Filed On 3/2/04 6:05am ET ˇ SEC File 1-13783 ˇ Accession Number 891092-4-1074
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/02/04 Integrated Electrical Svcs Inc 8-K{7,9} 2/27/04 2:40 891092
Document/Exhibit Description Pages Size
1: 8-K Current Report 4 9K
2: EX-99.1 Company & Investment Profile 36 216K
Exhibit 99.1
[LOGO] IES
March 2004 www.ies-co.com
Integrated Electrical Services
(NYSE: IES)
Company & Investment Profile
--------------------------------------------------------------------------------
Key Investment Points
o IES is the largest provider of electrical contracting services in the U.S.
with approximately 140 locations across the country. Its size, diverse
customer base and breadth of services give the Company significant
advantages in the marketplace and cushion it from economic swings.
o The Company's size allows it to provide nationwide service to larger
customers and to execute simultaneous multi-site projects.
o In 2004 and 2005, many sectors where IES has significant strength and
tends to have higher profit margins, such as manufacturing facilities,
hotels, office buildings and retail centers, are expected to have
significant construction growth.
o IES is well positioned to take advantage of any power grid upgrade work.
Power utility work comprises seven percent of IES' current backlog,
including electrical infrastructure projects. IES has two subsidiaries
dedicated to this type of work and four others with a focus in this area.
o IES is beginning the growth phase, which is the third part of a
three-phased strategy. The first two phases improved IES' performance
metrics, increased integration and positioned the Company for continued
growth. IES made its first acquisition in three years in February 2003,
Riviera Electric in Colorado.
o IES generated record cash flow from operations ("CFFO") of $53.4 million
in 2002 and $39.3 million in 2003. In the first quarter of 2004, IES
generated another record $6.4 million CFFO.
o IES called $75 million of its 9 3/8% Senior Subordinated Notes and entered
into a new 4 year credit facility totaling $175 million. These
transactions will lower total debt to $223 million, a $25 million
reduction.
o IES maintains strong corporate governance policies, including split CEO
and Chairman positions and an eight-person board with five independent
directors.
(Amounts in Millions, except per share data)
----------------------------------------------------------------
Price (2/24/04) $10.59
52 Wk. High/Low $11.50 - $3.50
Total Shares (as of 1/23/04) 38.4
Equity Market Cap. $407
Average Daily Volume (total shares) 160,000
Cash (as of 12/31/03) $44
Total Debt (as of 12/31/03) $248
Total Enterprise Value (TEV)* $611
Institutional Ownership (as of 12/31/03) 60%
Inside Ownership (as of 12/31/03) 24%
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----------------------------------------------------------------
2004 EPS Guidance (per share) $0.55 - $0.75
2004 P/E Multiple 19.3x - 14.1x
Price / Sales Multiple 0.3x
Price / Book Value Per Share 1.5x
Book Value Per Share (per share) $6.96
----------------------------------------------------------------
Total Enterprise Value = Equity Market Cap. + Debt - Cash
IES HAS OUTPERFORMED THE S&P 500
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 1
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
INTEGRATED ELECTRICAL SERVICES, INC. - Summary Financial Data
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(Dollars in Millions)
--------------------------------------------------------------------------------
SUMMARY INCOME STATEMENT
--------------------------------------------------------------------------------
FYE - September 30,
-----------------------------
2001 2002 2003
------- ------- -------
Revenue $ 1,693 $ 1,475 $ 1,449
Cost of Services 1,386 1,254 1,241
------- ------- -------
Gross Profit 308 222 207
SG&A 214 174 154
Restruct. Charge -- 6 --
Goodwill Amort 13 -- --
------- ------- -------
Operating Income 81 42 54
Interest Expense (26) (27) (26)
Other, net -- 1 1
------- ------- -------
Pretax Income before Accounting Change 55 16 29
Taxes 26 6 8
Cumulative effect of Accounting Change -- 283 --
------- ------- -------
Net Income $ 29 $ (273) 20
======= ======= ==
Net Income before Accounting Change $ 29 $ 10 20
Diluted EPS $ 0.70 $ (6.86) $ 0.52
Accounting Change* -- (7.11) --
------- ------- -------
Operating EPS* $ 0.70 $ 0.25 $ 0.52
Diluted Shares 40.9 39.8 39.2
* Before cumulative effect of change in accounting principle, net of
tax.
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KEY MARGINS
--------------------------------------------------------------------------------
FYE - September 30,
2001 2002 2003
---- ---- ----
Gross Margin 18.2% 15.1% 14.3%
SG&A as % Revenues 12.6% 11.8% 10.6%
Operating Margin 4.8% 2.8% 3.7%
Pretax Margin 3.2% 1.1% 2.0%
Net Margin 1.7% 0.7% 1.4%
Return on Equity 5.5% 5.1% 7.6%
Return on Assets 2.8% 1.4% 2.8%
WACC (Weighted Average Cost of Capital) - Approximately 11%
[Enlarge/Download Table]
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2001 2002 2003 2004*
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52 Wk High $10.00 $6.50 $7.76 $11.50
52 Wk Low $4.90 $3.07 $3.10 $9.26
TEV/Op. Income High 7.9x 7.0x 9.4x
TEV/Op Income Low 3.3x 5.7x 6.0x
P/E High 10.5x 13.0x 14.9x 20.9x-15.3x
P/E Low 5.2x 6.1x 6.0x 16.8x-12.3x
*Share prices in 2004 are YTD and EPS is the corporate guidance range.
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SUMMARY BALANCE SHEET AND RATIOS
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(Dollars in Millions) FYE - September 30,
--------------------------------
Assets 2001 2002 2003
---- ---- ----
Current Assets $453 $438 $447
Total Assets $1,034 $722 $726
Liabilities and Equity
Current Liabilities $216 $194 $180
Total Debt $289 $249 $248
Stockholders' Equity $529 $254 $268
Working Capital % of Revenue* 13.8% 14.4% 15.6%
Capital Expenditures as % Revenue 1.5% 0.8% 0.6%
* Working Capital = Cur. Assets less Cash minus Non-Interest Bearing Cur.
Liabilities.
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BACKLOG*
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(Dollars in Millions)
1999 $644
2000 $726
2001 $789
2002 $801
2003 $708
Q1 '04 $714
* Excludes divestitures and is work which the Company has a signed contract
for, but has not yet completed.
[GRAPHIC OMITTED]
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 2
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Table of Contents
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Key Investment Points ................................................... 1
Summary Financial Data .................................................. 2
Company Overview ........................................................ 5
Three-Phase Strategic Plan .............................................. 12
Recent Financial Results and Guidance ................................... 16
Customer Overview ....................................................... 17
Accounting and Finance Overview ......................................... 18
IES Offices and Management Structure..................................... 20
Corporate Governance .................................................... 21
Industry Overview ....................................................... 23
Outlook and Valuation ................................................... 27
Income Statement ........................................................ 31
Balance Sheet ........................................................... 33
Statement of Cash Flows ................................................. 34
Appendix
Construction Accounting Primer .......................................... 35
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 3
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Disclosure Statement
--------------------------------------------------------------------------
This report was prepared by Integrated Electrical Services, Inc. ("IES" or
the "Company"). The opinions shared in this document are the beliefs of
management at the time of printing.
This document includes certain statements, including statements relating
to the Company's expectations of future operating results, that may be
deemed "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. In addition to historical
information, this document contains forward-looking statements made by the
management of IES. Such statements are typically identified by terms
expressing future expectation or goals. These forward-looking statements,
although made in good faith, include assumptions, expectations,
predictions, intentions or beliefs about future events and are subject to
risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements.
Factors that might cause such differences include, but are not limited to,
inherent uncertainties relating to estimating future results, fluctuations
in operating results because of down-turns in levels or types of
construction, incorrect estimates used in entering fixed-price contracts,
difficulty in managing operations in existing, geographically-diverse
operations, the high level of competition in the construction industry,
the impact of variations in interest rates, general level of the economy,
changes in the level of competition in the electrical industry, changes in
the costs of labor, changes in the cost or availability of bonds required
for certain types of projects, inability to find sufficient numbers of
trained employees, inability to successfully achieve or maintain planned
business objectives, inaccurate estimates used in percentage of completion
calculations, the unknown effect of U.S. involvement in armed conflict,
and seasonal variation in the ability to perform work.
Financial performance may be affected by many other important factors
including the following: the ability of IES to attract and retain key
personnel; the amount and rate of growth in IES' general and
administrative expenses; the ability of IES to stay within the limits of
the credit ratios set out in its debt covenants; changes in inflation or
other general economic conditions affecting the domestic construction and
electrical contracting industry; unanticipated legal proceedings and
unanticipated outcomes of legal proceedings; changes in accounting
policies and practices required by Generally Accepted Accounting
Principles, the Securities and Exchange Commission and other regulatory
bodies. Maintaining or achieving growth from operations is dependent
primarily on achieving anticipated levels of earnings before depreciation,
amortization, and other non-cash charges, controlling expenditures to
budgeted levels, collecting accounts receivable, and maintaining costs at
current or lower levels.
IES cautions readers that these factors as well as others, in some cases
have affected, and in the future could affect, IES' actual results and
could cause IES' results in the future to differ materially from the goals
and expectations expressed herein and in any other forward-looking
statements made by or on behalf of IES. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect
management's opinion only as the date hereof. The Company takes no
obligation to revise or publicly release the results of any revision of
these forward-looking statements. If any revisions are made to this
document, the revisions will necessarily be delayed from the occurrence of
the event or receipt of the information upon which the revision will be
based. Readers should carefully review the cautionary statement described
in this and other documents filed from time to time with the Securities
and Exchange Commission, including annual reports on Form 10-K.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 4
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Company Overview
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Integrated Electrical Services ("IES" or the "Company") is the nation's
leading provider of electrical solutions to the commercial, industrial,
residential and service markets. The Company provides a full range of
services from system design, build and installation to long-term service
and maintenance on a wide array of projects including: high-rise
residential and office projects; retail facilities; power plants;
municipal infrastructure; health care facilities; and single-family and
multi-family homes. In addition to electrical services, IES provides all
aspects of low voltage wiring and installation services including voice
and data cabling communications systems, fire and security systems and
building communication systems, eliminating the need for multiple vendors.
IES has two business segments, Commercial/Industrial and Residential. In
2003, 81% of revenues were from Commercial/Industrial, and 19% of revenues
were from Residential. IES' service and maintenance work is performed
within the Commercial/Industrial segment and accounted for 8% of IES'
revenue in fiscal 2003.
IES is headquartered in Houston, Texas and has developed a national
footprint of approximately 140 locations and 12,300 employees currently
serving the continental 48 states, with a concentration in the Sunbelt.
The Company began in 1997. At the time of its IPO in January 1998, the
Company had revenues of approximately $313 million. Since that time, IES
has grown rapidly through acquisitions and internal growth. From 1997 to
2003, revenues increased at a compounded annual growth rate of
approximately 29%. Included in that growth was approximately 5% organic or
"same store sales" growth.
