Other Total
--------------------------------------------------------------------------------------------------------------------------
Revenues.................. $ 716,340 $175,978 $ 69,370 $ 961,688 $ 74,200 $ -- $1,035,888
Cost of services.......... 583,440 134,938 45,967 764,345 52,370 -- 816,715
---------------------------------------------------------------------------------------------
Gross profit.............. 132,900 41,040 23,403 197,343 21,830 -- 219,173
Selling, general and
administrative.......... 68,335 16,524 6,617 91,476 10,388 12,007 113,871
Goodwill amortization..... 6,993 1,056 677 8,726 579 -- 9,305
---------------------------------------------------------------------------------------------
Operating Income.......... $ 57,572 $ 23,460 $ 16,109 $ 97,141 $ 10,863 $(12,007) $ 95,997
=============================================================================================
Other Data:
Depreciation expense...... $ 4,419 $ 493 $ 428 $ 5,340 $ 1,187 $ 201 $ 6,728
Capital expenditures...... 7,089 880 687 8,656 2,456 1,776 12,888
Total assets.............. 518,157 101,610 33,725 653,492 51,718 153,282 858,492
--------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 2000
----------------------------------------------------------------------------------------------
Electrical Contracting
----------------------------------------------------
Service Corporate
Commercial/ And Communications And
Industrial Residential Maintenance Subtotal Solutions Other Total
--------------------------------------------------------------------------------------------------------------------------
Revenues.................. $1,126,792 $250,877 $132,167 $1,509,836 $162,452 $ -- $1,672,288
Cost of services.......... 950,131 195,913 102,849 1,248,893 123,644 -- 1,372,537
---------------------------------------------------------------------------------------------
Gross profit.............. 176,661 54,964 29,318 260,943 38,808 -- 299,751
Selling, general and
administrative.......... 107,859 23,557 12,651 144,067 22,743 54,709 221,519
Goodwill amortization..... 9,343 1,505 1,096 11,944 1,267 -- 13,211
---------------------------------------------------------------------------------------------
Operating Income.......... $ 59,459 $ 29,902 $ 15,571 $ 104,932 $ 14,798 $(54,709) $ 65,021
=============================================================================================
Other Data:
Depreciation expense...... $ 7,613 $ 702 $ 893 $ 9,208 $ 2,599 $ 6,163 $ 17,970
Capital expenditures...... 13,337 1,254 1,564 16,155 5,377 6,849 28,381
Total assets.............. 663,810 144,856 61,102 869,768 113,229 36,993 1,019,990
--------------------------------------------------------------------------------------------------------------------------
40
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fiscal Year Ended September 30, 2001
----------------------------------------------------------------------------------------------
Electrical Contracting
----------------------------------------------------
Service Corporate
Commercial/ And Communications And
Industrial Residential Maintenance Subtotal Solutions Other Total
--------------------------------------------------------------------------------------------------------------------------
Revenues.................. $1,120,341 $257,440 $135,594 $1,513,375 $179,838 $ -- $1,693,213
Cost of services.......... 936,880 198,908 104,507 1,240,295 145,294 -- 1,385,589
---------------------------------------------------------------------------------------------
Gross profit.............. 183,461 58,532 31,087 273,080 34,544 -- 307,624
Selling, general and
administrative.......... 104,199 30,977 13,064 148,240 20,488 45,345 214,073
Goodwill amortization..... 9,115 1,505 1,096 11,716 1,267 -- 12,983
---------------------------------------------------------------------------------------------
Operating Income.......... $ 70,147 $ 26,050 $ 16,927 $ 113,124 $ 12,789 $(45,345) $ 80,568
=============================================================================================
Other Data:
Depreciation expense...... $ 9,558 $ 1,745 $ 994 $ 12,297 $ 2,529 $ 931 $ 15,757
Capital expenditures...... 8,471 1,936 3,587 13,994 4,796 7,011 25,801
Total assets.............. 673,992 112,779 81,573 868,344 94,617 70,542 1,033,503
--------------------------------------------------------------------------------------------------------------------------
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
10. STOCKHOLDERS' EQUITY:
Restricted Voting Common Stock
The shares of restricted voting common stock have rights similar to shares
of common stock except that such shares are entitled to elect one member of the
board of directors and to not otherwise vote with respect to the election of
directors and are entitled to one-half of one vote for each share held on all
other matters. Each share of restricted voting common stock will convert into
common stock upon disposition by the holder of such shares.
