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Integrated Electrical Services, Inc. (NASDAQ:IESC)

F2Q08 Earnings Call

May 13, 2008 9:30 am ET


Kenneth S. Dennard - Investor Relations

Michael J. Caliel - Chief Executive Officer

Raymond K. Guba - Chief Financial Officer


Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Integrated Electrical Services second quarter earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Ken Dennard. Please go ahead, sir.

Kenneth S. Dennard

Thank you [Josh], and good morning everyone. We appreciate you joining us for IES' conference call today to review fiscal 2008 second quarter results. We'd also like to welcome our Internet participants listening to the call as it is being simulcast over the web.

Additionally, as we mentioned in the news release, there is a short slide deck that corresponds with today's presentation on the company's website at, and that's on the Investor Relations page. Please download the PDF and follow along if you would like.

Before I turn the call over to management I have the normal housekeeping details to run through. If you didn't receive an e-mail with a news release yesterday afternoon, please call our offices at DRG&E and that number is 713529-6600 and provide us your contact information. Also, there will be a replay of today's call which will be available on the company's website for the archived webcast area. Also, there will be a telephonic instant replay available for the next seven days, and the replay information is in the press release yesterday.

Please note that information reported on this call speaks only as of today, May 13, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. General information about IES can be found on the company's website under Investor Relations and the company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments, press releases, etc. All are available free of charge through the website as soon as reasonably practical after the filing with the SEC.

Now with me this morning are Michael Caliel, Chief Executive Officer, and Randy Guba, Chief Financial Officer. I'd like to now turn the call over to Mike.

Michael J. Caliel

Thanks, Ken. Good morning, everyone, and thank you for joining us today to review our second quarter 2008 results.

Beginning with Slide 3, as I've been saying for the past several quarters, we continue to make progress on the comprehensive transformation program I'd outlined in late 2006. We remain intently focused on the critical initiatives of strengthening the overall foundation of the company, improving our operational performance, restructuring and consolidating the business, reducing the overall cost structure of the company, and strengthening our leadership ranks. All of these are serving to ultimately reposition IES for growth.

Turning to Slide 4, as part of this strategic plan we've divested or closed non-core divisions and worked to turn around underperforming ones. We've worked through some very difficult and unprofitable projects, we've taken decisive steps to improve the performance of a handful of underperforming businesses, and in each case, rather than trying to grow our way out of problems we've made the tough decisions to fix the underlying foundation of these businesses before attempting to grow them.

Last year we began the realignment of our business in the three major operating groups, Commercial Group, Industrial Group and Residential Group, and continue consolidating and integrating those businesses.

Now before I turn the call over to Randy, on Slide 5 let me point out some of the highlights of our second quarter.

Our adjusted income from continuing operations, which excludes restructuring costs and a onetime gain, was $0.06 per diluted share. SG&A was lower by approximately $7.6 million versus the second quarter a year ago. That's a decrease of almost 22%. Gross margin was 15.7% compared to 16.5% the year ago. Our backlog was approximately $382 million at the end of the second quarter compared to $348 million in the previous quarter. Our total restructuring costs year-to-date total $3.4 million, and our overall restructuring program remains on track to achieve a 15% to 20% reduction in non-operational field resource compensation costs. And finally, we extended our revolving credit facility under favorable terms.

Now let me turn the call over to Randy to review the financial performance in detail, and then I'll return to discuss more about our markets, the cost reduction programs we have under way, as well as some of our strategic investments and productivity enhancements and project management tools and training.

Raymond K. Guba

Thank you, Mike.

As you can see on Slide 6, revenues for the second quarter of fiscal 2008 were $196 million compared to $215 million reported in last year's second quarter. The revenue decline was primarily attributed to softness in our Residential business due to pressures in the housing market as well as weakness in certain segments of our Commercial Group. Parts of the Commercial business have been negatively affected by housing market pressures. Certain other areas have been impacted by delayed timing of job starts and reduced orders due to softness in parts of the economy.