Exhibit 1
IES Has a Nationwide Presence
Well positioned geographically with 140 locations across the U.S.
[GRAPHIC OMITTED]
Geographic and Market Sector Diversity
IES has established both geographic and market sector diversity, which
helps to insulate the Company from sector cyclicality. IES' national
presence mitigates region specific economic slowdowns. IES' presence in
the southwest and in Florida has been particularly beneficial through this
most recent construction decline because these areas were less impacted
than some of the other regions of the U.S. The impact of a slowdown in a
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 5
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
particular industry tends to be muted when compared to its smaller, more
geographically concentrated competitors.
IES has significant market diversity, with no market contributing more
than 13% of IES' revenues in fiscal 2003. Additionally, IES' proficiency
in a variety of industries allows it to be flexible and to share its
expertise across regions. For instance, with the increase in healthcare
construction spending over the past 2 years, one of the Company's
subsidiaries that specializes in healthcare facilities construction has
trained and aided other IES subsidiaries so the Company is able to perform
complex healthcare projects across the U.S. The residential market was
particularly strong in calendar 2003, with single family housing starts
higher than 2002's already record year. The strength in the residential
markets has helped to counter some of the weakness IES experienced in the
commercial/industrial segment resulting from the economic downturn.
Additionally, IES has established proprietary systems and processes which
help the Company bid on projects, manage projects once they have been
awarded and maintain and track customer information. Through the
consolidation of over 85 entities, IES has taken the best practices and
leveraged those systems and processes across the entire organization for
best in class practices. The Company's ability to transfer knowledge and
practical experience across its national footprint has provided this
diversity and distinguished IES from its competitors.
Exhibit 2
IES' Geographic and Market Diversity
Highly diversified with no region or market accounting for a significant portion
of revenues
-------------------------
GEOGRAPHIC DIVERSITY
-------------------------
Mid Atlantic 14%
Midwest 5%
Northeast 6%
Northwest 5%
South 36%
Southeast 23%
Southwest 11%
-------------------------
MARKET DIVERSITY
-------------------------
Percentage
of Revenue
----------
Single Family 13.0%
Health Care 9.0%
Heavy Industry/Manufacturing 9.0%
Hotels/Condos 9.0%
Institutions 9.0%
Service 8.0%
Utilities 7.0%
Office Buildings 6.0%
Retail 6.0%
Communications 5.0%
Other Commercial 5.0%
Airports 3.0%
Distribution 2.0%
Highway 2.0%
Government 1.0%
Largest business segment expected to grow after construction spending decline in
2002 and 2003
Commercial/Industrial Segment
IES provides services on commercial construction projects at hospitals;
high-rise buildings including office buildings; hotels and condominiums;
retail buildings; and schools and institutional buildings. In industrial
construction, IES provides services for: utilities, including power
generation and overhead and underground lines; water and waste water
facilities; manufacturing facilities; distribution centers; heavy
industrial projects; highway and transportation projects; airports; and
military and government installations.
New commercial and industrial work begins with either a design request or
engineer's plans from the owner or general contractor. Initial meetings
with the parties allow the contractor to prepare preliminary and then more
detailed design specifications, engineering drawings and cost estimates.
Once a project is awarded, it is conducted in scheduled phases, and
progress billings are rendered to the owner for payment, less a retainage
of 5% to 10% of the
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 6
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
construction cost of the project. Actual fieldwork is coordinated during
these phases, including: ordering of equipment and materials; fabrication
or assembly of certain components; delivery of materials and components to
the job site; scheduling of work crews; and inspection and quality
control. IES generally provides the materials to be installed as a part of
these contracts, which vary significantly in size from a few hundred
dollars to several million dollars. The average contract size is between
$500,000 and $600,000 and requires between six and nine months to
complete. In 2003, the Company serviced over 10,000 projects with
approximately 500 contracts in backlog over $1 million each in value and
an additional 75 are estimated to be greater than $5 million.
The Commercial/Industrial margins over the 2001-2003 period experienced
substantial decline as a result of the slowing economy and reduced
construction spending. Prior to the economic slowdown at the end of 2001,
IES earned gross margins of 17% to 19% in its Commercial/Industrial
segment. In 2003, IES realized a 12.7% gross margin in its
Commercial/Industrial segment, approximately 1% higher than the average
gross margin in backlog. The increase was caused by a number of factors
including: service work, which tends to be higher margin, is not
backlogged; change orders which occur during the execution of a project;
approximately 25% of the work in IES' backlog is negotiated work which
often has higher realized margins as a result of the allocation of SG&A
expenses; and an overall increase in margin resulting from the completion
of projects under estimated cost.
Service Work
Within the Commercial/Industrial segment, IES performs service work as
well as communications and power generation work. Service and maintenance
work is included in the Commercial/Industrial sector and accounted for 8%
of IES' revenues in 2003. It is typical for IES to perform service work or
have long-term service and maintenance contracts on projects the Company
has initially built. This work tends to have slightly higher margins,
ranging from 18% to 22%, and is slightly more capital intensive due to the
need for service trucks stocked with inventory.
Low-voltage market
Low-voltage services include work on communications and power line
applications. Low- voltage communication services consist primarily of
design, installation and maintenance of voice and data communication
cabling systems; design and installation of local and wide area networks;
fiber optic wide area network transmission lines (outside plant
construction); and communications space planning and video/CCTV/CATV
distribution design and installation. Projects entail the installation of
both cross-country fiber lines and local outside fiber lines, as well as
premise wiring systems ("fiber to desk"). Projects range in scope from
small office networks to networks for multi-site institutions. Often,
installation work is done in tandem with traditional electrical
contracting work.
The Company's work for the power line market consists primarily of the
installation, repair and maintenance of electric power transmission lines
and the construction and maintenance of electric substations. IES
generally serves as the prime contractor and performs substantially all of
the construction work on these contracts. Customers in this market are
utilities and government agencies. The Company believes demand for power
line services is driven by: new infrastructure development; utilities'
efforts to reduce costs through the outsourcing of power line installation
and maintenance services in anticipation of deregulation; and the need to
modernize and increase the capacity of existing transmission and
distribution systems.
Power Utility
IES does a significant amount of power, power line and "electrical grid"
work. The Company has two subsidiaries dedicated to that type of work and
another four that have a
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 7
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
specific focus in that area. In fiscal 2003, 5.3% of IES' revenue was from
power utility work. Although current construction spending estimates from
F.W. Dodge indicate that spending in this sector will be down in 2004,
power outages during 2003 may encourage heightened spending levels. IES is
uniquely positioned to perform additional work in this area and has the
ability to ramp-up its operations for the power utility sector quickly. In
2001, IES performed $138 million of work for power utility projects.
Exhibit 3
Revenue Breakdown by Services Performed
IES' revenues are diversified across the electrical and communications segments
---------------------
REVENUE BY TYPE
---------------------
(Dollars in Millions)
2000 2001 2002 2003
------ ------ ------ ------
Power Utility $ 122 $ 138 $ 111 $ 77
Communications 119 114 122 65
Service and Maint. 132 135 113 109
Residential 251 257 282 276
Commercial/Industrial 1,049 1,048 847 921
IES' most profitable business segment continues to experience record
construction levels
Residential Segment
IES is the largest residential electrical contractor in the country. IES'
residential segment is composed of three different types of projects:
single family homes, often tract homes with entire subdivisions built at
one time; high-end single family custom homes, which are often quite large
and include the latest trends in security and technology; and multifamily
low rise apartments, condominiums and town homes. While multi-family
projects are entered into the backlog, single family homes typically are
not due to the short turn around time.
Residential segment gross margins have ranged between 21% and 23%. With
robust residential construction spending in 2002 and 2003, margins
remained strong, however recent increases in copper prices as well as
increased competition held IES' 2003 residential gross margins to 21%. New
low interest rates have driven demand for new homes, creating the record
levels of spending. During 2003, single family housing starts were higher
than last year's already record year.
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 8
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
C&I operating income margins improvings
Exhibit 4
Operating Segment Data
[Enlarge/Download Table]
(Dollars in Millions)
-------------------------------------------------------------------------------------------------------------------
% Chg. % Chg. % Chg.
2000 2001/2000 2001 2002 2002/2001 2003 2002/2003
-------------------------------------------------------------------------------------------------------------------
Revenues
Commercial and Industrial $1,421.4 1.0% $1,435.8 $1,193.4 -16.9% $1,172.4 -1.8%
Residential 250.9 2.6% 257.4 282.0 9.6% 276.2 -2.1%
Gross Profit
Commercial and Industrial $ 244.8 1.8% $ 249.1 $ 159.9 -35.8% $ 149.2 -6.7%
Residential 55.0 6.4% 58.5 61.7 5.4% 58.0 -6.0%
Operating Income
Commercial and Industrial $ 89.8 11.2% $ 99.9 $ 36.5 -63.5% $ 48.1 32.1%
Residential 29.9 -12.9% 26.1 34.6 32.9% 24.9 -28.1%
Gross Profit Margin
Commercial and Industrial 17.2% 0.7% 17.3% 13.4% -22.8% 12.7% -5.0%
Residential 21.9% 3.7% 22.7% 21.9% -3.8% 21.0% -4.0%
Operating Income Margin
Commercial and Industrial 6.3% 10.1% 7.0% 3.1% -56.1% 4.1% 34.4%
Residential 11.9% -15.1% 10.1% 12.3% 21.3% 9.0% -26.6%
Backlog
Backlog is a key indicator of the Company's future revenues, and IES has a
history of a consistent backlog. Backlog is the amount of work IES has
signed contracts for but has not yet completed. Total backlog increased in
the first quarter of 2004 to $714 million from $708 million at the end of
2003. During the first quarter of 2004, IES added $189 million of new work
compared to $155 million in the first quarter of 2003.
The Company's backlog decreased to $708 million as of September 30, 2003
from approximately $801 million as of September 30, 2002. This decline is
the result of many factors including the removal of $16.5 million of
project work due to financial difficulties of a single customer. IES also
changed the backlog calculation method for many industrial long-term
maintenance contracts at the end of 2003, eliminating approximately $29
million in work from backlog. This work is not recorded in backlog
although it is still a source of revenues for IES. From 2001 through 2003,
IES worked on a few very large contracts that spanned two to three years
each which significantly increased backlog. These larger projects are
nearing completion, thus lowering the total backlog.