1997 Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the Company's 1997 Stock Plan (the "Plan"), which provides for the
granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the Plan is 15 percent of the
aggregate number of shares of common stock outstanding. The terms of the option
awards will be established by the compensation committee of the Company's board
of directors. Options generally expire 10 years from the date of grant, one year
following termination of employment due to death or disability, or three months
following termination of employment by means other than death or disability.
Directors' Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the 1997 Directors' Stock Plan (the "Directors' Plan"), which provides
for the granting or awarding of stock options to nonemployee directors. In May
2000, the Company's board of directors amended the Directors' Plan. The number
of shares authorized and reserved for issuance under the Directors' Plan is
250,000 shares. Each nonemployee director is granted options to purchase 3,000
shares at the time of an initial election of such director. In addition, each
director will be automatically granted options to purchase 3,000 shares annually
at each September 30 on which such director remains a director. All options have
an exercise price based on the fair market value at the date of grant and
vesting terms similar to options granted under the Directors' Plan discussed
above.
1999 Incentive Compensation Plan
In November 1999, the Board of Directors adopted the 1999 Incentive
Compensation Plan (the "1999 Plan"). The 1999 Plan, as amended, authorizes the
Compensation Committee of the Board of Directors or the Board of Directors
41
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to grant eligible participants of the Company awards in the form of options,
stock appreciation rights, restricted stock or other stock based awards. The
Company has up to 5.5 million shares of common stock authorized for issuance
under the 1999 Plan.
In December 1999 and March 2000, the Company granted restricted stock
awards of 609,306 and 400,000, respectively, under its stock plans to certain
employees. The December 1999 awards vested in equal installments on May 31, 2000
and August 31, 2000, provided the recipient was still employed by the Company.
The March 2000 award vests in equal installments on March 20th of each year
through 2004, provided the recipient is still employed by the Company. The
market value of the underlying stock on the date of grant for the December 1999
and March 2000 awards was $5.2 million and $2.3 million, respectively, which is
being recognized as compensation expense over the related vesting periods.
During the years ended September 30, 2000 and 2001, the Company amortized $5.4
million and $0.6 million, respectively, to expense in connection with these
awards. Through September 30, 2001, 678,269 shares of these common stock awards
vested and 31,037 shares of common stock were forfeited. To fund employee tax
liabilities, 234,234 of these awards were cancelled and 444,035 of these shares
were issued and are currently outstanding. At September 30, 2001, there were
300,000 shares of unvested common stock awards outstanding.
The following table summarizes activity under the Company's stock option
and incentive compensation plans:
Weighted Average
Shares Exercise Price
--------------------------------------------------------------------------------------------
Outstanding, September 30, 1998............................. 3,238,951 13.48
------------------------------
Options Granted........................................... 1,248,125 16.93
Exercised................................................. (316,312) 9.55
Forfeited................................................. (420,307) 15.20
------------------------------
Outstanding, September 30, 1999............................. 3,750,457 $14.81
------------------------------
Options Granted........................................... 1,987,482 10.18
Restricted Stock Granted.................................. 1,009,306 0.00
Exercised................................................. (579,839) 0.00
Forfeited and Cancelled................................... (721,111) 13.92
------------------------------
Outstanding, September 30, 2000............................. 5,446,295 $12.02
==============================
Options Granted........................................... 2,251,199 5.76
Restricted Stock Granted.................................. 43,783 0.00
Exercised................................................. (157,004) 0.47
Forfeited and Cancelled................................... (655,152) 13.04
------------------------------
Outstanding, September 30, 2001............................. 6,929,121 $10.06
==============================
Exercisable, September 30, 1999............................. $ 759,656 $14.17
==============================
Exercisable, September 30, 2000............................. $ 1,536,995 $13.74
==============================
Exercisable, September 30, 2001............................. $ 2,626,988 $12.23
--------------------------------------------------------------------------------------------
Unexercised options expire at various dates from January 27, 2008 through
September 30, 2011.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following subjective
assumptions:
1999 2000 2001
-------------------------------------------------------------------------------------------
