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 