Backlog is comprised primarily of Commercial/Industrial projects, since
most service work (except for long-term service contracts) and most single
family residential projects are not "backlogged" due to the short-term
nature of the projects. IES' ability to gain market share and maintain its
revenue base is a significant accomplishment. The Company's strong backlog
performance serves to highlight the advantage of its size and diverse
customer base. Exhibit 5 is an analysis of IES' recent backlog trends as
well as a review of IES' backlog by market type.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 9
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 5
Breakdown of Backlog by Market and Historical Backlog Trends
-----------------------------------------
MIX OF BACKLOG - 9/30/2003
-----------------------------------------
Percentage
of Backlog
----------
Institutions 17%
Hotels/Condos 12%
Health Care 12%
Utilities 11%
Apartments 9%
Airports 7%
Office Buildings 7%
Other Commercial 6%
Retail 5%
Heavy Industry/Manuf. 5%
Highway 4%
Distribution 3%
Communications 2%
Government 1%
-------------------------------
HISTORICAL BACKLOG
(Dollars in Millions)
-------------------------------
1999 $644.0
2000 $726.0
2001 $789.0
2002 $801.0
2003 $708.0
Q1 '04 $714.0
Utilization of Prefabrication Processes - IES' size and 100% merit shop
environment has allowed the Company to implement best practices across the
organization as it relates to prefabrication. IES has invested in and
utilizes prefabrication facilities to pre-assemble electrical components
that can later be installed on site. This is safer, more cost effective
and more efficient for IES and the customer. IES has prefabrication
centers strategically located to service the U.S. on large scale projects.
Highly variable cost structure, with 80% of costs from labor and specific
project related materials
Cost Drivers
IES' cost structure is highly variable. The three primary drivers of cost
are labor, materials and insurance. Approximately 40% of IES' costs are
from labor and labor related expenses, such as health insurance. As of
September 30, 2003, IES had approximately 13,000 employees, and
approximately 11,000 employees were field electricians. At the end of the
first quarter of 2004, IES had approximately 12,300 employees. The number
of field electricians is somewhat variable and fluctuates depending on the
number and size of active projects undertaken. Approximately 2,000
employees were project managers, job superintendents and administrative
and management personnel, including executive officers, estimators or
engineers, office staff and clerical personnel.
IES provides a health, welfare and benefit plan for all employees, subject
to eligibility requirements, and has a 401(k) plan to which eligible
employees may make contributions through a payroll deduction. IES matches
cash contributions of 25% of each employee's contribution up to 6% of each
employee's salary. IES also has an employee stock purchase plan through
which eligible employees may contribute up to 100% of their cash
compensation, with a maximum of $21,250 per year, toward the annual
purchase of our common stock at a discounted price. Over 750 of IES'
employees participated in this program during fiscal 2003.
Material costs are almost 100% variable, and approximately 40% of the
Company's costs incurred are for materials installed on projects. This
component is variable based on the demand for services. Typically, IES
incurs costs for materials once the Company begins work on the project. In
most cases, IES orders materials as needed, has the materials shipped
directly to the jobsite, and installs them within 30 days. Materials
consist of commodity-based items such as conduit, wire and fuses, as well
as specialty items such as fixtures, switchgear and control panels.
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 10
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
IES is insured for workers' compensation, employer's liability, auto
liability, general liability and employee healthcare, subject to large
deductibles. Losses up to the deductible amounts are accrued based upon
actuarial studies and estimates of the ultimate liability for claims
incurred and an estimate of claims incurred but not reported. The accruals
are based upon known facts and historical trends, and IES management
believes such accruals to be adequate. Costs for employee healthcare,
workers compensation and auto liability are somewhat variable based on
staffing requirements.
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 11
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Three-Phase Strategic Plan
--------------------------------------------------------------------------
Strategic Plan
In October 2001, IES implemented a three-phase strategic plan to
strengthen the Company during the recent downturn in construction
spending, further integrate the Company and focus on future growth. The
first phase of the strategy Back to Basics is largely in place and is an
ongoing process. Phase II One Company. One Plan. is 75% complete and
focuses on the integration of the Company. Phase III Continued Growth was
just initiated and is focused on expanding the Company through internal
and acquisition-driven growth. The three phases of the plan are detailed
in Exhibit 6 below:
Exhibit 6
A Well-Defined and Successful Strategy
[Enlarge/Download Table]
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PHASE I PHASE II PHASE III
-------------------------------------------------------------------------------------------------------
BACK TO BASICS ONE COMPANY. ONE PLAN. CONTINUED GROWTH
- Build Backlog - Regional Structure - Organic Growth
- Control Costs - Financial Reporting and - Greenfield Growth
- Focus on Cash Flow Planning - Strategic Acquisitions
- Employees - Continue Back to Basics
- Safety - Continue One Company. One
- Procurement Plan.
- Customers
- Continue Back to Basics
STATUS: IN PLACE AND ONGOING STATUS: 3/4 COMPLETE STATUS: EARLY STAGES
Phase I - BACK TO BASICS
Build Backlog - IES' backlog is currently $714 million, up from $708
million at the end of fiscal 2003. Backlog at the end of 2003 was down
approximately 12% from where it was at the end of fiscal 2002. However,
IES actually had an increase in new work added to backlog in fiscal 2003
versus fiscal 2002 ($665 million of new work in 2003 versus $590 million
in 2002). IES has 7,000 contracts in backlog versus 6,500 at the end of
fiscal 2002. The dynamics of the work has changed, allowing IES to turn
its backlog quicker.
Control Costs -- Over the past two years, IES has focused on controlling
the costs of doing business. In 2001, the Company reacted quickly to the
weakening economy. By focusing on efficiency, both in our home office and
in the field, IES decreased overall selling, general and administrative
(SG&A) expenses by 19% in 2002 and by an additional 12% in 2003. SG&A
expenses as a percent of revenue were 10.6% in fiscal 2003 versus 11.8% in
fiscal 2002. In the first quarter of 2004, IES' SG&A costs as a percent of
revenues dropped to 10.1% essentially achieving the 10% goal established
in the Back to Basics plan.
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 12
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
IES continues to operate more efficiently.
Exhibit 7
Improving Cost Structure
--------------------------------------------
Selling, General and Administrative Expenses
--------------------------------------------
(dollars in millions)
As a % of Revenue
-----------------
2000 $221.5 13.2%
2001 $214.1 12.6%
2002 $174.2 11.8%
2003 $153.7 10.6%
Focus on Cash Flow -- IES had another strong year in terms of free cash
flow generation. Free cash flow, defined as cash flow from operations ($40
million) less capital expenditures ($9 million), was $31 million in 2003.
Continued strong cash flow generation is a result of close attention to
operating profitability, with operating income margins increasing from
2.8% in 2002 to 3.7% in 2003. In addition, conservative capital
expenditures through more efficient allocation of resources, collecting
receivables and tax planning strategies have improved cash flow. IES
believes free cash flow is a good gauge of operating performance in the
construction industry, and it is the cash available to shareholders. In
the first fiscal quarter of 2004, IES generated a record $4.7 million in
free cash flow.
Exhibit 8
Record Levels of Free Cash Flow
IES improved its free cash flow generation by $58.7 million in 2002 and has
continued to maintain that performance through the first quarter of 2004.
------------------------- ------------------------------
ANNUAL FREE CASH FLOW* HISTORICAL Q1 FREE CASH FLOW*
------------------------- ------------------------------
(Dollars in Millions) (Dollars in Millions)
1999 -19.9 1999 -$1.0
2000 14.8 2000 -$3.3
2001 -17.2 2001 -$26.8
2002 41.5 2002 -$8.2
2003 31.4 2003 $0.7
2004 $4.7
* Cash Flow from Operations less Capital Expenditures.
------------------------------
HISTORICAL Q1 FREE CASH FLOW*
------------------------------
(Dollars in Millions)
1999 -3.318
2000 -26.817
2001 -8.181
2002 0.724
2003 4.68
* Cash Flow from Operations less Capital Expenditures.
Phase II - ONE COMPANY. ONE PLAN.
IES is comprised of electrical and communications contracting companies
across the U.S., working together to achieve a more efficient and
profitable organization. Phase II of IES plan is focused on integration
and realization of potential operating efficiencies.
Regional Structure - IES' subsidiaries are managed on a segment basis with
one residential region and five geographic regions, which are primarily
commercial and industrial. These regions are managed by Regional Operating
Officers ("ROO's") who report directly to the Chief Operating Officer, and
all aspects of planning and reporting are
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 13
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
performed regionally. This lowers overall operating costs while improving
management oversight. The regional structure has:
O Increased responsibility of regional operating leaders and financial
controllers
O Reduced the number of reporting entities
O Increased cross-utilization of employees among regions
O Implemented best practices on a regional basis
Financial Reporting - The implementation of a financial reporting and
planning system is over 80% complete, with two of six regions 100%
converted. IES has conducted extensive training on the new system for
project managers and financial controllers, which has improved overall
project management skills. This system provides:
O Real-time access to regional financial reporting records
O Better management controls
O Increased data and analysis tools available to project managers
O Increased ability to analyze Company performance and business trends
Employees - IES' employees are on a common benefit program and a
standardized incentive compensation program. Additionally, IES implemented
standardized training and development programs for all operations and
project managers. The Company has completed phase one of that training at
all locations and has begun phase two. As a result, IES has:
O Improved cross utilization of employees
O Improved project management skills and standardized processes across
IES
O Lowered overall cost structure while delivering more to the
employees
Safety - IES has safety directors responsible for all locations as well as
a national safety director and has implemented incident tracking to
identify the cause of accidents in order to prevent future occurrences.
IES has implemented frequent safety training, including weekly toolbox
talks and a new employee safety orientation video. In three years, IES
improved its OSHA recordable incident rate from 9.72 incidents per 100
employees to 2.99 incidents per 100 employees, which is a 69% improvement
and 63% better than the national average for electrical contractors of 8.1
incidents. IES also improved its claims management process to provide
assistance to employees and their families following an incident and
ensure prompt employee care and closure of a claim. The results are:
0 A continuously improving safety record
0 Lower overall costs due to a reduction in incidents
Exhibit 9
IES' Safety Record Continues to Improve
Safety statistics continue to improve and are already twice as strong as the
national average
---------------------
RECORDABLE ACCIDENTS
---------------------
(Per 100 Employees)
2000 9.72
2001 6.41
2002 4.65
2003 3.80
Q1 2004 2.99
Source: Company records.
Procurement - At the end of fiscal 2001, IES implemented a new procurement
strategy that involved forging relationships and alliances with
manufacturers, service providers and distributors. These alliances include
volume-based rebates, increased service commitments, funding for a
company-wide procurement catalog and partial sponsorship
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 14
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
of company-wide events. As part of this procurement strategy, IES put in
place a system for tracking purchases more accurately. IES expects
increased savings in 2004 because the Company has already increased the
percentage of goods purchased through the program in the first quarter of
2004
Exhibit 10
Savings from the Procurement Program Continue to Increase
Savings from procurement program are increasing each year
----------------------
PROCUREMENT SAVINGS
----------------------
(Dollars in Millions)
2002 $2.1
2003 $2.5
Customers - IES now manages its customers on a more national basis. The
Company established a national customer database and began developing a
centralized contract library as well as standardized contracts with larger
customers and national marketing materials. These tools have:
0 Improved customer relations on a national basis
0 Increased the number of customers utilizing IES across the nation
0 Increased number of projects with national scope and simultaneous
multi-site installations
Phase III - CONTINUED GROWTH
Phase III of IES' strategy is focused on "Planning the Future" through
organic, greenfield and acquisition growth while maintaining a high level
of operating efficiency. IES has identified key growth markets where it
will strive to be the market leader over the next few years. In some
markets, IES needs to expand existing service offerings to achieve the
goal, and in other markets, the Company will need to establish a presence
through greenfield expansion or acquisition. An example of this is the
acquisition of Riviera Electric in Colorado IES made in February of 2003.