Overall, reported revenues declined 8.6% from a year ago. Year-to-date revenues were $394 million compared to $443 million in the first half of 2007.

Gross profit for the second quarter was $31 million or 15.7% of revenues compared to $36 million or 16.5% of revenues a year ago. This decline was primarily due to lower consolidated revenues and decreased gross margin rates in our Industrial and Commercial Groups, partially offset by an improvement in gross margin in our Residential Group. Looking at a year-to-date comparison, our gross margin for the first half of 2008 was 16.2% compared to 16.6% last year.

Turning to Page 7, sales, general and administrative expenses, excluding restructuring charges, fell to $28 million or 14.1% of revenues, a decrease of $7.6 million from the same period in the prior year, where SG&A was 16.4% of revenues. The decrease in both overall spending and percentage of revenues was in part due to our strategic efforts to restructure our field offices and eliminate redundant positions and facilities. The greatest impact of these costcutting measures was in our Commercial Group, where approximately 100 positions have been eliminated.

Declining revenues also reduced selling costs, including target incentives. Notable declines in our SG&A expenses include a $2.1 million reduction in general and administrative charges resulting from our restructuring efforts, a $1.7 million decrease in management incentives, and a $3.8 million decrease in corporate expenses. Year-to-date SG&A expenses dropped $12.4 million or 18% to $58.2 million in the first half of 2008. As a percentage of revenues, SG&A expenses were 14.8% in the first half of 2008 compared to 15.9% in the first half of 2007.

On Slide 8, operating income for the quarter prior to restructuring charges was $3.1 million compared to $0.2 million in the prior year, which didn't have restructuring expenses. Year-to-date operating income prior to restructuring charges was $5.6 million compared to $3.1 million, which had no restructuring charges in the same period as 2007.

On Slide 9, net income from continuing operations was $93,000 or $0.01 per diluted share. Excluding the unusual items, adjusted net income from continuing operations was just under $1 million or $0.06 per diluted share. This compares to a net loss from continuing operations of $880,000 or $0.06 loss per share in the second quarter of last year.

For the first half of 2008, net loss from continuing operations was $935,000 or $0.06 loss per share. Excluding the unusual items, adjusted net income from continuing operations was $2 million or $0.14 per diluted share. This compares to net loss from continuing operations of $501,000 or $0.03 loss per share in the first six months of last year, which had no restructuring costs or unusual items.

On Slide 10, our adjusted EBITDA from continuing operations excluding nonrecurring restructuring charges and onetime settlements was $6.4 million for the second quarter compared to $2.8 million for the second quarter a year ago. We believe that EBITDA is a useful metric to provide investors comparable numbers to peer companies. We have provided a full reconciliation of adjusted EBITDA to net income in the second quarter earnings release. Year-to-date adjusted EBITDA from continuing operations excluding nonrecurring restructuring charges and onetime settlements was $11.5 million compared to $8 million in the same period of 2007.

Regarding our operational restructuring, we are on track to deliver a 15% to 20% reduction in nonoperational field resource compensation costs due to restructuring, along with improved operational efficiencies. We expect to incur pretax restructuring charges of approximately $5 to $10 million over the course of the process, which is expected to be substantially complete by September 2008. These charges will include compensation severance benefits, consulting charges, as well as facility consolidations and closings. Through the first half of fiscal 2008, our restructuring costs totaled $3.4 million.

Now turning to Slide 11, I will provide a review of our operating groups. Since we restructured our operations in three business groups, this is our second quarter reporting of our group data based on this new alignment.

Second quarter revenues for Commercial work declined by 2% to $111 million at a gross margin of 14.3%. This group was affected by reduced demand for light construction projects such as restaurants, movie theaters and local shopping centers which is correlated to the slowdown in the housing sector. We've also experienced increased competition for low-end retail work from residential contractors who have been impacted by the housing slowdown. Helping to offset the decline in this group were several significant projects, including university buildings, high-rise office towers, and large regional retail shopping centers.