Expected dividend yield..................................... 0.00% 0.00% 0.00%
Expected stock price volatility............................. 52.23% 94.42% 60.99%
Weighted average risk free interest rate.................... 5.24% 6.35% 5.15%
Expected life of options.................................... 6 years 6 years 6 YEARS
-------------------------------------------------------------------------------------------
42
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tables below summarizes options outstanding and exercisable at
September 30, 2001:
Weighted-Average
Range of Outstanding as of Remaining Weighted-Average Exercisable as of Weighted-Average
Exercise Prices September 30, 2001 Contractual Life Exercise Price September 30, 2001 Exercise Price
-----------------------------------------------------------------------------------------------------------------------
$0.0000 -- $4.6240 300,000 8.5 $ 0.0000 -- $ 0.0000
$4.6250 -- $7.8000 3,077,023 8.5 $ 5.6806 729,364 $ 5.5247
$7.8100 -- $10.5000 64,667 7.1 $ 9.4661 12,793 $ 9.6324
$10.5100 -- $15.5000 2,640,599 6.7 $13.7335 1,384,142 $13.5812
$15.5100 -- $22.1250 846,832 6.6 $18.1641 500,689 $18.3428
-------------------------------------------------------------------------------------------
6,929,121 7.5 $10.0645 2,626,988 $12.2327
-----------------------------------------------------------------------------------------------------------------------
Options exercisable at September 30, 1999, 2000 and 2001 had weighted
average fair values per option of $9.45, $8.10 and $3.55, respectively.
Employee Stock Purchase Plan
In February 2000, the Company's stockholders approved the Company's
Employee Stock Purchase Plan (the "ESPP"), which provides for the sale of common
stock to participants as defined at a price equal to the lower of 85% of the
Company's closing stock price at the beginning or end of the option period, as
defined. The number of shares of common stock authorized and reserved for
issuance under the ESPP is 1.0 million shares. The purpose of the ESPP is to
provide an incentive for employees of the Company to acquire a proprietary
interest in the Company through the purchase of shares of the Company's common
stock. The ESPP is intended to qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
The provisions of the ESPP are construed in a manner to be consistent with the
requirements of that section of the Code. As of September 30, 2000, there were
no shares purchased under the ESPP. During the year ended September 30, 2001,
the Company issued 207,642 shares pursuant to the ESPP. For purposes of SFAS No.
123, "Accounting for Stock-Based Compensation," estimated compensation cost as
it relates to the ESPP was computed for the fair value of the employees'
purchase rights using the Black-Scholes option pricing model with the following
assumptions for 2001: expected dividend yield of 0.00%, expected stock price
volatility of 60.99%, weighted average risk free interest rate of 5.15% and an
expected life of 0.5 years. The weighted average fair value per share of these
purchase rights granted in 2001 was approximately $1.52.
The Company follows Accounting Principles Board ("APB") Opinion No. 25 in
accounting for its stock-based compensation. Under APB Opinion No. 25, no
compensation expense is recognized in the consolidated statements of operations
if no intrinsic value exists at the date of grant. SFAS No. 123 requires that if
a company does not record compensation expense for stock options issued to
employees pursuant to APB Opinion No. 25, the company must also disclose the
effects on its results of operations as if the Company has adopted SFAS 123. Had
compensation costs for the Company's stock option plans, restricted stock awards
granted and the ESPP been determined consistent with SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts (in thousands, except per share information):
1999 2000 2001
------------------------------------------------------------------------------------------
Net income
As reported............................................... $48,107 $21,156 $28,710
Pro forma for SFAS No. 123................................ $42,720 $12,510 $21,630
Basic earnings per share
As reported............................................... $ 1.41 $ 0.53 $ 0.71
Pro forma for SFAS No. 123................................ $ 1.25 $ 0.31 $ 0.54
Diluted earnings per share
As reported............................................... $ 1.39 $ 0.52 $ 0.70
Pro forma for SFAS No. 123................................ $ 1.23 $ 0.31 $ 0.53
------------------------------------------------------------------------------------------
43
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated and because the Black-Scholes option-pricing model involves
subjective assumptions which may be materially different than actual amounts.
11. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with certain
affiliated companies. Amounts due from related parties at September 30, 2000 and
2001 were $256,000 and $222,000, respectively. In connection with certain of the
acquisitions, subsidiaries of the Company have entered into a number of related
party lease arrangements for facilities. These lease agreements are for periods
generally ranging from three to five years. Related party lease expense for the
years ended September 30, 1999, 2000 and 2001 were $2,850,000, $4,180,000 and
$4,335,000, respectively. Future commitments with respect to these leases are
included in the schedule of minimum lease payments in Note 7.