Colorado is projected to be a high growth market and IES did not
previously have a significant presence there.
IES called $75 million of its 9 3/8% senior subordinated notes which will reduce
debt by $25 million
Capital Structure Improvements
Across all three phases of IES' strategic plan, IES has implemented an
increasingly conservative capital structure. IES is utilizing its free
cash flow to set a solid foundation for the future. The Company reduced
debt by $39.1 million in fiscal 2002, completed a two million share common
stock repurchase program in 2003, and announced a new program in November
that will total up to $13 million in stock repurchases over time.
Additionally on February 27, 2004, IES called $75 million of 9 3/8% senior
subordinated notes and entered into a new credit facility that extends to
February 2008. The facility includes a $50 million funded term loan and a
$125 million revolving line of credit. The proceeds from the term loan
will be used to call the notes. The Company had $44.2 million in cash on
December 31, 2003, and a portion of that cash will be used to call the
notes. Based on the current LIBOR rate plus 2.75%, the retirement of debt
would reduce pre-tax interest expense by approximately $5.3 million on an
annual basis. However, there is a 4.7% call premium on the notes and some
unamortized fees which will create a one-time after-tax charge of
approximately $3 million for calling the $75 million in notes. The Company
will continue to analyze opportunities to retire debt over time to reduce
total debt levels to under $200 million. After these transactions, IES
will have $223 million in total debt.
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NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 15
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
First Quarter Results and Recent Earnings Guidance
--------------------------------------------------------------------------
Overview of the Quarter
IES Generated record free cash flow for the first quarter.
On January 27, 2004, IES announced first quarter results for the period
ended December 31, 2003. The Company earned $0.16 per share for the
quarter compared to $0.10 per diluted share in the same quarter last year.
Net income for the first fiscal quarter includes the release of $1.4
million or $0.04 per share of a tax valuation allowance. Deferred tax
valuation allowances were established upon the adoption of SFAS 142 during
fiscal 2002. The remaining valuation allowance of $4.8 million will be
evaluated quarterly and as events require to determine adequacy.
For the first quarter of 2004, revenues were $359.8 million compared to
revenues of $348.6 million for the first quarter one year ago. IES
generated a record free cash flow of $4.7 million, which compares to $0.7
million of free cash flow in the first quarter of fiscal 2003. IES defines
free cash flow as cash flow from operations less capital expenditures and
uses this measure because the Company believes it is a good gauge of
operating efficiency.
Backlog
Backlog as of December 31, 2004 was $714 million compared to $708 million
at the end of the fourth quarter of 2003 and $766 million at the end of
the first quarter of 2003. IES added $189 million of new larger project
work, which is defined as projects greater than $300,000, to backlog
during the first quarter compared to $148 million added during the fourth
quarter of fiscal 2003 and $155 million during the first quarter of 2003.
New work includes:
0 $63 million of hotel, apartment and condominium projects
0 $24 million of office buildings
0 $24 million of water and utility projects
0 $18 million of institutional projects
0 $17 million of manufacturing and high technology projects
0 $10 million of distribution centers
0 $9 million of healthcare facilities
0 $8 million of airport projects
0 $6 million of communications projects
0 $5 million of retail centers
Outlook
IES maintained its guidance for the year and expects diluted earnings per
share of $0.55 to $0.75 and provided second fiscal quarter guidance of
$0.10 and $0.15 per share.
Exhibit 11
Quarterly EPS Trends
------------------------------------------------------------------
2001 2002* 2003 2004P
------------------------------------------------------------------
Q1 - Dec $0.17 ($0.04) $0.10 $0.16 A
Q2 - Mar $0.20 $0.05 $0.09 $0.10 - $0.15
Q3 - Jun $0.26 $0.19 $0.14 ---
Q4 - Sep $0.08 $0.06 $0.20 ---
--------- --------- ---------- ----------------
Full Year $0.70 $0.25 $0.52 $0.55 - $0.75
------------------------------------------------------------------
* Excludes charges related to a cumulative effect of change in accounting
principle.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 16
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Customer Overview
--------------------------------------------------------------------------
Customers
IES has a diverse customer base in both the Commercial/Industrial segment
and the Residential segment. IES typically works for a general contractor;
however, in some cases, the Company works directly for the end users or
owners such as manufacturers, utility companies, governments, or
municipalities, property managers, hotel chains or health care facilities.
IES is awarded work as a result of both of these relationships, and the
Company is focused on fostering relationships and maintaining customer
satisfaction with the end customer as well as the general contractor.
Residential customers primarily include local, regional and national
homebuilders and developers. Competitive factors particularly important in
the residential market include the Company's ability to develop
relationships with homebuilders and developers by providing services in
each area of the country in which they operate. This ability has become
increasingly important as consolidation has occurred within the
residential construction industry, and homebuilders and developers have
sought out service providers on whom they can rely for consistent service
in all of their operating regions. This trend has positioned IES well, and
it has relationships with many of the nations largest home builders and
multi-family developers. The following is a listing of IES' leading end
customers and general contractors in the Commercial/Industrial segment as
well as IES' top single family and multifamily residential customers
sorted alphabetically.
Exhibit 12
Top Commercial/Industrial and Residential Customers
---------------------------------------------------------------
End Customers General Contractors
---------------------------------------------------------------
3M AMEC
Blue Cross / Blue Shield Austin Industries
Four Season's Hotels Beck Group
Gaylord Entertainment Bovis Lend Lease
Hilton Hotel Corporation Brasfield & Gorrie
Home Depot Centex Construction Group
Honda Flour Corporation
Hyatt Corporation Hannover Company
Intel Hensel Phelps Construction
Kohl's Hubbard Construction Group
Marriott International J.E. Dunn Group
Midlothian Energy Kraft Construction
Nissan Lemoine Company
Omni Hotel Manhattan Construction
Publix MB Kahn Construction
Ritz Carlton Hotel Co. Robins & Morton
Six Continents Skanska USA Building Inc.
Target Turner Corporation
Walgreen's Weitz Group LLC
Wal-Mart Whiting Turner Construction
---------------------------------------------------------------
------------------------------------------------------------------------------
Single Family Multifamily
------------------------------------------------------------------------------
Ashton Woods Homes Apartment Builders LTD
Beazer Homes Bovis Construction
First Texas (Broyd, Inc.) Camden Development
Gateway Homes (Champion Enterprises) Donohoe Construction
Gehan Homes Dwayne Henson and Associates
Grand Homes Fairfield Development
Kaufman & Broad Gibralter Construction Company
Kimball Hill Homes Global Construction Company
Lennar Homes Greystar Development
Mansions Custom Homes JPI Construction
Newmark Homes Lowder Construction Company
Perry Homes Morgan Group
Plantation Homes (McGuyer Home Builders) The Norsourth Corp.
Pulte Homes Peachtree Residential
Royce Homes Picerne
Ryland Homes Postwood Builders (Long Lake)
Torrey Homes (D. R. Horton) Pride Builders
Trendmaker Homes (Weyerhaeuser) Spanos Construction
Weekley Homes TCR Bissonnet Construction
Whitco Construction Company
------------------------------------------------------------------------------
National Projects
The Company's nationwide presence and name recognition helps it to compete
for larger national contracts with customers that operate throughout the
U.S. This represents a growing market, and IES has made significant
progress in pursuing these sizable accounts. A few of IES' current
national customers include Wal-Mart, Marriott, Nordstrom, the U.S. Navy,
Intel, Starbucks, Ryland Homes and Pulte Homes. IES' size and national
service offering uniquely positions it as the only single source open shop
electrical contracting service provider able to execute projects on a
national basis. IES can execute these projects over time or on a
simultaneous multi-site basis. IES is able to take on very large and
complex projects often with a national scope that would exceed the
capabilities and resources of most of its competitors.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 17
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Finance and Accounting Overview
--------------------------------------------------------------------------
Financial Resources
Access to resources is a key to success, especially in the recent
construction environment. Many of IES' competitors have experienced
reduced access to both bonding capacity and capital, which constrains
their ability to effectively compete and bid on many jobs. As a result of
size and track record, IES has adequate capacity. This, in conjunction
with IES' new $175 million credit facility, provides a significant
competitive advantage over most of its local competitors. IES is better
able to bid on larger projects that require bonding and working capital.
The Company has had a relationship with the same surety since IES'
inception. Recently, the Company added a second or co-surety, thus
increasing the amount of surety credit. IES' relationship with its
sureties is such that it will indemnify them for any expenses they incur
in connection with any of the bonds they issue on IES' behalf. In a market
where bonding has become an issue for many of IES' competitors, the
Company is fortunate to be in such a strong position as it relates to
bonding capacity. To date, IES has not incurred significant expenses to
indemnify its sureties for expenses they incurred on IES' behalf. As of
December 31, 2003, the expected cost to complete on projects covered by
surety bonds was approximately $226 million.
Revenue Recognition
The Company recognizes revenue when services are performed except when
work is being performed under a fixed price 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 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.
Allowance for Bad Debt
The Company has a policy in place to allow for potentially uncollectible
accounts receivable. The policy requires monthly review of all accounts
receivable and a specific
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 18
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
provision for problem accounts as well as a general reserve to provide for
any unknown problems. As of December 31, 2003, the Company's allowance for
bad debt reserves was $5.4 million or 2.2% of trade accounts receivable.
It is very unusual for IES to have bad debt because IES has lien rights on
most of the projects it provides services on.
High Deductible Insurance
Necessary insurance in the construction industry includes health, bodily
injury, property damage and injured workers' compensation. IES maintains
automobile and general liability insurance for third party health, bodily
injury and property damage and workers' compensation coverage, which is
appropriate to insure against these risks. The Company's third-party
insurance is subject to large deductibles, and IES establishes reserves,
and effectively self-insures for much of the exposures.
Tax Planning
IES' effective tax rate was impacted in the fourth quarter of 2003 and the
first quarter of fiscal 2004 by the release of deferred tax valuation
allowances that were established upon the adoption of SFAS 142 during
fiscal 2002. IES has released $4.2 million of a tax valuation allowances
through the first quarter of 2004 ($2.8 million in the fourth quarter of
fiscal 2003 and $1.4 million in the first fiscal quarter of 2004) and the
remaining valuation allowances of $4.8 million will be evaluated quarterly
and as events require to determine adequacy. Excluding any future
adjustments from these allowances, IES' effective tax rate should be
consistent with historical levels. Currently, it is likely that cash taxes
will be less than book taxes as a result of tax positions. IES has
established a $26.1 million reserve in other non-current liabilities as of
September 30, 2003, which the Company believes is adequate if these tax
positions are successfully challanged by a taxing authority.