Year-to-date revenues for our Commercial Group were $221 million compared to $226 million in the same period in 2007, a 2% decline.

Our Commercial Group's gross margin percentage declined by 10 basis points in the second quarter, driven primarily by two of our divisions. In one we are completing underperforming legacy projects and at the other we are completing several low-margin projects. Year-to-date gross margin in our Commercial Group was 14.6% compared to 15.4% in the same period last year.

On Slide 12, our second quarter revenues for Industrial work were up $7 million from last year to approximately $35 million. Our gross margin declined to 13.7% versus 16.9% last year as a result of increased transportation expenses and the completion of several large high-margin projects that we have not been able to replace as of yet. The Industrial market is generally not as cyclical as the rest of the construction industry due to the nature of the projects, which are often large-scale multi-year contracts financed by large corporations or government agencies. For the 2008 period, our Industrial division has seen growth in utility line service projects as well as increased construction at electrical substations, ethanol plants, and pulp and paper mills.

Year-to-date, our Industrial Group's revenues were $68 million compared to $58 million in the same period in 2007, a 17% increase. Gross margin in the segment was 15.6% in the first half of 2008 compared to 15.5% in the first half of 2007.

On Slide 13, our Residential Group generated revenues of approximately $50 million in the second quarter with a gross margin of 20% compared to $74 million and 19.7% last year.

The reduction in revenue was due to the well-known drop in demand in the residential sector, in particular for single-family housing, however residential gross margin improved approximately 30 basis points in the current year versus last in spite of the competitive pressures in this industry. We attribute this improvement to stabilization in material costs, including copper wire and aluminum, improved project execution and labor productivity. We've also added several new multi-family housing jobs with higher profit margins.

Year-to-date revenues in our Residential segment were $106 million compared to $159 million in the same period in 2007, a 33% decline. Gross margin in our Residential segment year-to-date was 19.9% compared to 18.8% in the first half of 2007.

Now turning to the backlog on Slide 14, our backlog was $382 million compared to $348 million at the end of the first quarter and $348 million at the end of the second quarter a year ago. A sequential increase in backlog occurred in each of the company's groups, the largest improvement in the Commercial and Industrial Groups, largely due to growth in construction projects such as university buildings, large entertainment facilities and shopping centers, electrical substations and manufacturing plants. The improved backlog for the Residential Group is attributable to the market shift away from single-family, which does not create backlog, to multi-family housing, which does. As we have said before, we continue to be selective with the quality of our backlog.

Now turning to Slide 15, we ended the second quarter with $31.9 million in unrestricted cash and cash equivalents compared to $35.6 million in the preceding quarter and $57.3 million a year ago. We also had $35.7 million available under our revolving credit facility and therefore had liquidity totaling $67.6 million, which we believe is adequate to meet our operating needs. Our quarter-end cash balances are lower than last as a result of paying down debt, repurchasing our stock, reinvesting infrastructure, and investing in working capital.

In May we entered into an amendment to our revolving credit facility extending the maturity date to May 12, 2010. We elected to reduce the size of the facility by $20 million to better match our needs. This facility has improved terms, including the elimination of a restricted cash requirement, allowing us to recover $20 million.

An update on our share repurchase program, to date the company has purchased 156,000 shares totaling $2.8 million. We are presently establishing a Rule 10b51 plan which allows us to purchase during blackout periods.

I'll now turn the call back to Mike for his comments.

Michael J. Caliel

Thanks, Randy.

Improving execution across the business is one of the key cornerstones to enhancing our performance. As I've stated in the past, we're in the midst of a major turnaround at IES in our overall cost structure, our operating disciplines and our work processes. And, as you can see on Slide 16, during the first six months of fiscal 2008 we've expanded our restructuring efforts in response to the softening market conditions and to position ourself for the future.