12. EMPLOYEE BENEFIT PLANS:
In November 1998, the Company established the Integrated Electrical
Services, Inc. 401(k) Retirement Savings Plan (the "401(k) Plan"). All IES
employees are eligible to participate subsequent to completing six months of
service and attaining age twenty-one. Participants become vested in Company
matching contributions following three years of service.
Certain subsidiaries of the Company do not participate in the 401(k) Plan,
but instead provide various defined contribution savings plans for their
employees (the "Plans"). The Plans cover substantially all full-time employees
of such subsidiaries. Participants vest at varying rates ranging from full
vesting upon participation to those that provide for vesting to begin after
three years of service and are fully vested after eight years. Certain plans
provide for a deferral option that allows employees to elect to contribute a
portion of their pay into the plan and provide for a discretionary profit
sharing contribution by the individual subsidiary. Generally the subsidiaries
match a portion of the amount deferred by participating employees. Contributions
for the profit sharing portion of the Plans are generally at the discretion of
the individual subsidiary. The aggregate contributions by the Company to the
401(k) Plan and the Plans were $1,460,000, $2,106,000 and $3,380,000 for the
years ended September 30, 1999, 2000 and 2001, respectively.
13. COMMITMENTS AND CONTINGENCIES:
Subsidiaries of the Company are involved in various legal proceedings that
have arisen in the ordinary course of business. While it is not possible to
predict the outcome of such proceedings with certainty and it is possible that
the results of legal proceedings may materially adversely affect us, in the
opinion of the Company, all such proceedings are either adequately covered by
insurance or, if not so covered, should not ultimately result in any liability
which would have a material adverse effect on the financial position, liquidity
or results of operations of the Company. The Company expenses routine legal
costs related to such proceedings as incurred.
The Company has committed to invest up to $5.0 million in EnerTech Capital
Partners II L.P. ("EnerTech"). EnerTech is a private equity firm specializing in
investment opportunities emerging from the deregulation and resulting
convergence of the energy, utility and telecommunications industries. Through
September 30, 2001, the Company had invested $1.5 million under its commitment
to EnerTech.
The Company has committed to advance EPV, an affiliate, up to $1.8 million
in the form of notes receivable. At September 30, 2001, the Company had notes
receivable totaling approximately $1.3 million. Subsequent to September 30,
2001, EPV was advanced the remaining $0.5 million under the Company's
commitment.
44
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information for the years ended September 30, 2000 and
2001 are summarized as follows (in thousands, except per share data):
Fiscal Year Ended September 30, 2000
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------
Revenues.................................................... $335,191 $370,327 $452,149 $514,621
Gross profit................................................ $ 59,620 $ 62,860 $ 78,048 $ 99,223
Net income.................................................. $ 2,603 $ (2,475) $ 10,084 $ 10,944
Earnings per share:
Basic..................................................... $ 0.07 $ (0.06) $ 0.25 $ 0.27
Diluted................................................... $ 0.07 $ (0.06) $ 0.25 $ 0.27
-------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 2001
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------------------------------------------------------
Revenues.................................................... $427,030 $418,557 $423,988 $423,638
Gross profit................................................ $ 74,541 $ 76,749 $ 81,755 $ 74,579
Net income.................................................. $ 7,008 $ 8,075 $ 10,533 $ 3,094
Earnings per share:
Basic..................................................... $ 0.17 $ 0.20 $ 0.26 $ 0.08
Diluted................................................... $ 0.17 $ 0.20 $ 0.26 $ 0.08
-------------------------------------------------------------------------------------------------------
The sum of the individual quarterly earnings per share amounts may not
agree with year-to-date earnings per share as each period's computation is based
on the weighted average number of shares outstanding during the period.
15. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):
During the first fiscal quarter of 2002, the Company implemented cost
reduction procedures and terminated certain positions at the corporate office
and field locations. The Company expects to incur approximately $4.0 million to
$4.5 million in associated costs.
45
PART IV
Item 14. Exhibits
23.1 Consent of Arthur Andersen LLP
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on February 14th, 2002.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ WILLIAM W. REYNOLDS
---------------------------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer
47
INDEX TO EXHIBITS
23.1 Consent of Arthur Andersen LLP