Goodwill Impairment Analysis - SFAS 142
Effective October 1, 2001, the Company adopted SFAS 142, "Goodwill and
Other Intangible Assets," which establishes new accounting and reporting
requirements for goodwill and other intangible assets. Goodwill
attributable to each of the Company's reporting units was tested for
impairment by comparing the fair value of each reporting unit with its
carring value. Fair value was determined using discounted cash flows,
market multiples and market capitalization. These impairment tests are
required to be performed at adoption of SFAS No. 142 and at least annually
thereafter. Significant estimates used in the methodologies include
estimates of future cash flows, future short-term and long-term growth
rates, weighted average cost of capital and estimates of market multiples
for each of the reportable units. On an ongoing basis (absent any
impairment indicators), the Company expects to perform its impairment test
annually during the first fiscal quarter. The 2003 goodwill impairment
analysis resulted in no impairment in value, given that each business
unit's implied value, as determined by the analysis described above, was
greater than the book value.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 19
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
IES' Officers and Management Structure
--------------------------------------------------------------------------
IES is fortunate to have a wealth of talent as a result of acquiring over
85 companies, many of them leading operators in their regions. Currently,
8 of IES' 12 officers, including the Regional Operating Officers, have
previously served as presidents of acquired subsidiaries.
The Executive Committee is supplemented by a regional operating structure
consisting of five geographically based regions and a residential region.
The regions are led by Regional Operating Officers ("ROOs") that report
directly to the Company's Chief Operating Officer and Chief Executive
Officer. Each ROO is supported by a Regional Controller ("RC") who is
responsible for monitoring all financial aspects of operations within
their region. Together, the ROO and RC maintain control and consistent
application of policies and procedures throughout the Company. They
provide a control environment to address financial operating results and
concerns and carry out company initiatives.
At the end of each quarter, the regions host a series of quarterly review
meetings called "Home and Away" meetings. The CEO, COO, CFO, Regional
Operating Officers and the Presidents of the subsidiaries attend these
Home & Away meetings. Every other quarter, regions conduct these meetings
at or near their "home" locations and on opposite quarters, attend an
"away" meeting at the home office in Houston. These meetings facilitate
face-to-face sharing of results, events, opportunities and concerns,
allowing for sharing of best practices and cross-selling among the
subsidiaries. Below is an overview of IES' senior officers who comprise
the Executive Committee.
H. "Roddy" Allen, P.E., 63, became Chief Executive Officer and President
of IES in October 2001. Mr. Allen originally was President of H.R. Allen,
which was acquired by IES in 1998. Prior to becoming CEO, Mr. Allen has
held positions at IES including Chief Operating Officer, Senior Vice
President of Eastern Operations, Regional Operating Officer, and President
of H.R. Allen.
Richard China, 45, has been Chief Operating Officer of the Company since
October 2002. From May 2002 to October 2002, Mr. China was President of
IES Communications, Inc. From August 1999 to May 2002, Mr. China served as
a Regional Operating Officer of the Company. Prior to August 1999, Mr.
China served as the President of Primo Electric Company, Inc., one of the
Company's subsidiaries.
William W. Reynolds, 45, has been the Chief Financial Officer and
Executive Vice President of the Company since June 2000. Mr. Reynolds
joined IES after having served as Vice President and Treasurer of Peoples
Energy Corporation in Chicago, Illinois from 1998 to 2000. Prior to his
appointment with Peoples Energy Corporation, Mr. Reynolds was Vice
President and Project Finance Corporate Officer for MCN Energy Group, Inc.
in Detroit, Michigan from 1997 to 1998. Prior to 1997, Mr. Reynolds spent
17 years with BP Amoco Corporation, serving in a variety of positions both
internationally and domestically.
Margery Harris, 43, has been the Senior Vice President of Human Resources
of the Company since October 2000. From 1995 to 2000, Ms. Harris was
employed by Santa Fe Snyder Corporation, a large global independent
exploration and production company, serving most recently as Vice
President of Human Resources. Prior to that Ms. Harris was a lead
consultant with Hewitt Associates, a premier total compensation consulting
firm.
Robert Stalvey, 53, serves as Senior Vice President of Operations. He
previously served as Vice President of Special Projects. In 1976, he
became co-owner of Ace Electric, one of the original 16 IES subsidiaries.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 20
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Corporate Governance
--------------------------------------------------------------------------
Since IES' initial public offering ("IPO") in 1998, the Company has
divided the duties of Chairman of the Board and Chief Executive Officer
between two individuals. As a governance policy, this prevents a
concentration of control with one person. Since the IPO, Byron Snyder has
served as Chairman, and since late 2001, H. Roddy Allen has served as
Chief Executive Officer.
Board of Directors
The IES board has significant representation from independent directors.
The Board of Directors consists of 8 directors, of which five are
independent. The inside board members include H. Roddy Allen, the
President and Chief Executive Officer, Rick China, the Chief Operating
Officer, and Byron Snyder, the Chairman of the Board and founder of IES,
who is non-management, although not independent. This stands in contrast
to the original board in 1998, consisting of 11 members, many of whom were
among the 16 owners of the founding companies.
The Board has four committees: Audit, Compensation, Nominating/Governance
and Executive. The Audit, Compensation, and Nominating/Governance
committees are composed entirely of independent directors.
During fiscal 2002, IES implemented an evaluation process in which the
Board of Directors and those reporting directly to the CEO review the CEO
anonymously and rate him on key business and management strengths. These
ratings are reviewed by the Board and serve as an early warning system for
potential problems.
Controls
IES also maintains a growing internal audit function, an important
consideration for a company that has grown through acquisition and has
numerous subsidiaries across the country. Currently, every subsidiary
undergoes an internal audit at least once every three years, with
approximately 20 internal audits performed each year.
IES has in place an integrated system of internal controls, including
management of operations, information systems and financial activities.
These controls complement the regional operating structure established
under the Company's One Company. One Plan. strategy and are designed to
provide a framework of procedures, monitoring systems and certifications
that enable the Company to ensure compliance with company policies as well
as applicable rules and regulations.
Although IES management believes an effective structure is in place to
manage the business, there are inherent risks in the contracting industry
especially as it pertains to fixed bid contracts that may experience fade
in profitability over the life of the contract. Although the structure and
controls are in place to minimize this and other risks, there is no
guarantee that IES will not experience financial difficulties as a result
of these risks. See the disclosure statement on page 4 for additional risk
factors.
Information Systems
The Company only has 10 subsidiaries left to convert to its fully
integrated Enterprise Resource Planning ("ERP") system known as Forefront.
The Company expects that this implementation will be complete by January
2005. This system, while allowing real time access to subsidiary and
project data, facilitates the implementation of standard and consistent
financial controls throughout the Company.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 21
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
The Company's ERP system is complemented by consolidation software known
as Financial Manager's Workbench. The implementation of this software is
substantially complete and is already used for contract analysis and
budgeting.
The information obtained from these meetings and reports provides the
Company with a strong platform to support its financial certification
process. Section 302 of the Sarbanes-Oxley Act of 2002 ("SOX") requires
the Company's Chief Executive Officer and Chief Financial Officer to
certify the accuracy of the quarterly and annual financial statements of
the Company. The purpose of the control environment and financial
monitoring is to provide the Company's management with information that
enables them to accurately and reliably make that certification. In this
vein, each subsidiary president and controller provides a certification to
IES management, and each Regional Operating Officer and Regional
Controller provides a similar certification to management. These internal
certifications include the scope, definitions and expectations outlined in
the Sarbanes-Oxley certifications.
Additionally, all of the IES' locations are joined on a common Wide Area
Network ("WAN"). This platform enables the Company to access and monitor
the computer servers at each subsidiary location and facilitates efficient
communication across the Company. Stringent controls are in place limiting
access to the data stored on each location's server.
Internal Audit Program
IES utilizes all of its corporate resources to monitor the Company's
operations. The Company has in place an internal audit program that
requires each subsidiary to undergo an internal audit at least once every
three years. The internal audit reports are distributed to the
subsidiary's management, to the Executive Committee and to the IES' Audit
Committee of the Board of Directors. Audit findings are addressed, and a
revisit is performed six months after the initial internal audit to ensure
compliance.
Sarbanes-Oxley Act compliance required by September 2005
Sarbanes-Oxley
IES is currently assessing and documenting its internal controls for
compliance with Section 404 of the Sarbanes-Oxley Act. The Company has
established a team to assess and evaluate IES' compliance with this law.
This team consists of members from finance, internal audit, and
operations. IES has also contracted PriceWaterhouseCoopers to serve as
consultants in the Company's efforts as well as co-sourcing the testing
function. IES anticipates beginning internally testing the Company's
internal controls in early summer. With the recent change in compliance
date by the Securities and Exchange Commission, IES will be required to
assert compliance for the fiscal year ending September 30, 2005 and the
Company is committed in accomplishing documentation and evaluation of
internal control structure over financial reporting to meet this deadline.
Ethics Hotline
IES has a confidential toll-free hotline for the purpose of reporting
known or suspected events of theft, fraud or other financial abuse. The
hotline is monitored by a third party and reported to the Company.
Reported incidents are communicated to the proper management to
investigate. The reported incidents, results of investigations and
corrective actions taken are communicated to the Company's Audit
Committee.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 22
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
IES' significant size and national presence allows it to successfully compete
for stable sources of revenue
Industry Overview
--------------------------------------------------------------------------
The electrical and low voltage contracting industry is highly fragmented,
comprised of more than 70,000 companies, most of which are small,
owner-operated businesses. Only a little over 1% of these companies have
more than 100 employees and just a handful, like IES, have thousands of
workers and the advantages of significant scale. According to EC&M
Magazine, there were only 12 U.S. electrical contractors with revenues in
excess of $200 million in 2003.
As the largest electrical contracting company in the U.S., the source of
IES' revenue is exceptionally stable. Virtually all construction and
renovation work in the U.S. requires electrical contracting services, and
electrical and low voltage work usually runs between 8%-12% of the cost of
a commercial or industrial project and 5%-10% of the cost of a residential
project. This percentage is substantially higher in high-end residential
home building. Growth in the electrical contracting market has accelerated
in recent years due to:
* Complexity as a result of the increase in computer, security and
communications systems in the workplace. Computers, printers and
on-line access are a part of virtually every workstation, increasing
the electrical and low voltage demands placed on a given system. New
telecommunications systems have also increased the burden as well as
networking of local and wide area computer systems.
* The pace of electrical renovation of existing structures has
increased, primarily as a result of more advanced computer and
communications systems.
* The increased focus on cost savings through energy management
systems
* New electrical codes for power efficiency and safety
* National energy standards have been revised stressing
energy-efficient lighting fixtures and other equipment.
* Increased demand for backup power systems as the workplace has
become more complex and more dependent upon technology.
* Heightened requirements have increased demand and sophistication of
security systems.
* Increased demand for preventative maintenance to minimize disruption
of power.
The electrical contracting industry had difficult years in 2002 and 2003
due to the reduction in commercial and industrial construction spending.