To that end, in the first six months of the fiscal year we've organized the Commercial Group into six operating divisions, consolidating the leadership and back office functions and thereby significantly reducing our SG&A costs. We've accelerated and expanded our restructuring programs in response to the heightened market pressure, particularly within the Commercial Group. We've closed three offices in our Residential Group and two office locations in our Commercial Group, consolidating them into other IES locations. We hired a new group vice president to lead our Industrial Group, and we've reassigned a Residential vice president to focus solely on growing our multi-family housing business.

While we're intent on reducing our cost base during our restructuring, we've also been strategically investing in productivity enhancement tools such as project management processes and systems, upgrading our financial and operational reporting systems to better manage the business, and strengthening our leadership team, all to create a sustainable and scalable platform for growth.

With the progress we've made in stabilizing our restructured operations, we are now focusing on organic growth. Accordingly, we've developed and installed an order management system to drive visibility and accountability in meeting our growth targets.

Now, with respect to our markets, we expect to see continued softness in the residential market. And while there has been softening in some Commercial sectors, we're seeing strength in other areas of our Commercial market, especially institutional and health care. The industrial market is still solid, and we continue to focus on opportunities in that sector.

So in summary, despite the headwinds in the economy, our first half results showed improvement over last year. Orders have picked up. The size and quality of our backlog continues to strengthen, and our capital structure has been significantly enhanced. We're also reinvesting in the business by retooling our systems and processes to make us more efficient and effective, and we're investing in our leadership to develop a world class team.

And as I've said before, our focus is on execution, on accountability, and getting the fundamentals right in order to strengthen the entire foundation of IES and then position the company for improved performance for growth and to create value for our stakeholders.

As always, thank you for your support. We'll talk to you during the next quarter.

Kenneth S. Dennard

Certain statements in this conference call, including statements regarding the restructuring plan and total estimated charges and cost reductions associated with this plan are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, all of which are based upon various estimates and assumptions that the company believes to be reasonable as of the date hereof. These statements involve risks and uncertainties that could cause the company's actual future outcomes to differ materially from those set forth in such statements.

Such risks and uncertainties include, but are not limited to, the inherent uncertainties related to estimating future operating results and the company's ability to generate sales or operating income, potential difficulty in addressing material weaknesses that have been identified by the company, fluctuations in operating results because of downturns in the level of commercial and residential construction, delayed payments resulting from financial difficulties affecting customers, inaccurate estimates used in entering into contracts, inaccuracies in estimating revenue and percentage of completion on projects, the high level of competition in the construction industry, both from third parties and ex-employees, increase in the cost of commodities used in our industry, including steel, copper, plastic, aluminum and gasoline, weather-related delays, accidents resulting from the physical hazards associated with the company's work, difficulty in reducing SG&A, loss of key personnel, particularly the presence of business units, litigation risks and uncertainties, difficulties incorporating new accounting control operating procedures and centralization of back office functions, and disruptions in or the inability to effectively manage consolidations.

You should understand that the foregoing, as well as other risks discussed in this call, are in the company's annual report on Form 10-K for the year ended September 30, 2007 could cause future outcomes to differ materially from those expected in such [inaudible] statements. The company undertakes no obligation to publicly update or revise information concerning the restructuring efforts, borrowing availability or cash position or any forward-looking statements to reflect events or circumstances that may arise as of the date of this call.

Forward-looking statements are provided in this call pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of the estimates, assumptions, uncertainties and risks described therein.

I'd now like to - general information about IES can be found at the company's website. The company's annual report on Form 10-K, quarterly reports, 10-Qs and others are on the website and free of charge.

And that will be concluding the call. Operator?


Ladies and gentlemen, this concludes the Integrated Electrical Services second quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 3035903000 or 18004052236. The passcode is 11113499#.

ACT would like to thank you for your participation. Have a pleasant day. You may now disconnect.

Question-and-Answer Session

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