Commercial and industrial construction, which accounts for about 40% of
revenues for IES, was down 18% in 2002 and 2% in 2003 according to
preliminary figures from F.W. Dodge, the industry's primary source for
construction data and forecasts. Achieving comparable growth in this
sector was particularly difficult when compared to the record year in
2000, the strongest year on record for commercial/industrial construction
spending. The strong demand in the late 1990's and early 2000 increased
the supply of providers, which made the decreases in 2002 and 2003
particularly difficult due to excess capacity in the electrical service
provider market. Exhibit 13 below details the movements of the electrical
contracting market through the upswing and subsequent decline.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 23
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
While IES has less than a 2% share of the total electrical market, it has a
4%-5% share of the commercial and industrial market for electrical contracting.
Exhibit 13
Annual Electrical Contractor Revenues
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------
ELECTRICAL CONTRACTOR SALES
------------------------------------------------------------------------------------------------------------------------
(Dollars in Billions)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E
---- ---- ---- ---- ---- ---- ---- ---- ---- ----- -----
53.0 59.3 64.3 72.0 76.5 89.5 95.0 86.4 85.8 89.8 94.9
Source: Electrical Contractor Magazine through 2001, IES estimates for
2002-2005 using total construction spending data from F.W. Dodge.
Early indications are that commercial and industrial construction spending
has begun to increase, and 2004 is projected to be a growth year,
generating a 10% increase in commercial and industrial spending and a 1%
increase in overall construction spending. Additionally, the growth
drivers for the industry detailed above are long-term in nature and will
continue to generate demand for electrical contracting services throughout
the next several decades. Forecasts of the next 5 years from F.W. Dodge
indicate a combined growth of over 37% in commercial and industrial
spending, from which IES derives over 80% of its revenue and 16% in total
construction spending into 2008.
Residential construction, driven by record low mortgage rates, drove
spending on single family housing construction up 13% in 2002 according to
F.W. Dodge and is projected to have gone up another 11% in 2003.
Residential construction spending in 2004 is expected to remain relatively
flat versus 2003, but given the record spending levels in 2002 and 2003, a
flat year will continue to provide significant opportunity in the
residential sector, which is estimated to be 52% of the construction
market in 2004. The low rates are so appealing currently that many people
who would typically be apartment dwellers are becoming first-time
homeowners instead. This caused the single family home and condominium
market to remain quite strong in 2003. 2004 and 2005 overall residential
construction is expected to assume a more sustainable level following the
blistering pace set in 2003.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 24
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Publicly Traded Peers
IES is currently the only "pure play" publicly traded electrical
contractor in the United States. Recently ranked the number one electrical
contractor by EC&M Magazine, IES earned $300 million more in revenue than
the runner-up, EMCOR. Specialty contractor competitors such as EMCOR
provide other services besides electrical contracting such as mechanical
contracting and building maintenance services as well as other operations.
Below is an overview of some of the publicly traded specialty contractors:
EMCOR
The company operates internationally with locations in the United States,
Canada, Europe, the Middle East and South Africa. Through over 70
operating companies, EMCOR employed 26,000 workers and generated about
$4.53 billion in revenues in 2003, making it the largest specialty
contractor as ranked by ENR in 2003. The company divides its business into
four segments: (1) mechanical construction, (2) electrical construction,
(3) facilities management, and (4) energy and technology services. In
2002, facilities services made up about 17% of revenues and the remainder
was approximately equally divided between renovation/retrofit work and new
construction. EMCOR's work tends to be concentrated in larger cities due
to its union affiliation. This has allowed the company to win public
transportation work to buffer it during the economic slowdown, though such
public sector work is much lower in margin than private sector work.
Quanta Services
Quanta is a leading provider of specialized contracting services, with a
focus on the electric power, telecommunications, broadband cable and gas
pipeline industries. The company provides a comprehensive range of
services, including the design, installation, maintenance and repair of
many types of network infrastructure. Quanta has offices in 40 states, and
operations in all 50 states, as well as Canada. Revenues in 2003 were
approximately $1.64 billion.
Comfort Systems
The company focuses almost exclusively on the heating, ventilation and air
conditioning market (known as HVAC) and is a leading provider of these
services, with 2003 revenues of about $785 million. It ranks as the
seventh largest specialty contractor in the U.S. In 2002, the company sold
off 19 subsidiaries representing about $650 million in revenues to EMCOR.
Comfort Systems now has 63 locations in 51 cities throughout the US.
Dycom
Dycom Industries Inc., headquartered in Palm Beach Gardens, Florida, is
one of North America's largest telecommunications and electrical services
companies. One of the oldest of the larger specialty contractors, the
company was founded in 1969. Dycom has 30 operating subsidiaries. Dycom
currently serves over 100 different customers in 48 states, with
approximately 7,000 employees, based out of more than 200 locations
throughout the United States. Revenues for fiscal year 2003 approximated
$618 million. In 2002, Dycom acquired Arguss, a provider of infrastructure
services to cable telecommunications companies, for about $85 million,
expanding its geographical footprint within its existing customer base.
Following is a chart that illustrates how IES differs from some of it
closer peers. Notice that IES is the only pure play electrical contractor
in the group. IES is also the only completely open shop electrical
contractor, giving it significantly more flexibility on utilizing
prefabrication and preassembly on projects, saving money and time.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 25
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 14
IES versus its Closest Peers
--------------------------------------------------------------------------------
Revenues(1) MRR (2) as Unionized
--------------------------------
EC MC FS Other % of Revenue Workforce
--------------------------------------------------------------------------------
IES 100% - - - 26% 0%
EMCOR (3) 29% 44% 17% 10% 40% 75%
Quanta Services 53% - - 47% 40% 39%
Comfort Systems 3% 90% - 7% 48% 0%
Dycom 2% - - 98% N/A 0%
--------------------------------------------------------------------------------
(1) EC= Electrical Contracting, MC= Mechanical Contracting, FS= Facilities
Services
(2) MRR = Maintenance, Repair and Renovation
(3) Not pro forma for the recent acquisition of a facilities services
business.
Competitors
Typically, IES bids against a larger national competitor like EMCOR or one
of the larger private participants such as Rosendin or Fisk on national
projects or large regional projects, such as an airport. In addition to
publicly traded peers, IES competes against private regional participants
that range from $40 million to over $300 million in revenues, as well as
smaller local competitors that can range anywhere from $2 million to $30
million in revenues. There are 10 electrical contractors with revenues
between $200 million and $600 million based on 2002 revenue per ENR's "Top
600 Specialty Contractors" report. IES competes against many of these
companies. However, it is only occasionally and in selected markets. There
are another 100 or so companies in the $40 million to $200 million range,
and of those companies, IES competes against approximately 40 in local and
regional markets as well as in certain segments, such as utilities or
multifamily residential.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 26
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Outlook and Valuation
--------------------------------------------------------------------------
Market Outlook
F.W. Dodge now believes that construction spending increased about 3% in
fiscal 2003, as single family housing construction growth of 11% boosted
slower non-residential and non-building segments. Total non-building
construction declined 8% in 2003 due to slow- downs in public works and
utilities, and overall non-residential building construction decreased by
1%. There are several factors impacting construction this year. With
declining incomes and tax dollars, states and the federal government have
seen projected budget surpluses quickly turn to deficits, causing public
works and institutional building projects to slow this year. Additionally,
while interest rates are currently low, F.W. Dodge believes mortgage rates
will begin a moderate upward movement in 2004 that will cause single
family housing starts to flatten. In January 2004, housing starts were
down slightly from December, however, the declines were attributed to
extended cold weather in January.
The years 2004 and 2005 are both projected to be stable in total
construction spending, growing at an overall rate of 1% in 2004 and 1% in
2005, with annual double digit growth expected in the commercial and
industrial construction markets where approximately 80% of IES' revenue is
generated. Looking further forward, 2006, 2007 and 2008 are projected to
see growth averaging nearly 5% per year.
Below is a chart which outlines F.W. Dodge's construction spending
projections through 2005. Non-residential building construction includes
commercial and industrial construction as well as institutional
construction which is comprised of schools, healthcare facilities and
government and public buildings. Non-building construction includes
spending on roads and other transportation projects and utilities.
Exhibit 15
U.S. Construction Market Outlook
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------
Market Growth
--------------------------------------------------
2002A 2003E 2004E 2005E
---------------------------------------------------------------------------------------------
December 2003 Outlook
Non-Residential Building Construction -9% -1% 4% 9%
Residential Building Construction 13% 11% 0% -5%
Non-Building Construction -8% -8% -1% 4%
---------------------------------------------------------------------------------------------
Source: F.W. Dodge December 2003 Construction Marketing Forecasting.
Exhibit 16 is an overview of F.W. Dodges construction spending
expectations through 2005 by market segment. Notice that most of IES'
markets are projected to see significant growth over the next two years.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 27
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 16
Construction Growth by Market
Many of IES' more profitable markets are projected to have significant growth in
2004.
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
Company Data - 2003 F.W. Dodge Proj. Const. Spending by Mkt.(1)
% of Revenue 2002 2003 2004 2005
----------------------------------------------------------------------------------------------------------------
Commercial
Office Buildings 6.1% -25% -10% 11% 17%
Communications 4.5% Data Not Available
Other Commercial 4.6% -5% -7% 4% 13%
Retail 6.4% -5% 9% 7% -1%
Institutions 9.2% -3% 2% 0% 3%
Hotels and Condos 9.1% -20% 13% 14% 24%
Health Care 9.1% 12% -6% -3% 4%
Industrial
Highway 2.1% 1% -5% 0% 4%
Government 1.2% -3% -14% 3% 8%
Power and Utility(2) 5.3% -51% -28% -15% -12%
Distribution 1.4% -17% -14% 13% 21%
Manufacturing 9.9% -35% 11% 8% 30%
Airport 2.8% -3% -2% 7% 10%
Water 1.8% 15% -6% -2% 4%
Residential
Single family 13.3% 15% 11% -1% -8%
Multifamily 5.8% 3% 12% 6% 9%
Shading = Significant growth markets in '04 & '05
---------------------------------------------------------------------------------------------------------------------------------
(1) Source is December 2003 F.W. Dodge report and IES company data.
(2) Market data includes electrical services provided for communications
infrastructure which is why this market is in such a state of
decline.
IES' Weighted Average Cost of Capital ("WACC")
IES believes its cost of capital, based on a WACC analysis, is
approximately 11%. WACC is the combination of IES' cost of debt, which is
approximately 6% after tax, and its cost of equity, which is between 15.5%
and 16.5%. The calculation is based on using the average beta for the
specialty contracting industry adjusted for the appropriate capital
structure, a risk free rate of 4.0% to 4.5%, which is the recent 10-year
government bond rate, and a target debt to capital for IES of between 30%
and 40%. The WACC analysis also includes a 3.1% size premium for cost of
equity given that IES is a small cap stock.
Comparison of Historical Profitability Performance versus Construction
Spending
The industry is highly cyclical and driven to a large extent by
construction expenditures. Growth in construction expenditures can vary
widely from year to year, and this will have a flow-through impact on
profitability of electrical, mechanical and other contractors.
Construction spending, the primary business driver for IES and its
competitors, is highly variable and can significantly impact
profitability.
Exhibit 17 below illustrates IES and its peers' gross profit margin and
operating income margin over the past four years. With the exception of
EMCOR, which generates over 20% of its revenues from facilities
maintenance which is not tied to construction, the profit margins have
contracted as commercial and industrial construction spending has
declined.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 28
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 17
Profit Margins have declined as Commercial and Industrial Construction
Spending has Declined
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin Operating Income Margin
----------------------------------------------------------- -------------------------------------------------------
1999 2000 2001 2002 2003E 1999 2000 2001 2002 2003E
---------------------------------------------------------------------------------------------------------------------------------
IES* 21.2% 17.9% 18.2% 15.1% 14.3% 9.3% 3.9% 4.8% 2.8% 3.7%
EMCOR 10.2% 10.3% 11.5% 12.2% 10.7% 2.0% 2.3% 2.6% 2.9% 1.2%
Com. Syst. 21.4% 17.9% 17.9% 17.7% 16.9% 6.8% 1.3% 3.3% 2.0% 2.0%
Quanta* 23.2% 23.1% 20.5% 13.5% 12.2% 13.3% 12.6% 12.4% 4.2% 1.4%
---------------------------------------------------------------------------------------------------------------------------------
* IES and Quanta are actual numbers for 2003.
Exhibit 18
IES Peer Analysis
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------------------------
Fiscal 2/24/2004 EPS Price/Earnings
----------------------------------- ----------------------------------
Company Symbol Year Price 2002 2003E 2004E 2002 2003E 2004E
-------------------------------------------------------------------------------------------------------------------------------
Specialty Contractors
EMCOR EME Dec $39.77 $4.07 $1.64 $2.61 9.8x 24.3x 15.2x
Comfort Sys. FIX Dec 6.48 0.14 0.13 0.28 46.3 49.8 23.1x
Dycom DY Jul 25.13 0.53 0.36 1.00 47.4 69.8 25.1x
Quanta PWR Dec 8.43 0.35 0.08 0.33 24.1 105.4 25.5x
-------------------------------------------------------------------------------------------------------------------------------
Median 35.2x 59.8x 24.1x
Mean 31.9x 62.3x 22.3x
-------------------------------------------------------------------------------------------------------------------------------
Engineering/Construction
Shaw Group SGR Aug $11.69 $2.26 $1.26 $0.55 5.2x 9.3x 21.3x
Fluor FLR Dec 40.20 2.13 2.23 2.23 18.9 18.0 18.0x
Jacobs JEC Sep 43.17 1.98 2.27 2.54 21.8 19.0 17.0x
-------------------------------------------------------------------------------------------------------------------------------
Median 18.9x 18.0x 18.0x
Mean 15.3x 15.4x 18.8x
-------------------------------------------------------------------------------------------------------------------------------
IES(1) IES Sep $10.59 $0.50 $0.52 $0.55 - $0.75 21.2x 20.4x 19.3x - 14.1x
-------------------------------------------------------------------------------------------------------------------------------
Source: First Call and various equity analyst reports.
(1) 2002 financial data for IES is before one-time charges of $15.2 million
($9.9 million after tax) and excludes the impact of SFAS 142.
(2) Shaw Group was not a member of the peer group included in IES' proxy
statement.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 29
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Exhibit 19
IES Peer Analysis
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------------------
Op. Income EBITDA Op. Income EBITDA TEV/Op. Inc. TEV/EBITDA TEV/Op. Inc. TEV/EBITDA
Company Symbol 2003E 2003E 2004E 2004E 2003E 2003E 2004E 2004E
------------------------------------------------------------------------------------------------------------------------------------
Specialty Contractors
EMCOR EME $54 $74 $77 $98 13.5x 9.8x 9.5x 7.5x
Comfort Sys. FIX 16 21 22 27 16.0 12.2 11.6 9.4
Dycom DY 26 65 79 122 46.1 18.5 15.4 10.0
Quanta PWR 49 111 86 153 26.3 11.6 14.9 8.4
------------------------------------------------------------------------------------------------------------------------------------
Median 21.2x 11.9x 13.3x 8.9x
Mean 25.5x 13.1x 12.9x 8.8x
------------------------------------------------------------------------------------------------------------------------------------
Engineering/Construction
Shaw Group SGR $101 $146 $82 $114 7.7x 5.3x 9.5x 6.8x
Fluor FLR 265 345 270 348 11.5 8.9 11.3 8.8
Jacobs JEC 193 233 224 262 12.2 10.1 10.5 9.0
------------------------------------------------------------------------------------------------------------------------------------
Median 11.5x 8.9x 10.5x 8.8x
Mean 10.5x 8.1x 10.4x 8.2x
------------------------------------------------------------------------------------------------------------------------------------
IES(1) IES $54 $69 11.3x 8.9x
------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------
Consensus
Company Symbol Growth Rate
---------------------------------------------
Specialty Contractors
EMCOR EME 15%
Comfort Sys. FIX 13%
Dycom DY 14%
Quanta PWR 13%
-------------------------------------------
Median 14%
Mean 14%
-------------------------------------------
14%
Engineering/Construction
Shaw Group SGR 10%
Fluor FLR 13%
Jacobs JEC 15%
-------------------------------------------
Median 13%
Mean 13%
-------------------------------------------
IES(1) IES 20%
-------------------------------------------
Source: First Call, Value Line, various equity analysts reports. Consensus
growth rates are from First Call.
(1) 2002 financial data is before one-time charges of $15.2 million ($9.9
million after tax) and excludes
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 30
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Integrated Electrical Services, Inc. Income Statement - Annual
--------------------------------------------------------------------------------
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) FYE - September 30,
2000 2001 2002 2003
------------------------------------------------------------------------------------------------------------
Revenues $ 1,672,288 $ 1,693,213 $ 1,475,430 $ 1,448,553
Cost of services (including depreciation) 1,372,537 1,385,589 1,253,844 1,241,330
Gross profit 299,751 307,624 221,586 207,223
Selling, general and administrative expenses 221,519 214,073 174,184 153,651
Restructuring charges* -- -- 5,556 --
Goodwill amortization 13,211 12,983 -- --
------------------------------------------------------------------------------------------------------------
Income from operations 65,021 80,568 41,846 53,572
Other income (expense):
Interest expense (23,230) (26,053) (26,702) (25,744)
Other, net 1,008 (134) 964 781
------------------------------------------------------------------------------------------------------------
Interest and other, net (22,222) (26,187) (25,738) (24,963)
------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 42,799 54,381 16,108 28,609
Provision (benefit) for income taxes 21,643 25,671 6,175 8,179
------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of
change in accounting principle 21,156 28,710 9,933 20,430
------------------------------------------------------------------------------------------------------------
Cumulative effect of change in
accounting principle -- -- 283,284 --
------------------------------------------------------------------------------------------------------------
Net income (loss) $ 21,156 $ 28,710 ($ 273,351) $ 20,430
============================================================================================================
Diluted earnings (loss) per share
before cumulative effect of
change in accounting principle $ 0.52 $ 0.70 $ 0.25 $ 0.52
============================================================================================================
Cumulative effect of change in
accounting principle $ 0.00 $ 0.00 ($ 7.11) $ 0.00
============================================================================================================
Diluted earnings (loss) per share $ 0.52 $ 0.70 ($ 6.86) $ 0.52
============================================================================================================
Diluted shares used in the computation
of earnings (loss) per share 40,410 40,900 39,848 39,225
Key Margins
Gross Margin 17.9% 18.2% 15.0% 14.3%
SG&A Margin 13.2% 12.6% 11.8% 10.6%
Operating Margin 3.9% 4.8% 2.8% 3.7%
Interest Expense 1.4% 1.5% 1.8% 1.8%
Pretax Margin 2.6% 3.2% 1.1% 2.0%
Tax Rate 50.6% 47.2% 38.3% 28.6%
Net Income Margin 1.3% 1.7% 0.7% 1.4%
------------------------------------------------------------------------------------------------------------
Source: Integrated Electrical Services SEC documents.
* Restructuring charges are associated with reorganizing the business and
are primarily costs associated with reductions in staff.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 31
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Integrated Electrical Services, Inc. Income Statement - Quarterly
---------------------------------------------------------------------------
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Quarter Ended - Fiscal 2003 Fiscal '04
------------------------------------------------------ -----------
12/02A 3/03A 6/03A 9/03A 12/03A
------------------------------------------------------ ----------
Revenues $ 348,577 $ 343,135 $ 375,339 $ 381,502 $ 359,843
Cost of services (including depreciation) 297,221 294,030 321,930 328,149 309,232
--------------------------------------------------- ---------
Gross profit 51,356 49,105 53,409 53,353 50,611
Selling, general and administrative expenses 38,619 37,460 38,193 39,379 36,279
Restructuring charges
--------------------------------------------------- ---------
Income from operations 12,737 11,645 15,216 13,974 14,332
Other income (expense):
Interest expense (6,456) (6,343) (6,397) (6,548) (6,459)
Other, net (90) 175 (19) 715 91
--------------------------------------------------- ---------
Interest and other, net (6,546) (6,168) (6,416) (5,833) (6,368)
--------------------------------------------------- ---------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 6,191 5,477 8,800 8,141 7,964
Provision (benefit) for income taxes
2,384 2,108 3,389 298 1,736
--------------------------------------------------- ---------
Net income (loss) before cumulative effect of
change in accounting principle 3,807 3,369 5,411 7,843 6,228
--------------------------------------------------- ---------
Net income (loss) $ 3,807 $ 3,369 $ 5,411 $ 7,843 $ 6,228
=================================================== =========
Diluted earnings (loss) per share $ 0.10 $ 0.09 $ 0.14 $ 0.20 $ 0.16
=================================================== =========
Diluted shares used in the computation
of earnings (loss) per share 39,472 39,372 39,162 39,163 38,836
Key Margins
Gross Margin 14.7% 14.3% 14.2% 14.0% 14.1%
SG&A Margin 11.1% 10.9% 10.2% 10.3% 10.1%
Operating Margin 3.7% 3.4% 4.1% 3.7% 4.0%
Interest Expense 1.9% 1.8% 1.7% 1.7% 1.8%
Pretax Margin 1.8% 1.6% 2.3% 2.1% 2.2%
Tax Rate 38.5% 38.5% 38.5% 3.7% 21.8%
Net Income Margin 1.1% 1.0% 1.4% 2.1% 1.7%
--------------------------------------------------------------------------------------------------------------- ---------
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 32
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Integrated Electrical Services, Inc. Balance Sheet
--------------------------------------------------------------------------------
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) September 30, Quarter Ended Dec. 31,
------------------------------------------- ------------------------
2001 2002 2003 2002 2003
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 3,475 $ 32,779 $ 40,201 $ 19,062 $ 44,153
Accounts Receivable:
Trade, net of allowance 275,922 237,310 245,618 228,310 236,862
Retainage 64,933 62,482 68,789 61,844 68,829
Related party 222 153 67 144 36
Cost and estimated earnings in excess of billings on
uncompleted contracts 62,249 46,314 48,256 46,007 49,226
Inventories 21,855 23,651 20,473 22,677 22,647
Prepaid expenses and other current assets 23,858 35,041 23,319 35,066 24,728
----------- ----------- ----------- ----------- -----------
Total current assets 452,514 437,730 446,723 413,110 446,481
Property and equipment, net 70,343 61,577 52,697 58,899 50,756
Goodwill, net 482,654 198,220 197,884 198,005 197,884
Other noncurrent assets, net 27,992 24,112 28,870 23,683 27,546
----------- ----------- ----------- ----------- -----------
Total assets $ 1,033,503 $ 721,639 $ 726,174 $ 693,697 $ 722,667
=========== =========== =========== =========== ===========
Liabilities and Stockholder's Equity
Current Liabilities
Short-term debt and current maturities of long-term debt $ 679 $ 570 $ 256 $ 467 $ 186
Accounts payable and accrued expenses 164,272 141,398 138,143 115,505 126,905
Income taxes payable 700 -- -- 167 --
Billings in excess of costs and estimated earnings
on uncompleted projects 50,234 51,548 41,913 45,383 42,067
----------- ----------- ----------- ----------- -----------
Total current liabilities 215,885 193,516 180,312 161,522 169,158
Long-term bank debt 12,000 -- -- -- --
Other long-term debt 872 504 195 381 169
Senior subordinated notes, net 273,210 247,935 247,927 247,932 247,924
Other noncurrent liabilities 2,892 25,252 30,183 26,651 32,002
----------- ----------- ----------- ----------- -----------
Total liabilities 504,859 467,207 458,617 436,486 449,253
Stockholders' Equity:
Preferred stock, $0.01 par value -- -- -- -- --
Common stock, $0.01 par value 383 385 385 385 385
Restricted voting common Stock, $0,01 par value 26 26 26 26 26
Additional paid in capital 428,697 428,427 427,709 428,420 429,804
Unearned Restricted Stock -- -- -- -- (1,909)
Treasury stock, at cost (9,181) (9,774) (16,361) (10,795) (16,918)
Retained earnings (deficit) 108,719 (164,632) (144,202) (160,825) (137,974)
----------- ----------- ----------- ----------- -----------
Total shareholders' equity 528,644 254,432 267,557 257,211 273,414
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,033,503 $ 721,639 $ 726,174 $ 693,697 $ 722,667
=========== =========== =========== =========== ===========
Source: Integrated Electrical Services SEC documents.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 33
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Integrated Electrical Services, Inc. Statement of Cash Flows
--------------------------------------------------------------------------------
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Fiscal Year Ended September 30, Quarter Ended Dec. 31,
-------------------------------------- ---- ------------------------------
2000 2001 2002 2003 2002 2003
----- ---- ----- ----
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities $ 21,156 $ 28,710 ($273,351) $ 20,430 3,807 6,228
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Cumulative effect of change in
accounting principle -- -- 283,284 -- -- --
Allowance for doubtful accounts 1,768 912 4,324 2,277 379 (389)
Deferred income taxes (177) (4,938) 6,175 8,179 -- (1,430)
Depreciation and amortization 32,656 30,345 18,633 16,315 3,650 3,453
(Gain) loss on sale of property and equipment (145) (287) 1,547 38 59 10
Non-cash compensation charge 5,378 568 1,422 -- -- 83
Gain on divestitures -- -- (2,145) (381) (26) --
Changes in operating assets and liabilities
Increase (decrease) in:
Accounts receivable, net (82,917) 26,163 30,943 (2,667) 8,401 8,962
Inventories (2,900) (4,979) (2,770) 3,011 873 (2,174)
Costs and estimated earnings in
excess of billings on
uncompleted contracts (11,489) (10,785) 14,524 (1,545) 105 (970)
Prepaid expenses an other current assets (1,096) (15,640) (9,824) 1,200 (27) 123
Other noncurrent assets (4,329) 2,840 3,199 (2,221) 429 673
Increase (decrease) in:
Accounts payable and accrued expenses 72,763 (37,831) (37,739) 2,606 (10,075) (8,330)
Billings in excess of costs and
estimated earnings on
uncompleted contracts 15,131 (6,414) 3,709 (13,083) (6,101) 154
Other current liabilities (2,880) (250) 172 -- 167 --
Other noncurrent liabilities 295 220 11,264 5,144 1,612 34
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities $ 43,214 $ 8,634 $ 53,367 $ 39,303 $ 3,253 $ 6,427
--------- --------- --------- --------- --------- ---------
Cash Flows from Investing Activities
Proceeds from sale of property and equipment 2,742 1,467 895 2,339 1,056 223
Additions of property and equipment (28,381) (25,801) (11,895) (8,727) (2,529) (1,745)
Purchase of businesses, net of cash acquired (33,225) (233) -- (2,723) -- --
Sale of businesses -- -- 7,549 2,153 1,084 --
Investments in securities (1,670) (5,599) (300) (900) -- (400)
Additions to note receivable from affiliate -- (1,250) (583) -- -- --
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities ($ 60,534) ($ 31,416) ($ 4,334) ($ 7,858) ($ 389) ($ 1,922)
--------- --------- --------- --------- --------- ---------
Cash Flows from Financing Activities
Borrowings 63,434 231,744 74,613 77 5 40
Repayments of debt (48,278) (192,811) (97,941) (16,309) (15,835) (139)
Proceeds from sale of interest rate swaps -- -- 4,040 -- -- --
Purchase of treasury stock -- (10,376) (984) (10,207) (769) (3,350)
Payments for debt issuance costs -- (5,358) -- (679) -- --
Proceeds from issuance of stock -- 1,038 -- -- 18 20
Proceeds from issuance of stock to employees -- 980 -- 821 -- --
Proceeds from exercise of stock options 3 270 543 2,274 -- 2,876
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities $ 15,159 $ 25,487 ($ 19,729) ($ 24,023) ($ 16,581) ($ 553)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (2,161) 2,705 29,304 7,422 (13,717) 3,952
Cash and equivalents, beginning of period 2,931 770 3,475 32,779 32,779 40,201
--------- --------- --------- --------- --------- ---------
Cash and equivalents, end of period $ 770 $ 3,475 $ 32,779 $ 40,201 $ 19,062 $ 44,153
========= ========= ========= ========= ========= =========
Supplemental disclosure of cash
flow information
Cash paid for:
Interest $ 23,151 $ 23,793 $ 23,117 $ 24,003 $ 277 $ 210
Income taxes 24,832 30,667 5,091 599 -- --
Source: Integrated Electrical Services SEC documents
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 34
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Appendix I - Construction Accounting Primer
--------------------------------------------------------------------------
As an electrical contractor, IES uses construction accounting conventions
as prescribed under GAAP accounting. The primary issue surrounding
construction accounting is recognition of revenue from longer-term
construction contracts. With longer-term fixed-price contracts,
contractors generally use the percentage of completion method of
accounting. This method requires companies to estimate the percentage of a
project that it has completed work on. There are several acceptable
methods for determining percentage of completion such as: the ratio of
costs incurred to date to the total expected costs at completion, the
ratio of labor hours or dollars incurred to date to the total expected
labor hours or dollars at completion, or any other rationale and
systematic method. IES uses the ratio of costs incurred to date to the
total expected costs at completion to estimate percentage of completion.
Generally, if 40% of a project's cost has been incurred over a 6 month
period then the company should recognize 40% of the revenues and 40% of
the profits related to the project. The primary issue in percentage of
completion accounting is the use of estimates for total costs at
completion. If estimates change during a project, the impact of the change
in profitability is recognized in the period in which the estimate is
changed. The following example illustrates how changes in estimates can
impact the profitability across periods.
Example:
O Fixed price contract to be completed over 2 accounting periods.
O Total contract amount equals $1 million.
O Cost of project to contractor is $850,000 for a 15% margin at
completion.
Company Estimates are Correct Throughout Project
--------------------------------------------------------------------------------
Period 1 Period 2 Total
--------------------------------------------------------------------------------
Revenue $500,000 $500,000 $1,000,000
Cost of Goods Sold
425,000 425,000 850,000
------- ------- -------
Gross Profit $75,000 $75,000 $150,000
Gross Margin 15.0% 15.0% 15.0%
--------------------------------------------------------------------------------
The Project is Completed at a Higher Profit Than Originally Estimated
--------------------------------------------------------------------------------
Period 1 Period 2 Total
--------------------------------------------------------------------------------
Revenue $500,000 $500,000 $1,000,000
Cost of Goods Sold
425,000 400,000 825,000
------- ------- -------
Gross Profit $75,000 $100,000 $175,000
Gross Margin 15.0% 20.0% 17.5%
--------------------------------------------------------------------------------
In the second example above, the original profit estimates are
significantly understated. In period two, the profitability on the project
rises as profits "catch up" to reflect a 17.5% margin over the life of the
contract. For companies with long projects that last for 2 to 3 years, the
risk of under- or overstating revenues and profitability for several
quarters exists, but for companies with an average project life of 2 to 3
months, this risk is substantially reduced. The average project life at
IES is only 6 to 8 months, so any inaccuracies in estimates are corrected
fairly quickly. Additionally, because of IES' size and large number of
projects, under- and overestimates across the Company will tend to offset
each other.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 35
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Under percentage of completion accounting, contract revenue is based on
costs incurred while customer billings may be impacted by other factors
such as achieving certain milestones, acceptance of completed work by the
customer, or some other schedule. Because of this discrepancy, contract
revenue recognized is usually different from the amount billed as the
project progresses. When revenue recognized exceeds customer billings, the
excess is reported as a current asset referred to as "costs and estimated
earnings in excess of billings on uncompleted contracts." Sometimes it may
be referred to as "underbillings" or "unbilled receivables" although these
are not GAAP terms.
Conversely, when customer billings exceed contract revenue recognized, the
excess is reported as a current liability referred to as "billings in
excess of costs and estimated earnings on uncompleted contracts."
Sometimes it may be referred to as "overbillings" although this is not a
GAAP term. When calculating days sales outstanding, underbillings should
be added to accounts receivable, and overbillings should be subtracted
from accounts receivable.
The other balance sheet term that sometimes causes confusion is retainage.
It is a current asset on the balance sheet that is a subcategory of
accounts receivable. Often, some portion of payment is held at the
completion of a contract for some period of time, almost like a warranty.
The amount of retainage on a project is determined upfront when the terms
of the contract are negotiated and is typically 5% to 10% of the overall
revenue on the project.
================================================================================
NYSE: IES (C)2004 Integrated Electrical Services, Inc. Page 36
See Page 4 for Disclosure Statement. This document was produced by Integrated
Electrical Services, Inc. and is not an independent analyst report.
Dates Referenced Herein and Documents Incorporated By Reference
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