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Posted Today 12:51PM 02/14/2013
Quarterly Report
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the "Consolidated Financial Information" appearing in this section of this report as well as the historical financial statements and related notes contained elsewhere herein. Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information. The term "Energy Services" refers to the Company and wholly-owned subsidiaries on a consolidated basis. Forward Looking Statements Within Energy Services' financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "may," "will," "should," "could," "expect," "believe," "intend" and other words of similar meaning. These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond Energy Services' control. Energy Services has based its forward-looking statements on management's beliefs and assumptions based on information available to management at the time the statements are made. Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and any or all of Energy Services' forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions and by known or unknown risks and uncertainties. All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report. In addition, Energy Services does not undertake and expressly disclaims any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise. Company Overview Energy Services was formed on March 31, 2006, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. It operated as a "blank check company" until August 15, 2008 at which time it completed the acquisitions of ST Pipeline, Inc. and C J Hughes Construction Company, Inc. During the fourth quarter of 2012, the Company delisted from the New York Stock Exchange. The Company's common stock now trades in the Over-the-Counter market under the symbol "ESOA". On November 28, 2012, the Company entered into a Forbearance Agreement with our lenders related to our revolving line of credit and term debt. The Forbearance Agreement, among other things, requires that the Company close the S. T. Pipeline subsidiary and dispose of its assets. The Company is also required to prepare recommendations relating to the on-going operations of Nitro Electric Company, Inc, C.J. Hughes Construction Company, and Contractors Rental Corporation, including refinancing, sale or liquidation of the companies. Under the terms of the Forbearance Agreement the Company cannot make additional draws on the revolving line of credit. Although we can request the establishment of a forbearance line of credit, the lenders are under no obligation to approve it. The limitations on our working capital could have a severe impact on our ability to obtain and perform additional work. The Forbearance Agreement may be terminated upon certain events but in any case on May 31, 2013. See "Risk Factors" and Note 10 of the Consolidated Financial Statements in the Company's September 30, 2012 10-K for more information. In connection with their audit of our 2012 financial statements, Arnett Foster Toothman PLLC, our independent public auditing firm, expressed substantial doubt about the ability of the Company to continue as a "going concern". The financial difficulties giving rise to Arnett Foster Toothman's conclusion include the significant and sustained losses that the Company has incurred over recent years as well as our inability to secure loans and lines of credit to fund our business in a manner deemed adequate to conduct our business. Although pursuant to the terms of the Forbearance Agreement, the Company is exploring all avenues to return to profitability, there can be no assurance that the Company will be able to successfully resolve the factors that gave rise to Arnett Foster Toothman's decision to render its "going concern" opinion. We have engaged a restructuring agent to aid us in the development of our restructuring plan, and intend to explore alternative financing options as well as the ability to raise equity capital. Since the acquisitions, Energy Services has been engaged in one segment of operations, which is providing contracting services for energy related companies. Currently, Energy Services primarily services the gas, oil and electrical industries. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. The Company is exploring options to remain active in the oil and gas industries with the discontinuance of S.T. Pipeline. The Company believes there is opportunity within this industry given the current projections of pipelines being constructed. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the electrical industry, the Company provides a full range of electrical installations and repairs including substation and switchyard services, site preparation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services' other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company's customers are located in West Virginia, Virginia, Ohio, Kentucky and Pennsylvania. The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as building and replacing gas line services to individual customers of the various utility companies. The Company enters into various types of contracts, including competitive unit price, time and material and fixed price (lump sum) contracts. The terms of the contracts will vary from job to job and customer to customer though most contracts are on the basis of either unit pricing in which the Company agrees to do the work for a price per unit of work performed or for a fixed amount for the entire project. Most of the Company's projects are completed within one year of the start of the work. On occasion, the Company's customers will require the posting of performance and/or payment bonds upon execution of the contract, depending upon the nature of the work performed. The Company generally recognizes revenue on unit price and time and material contracts when units are completed or services are performed. Fixed price contracts usually result in recording revenues as work on the contract progresses on a percentage of completion basis. Under this accounting method, revenue is recognized based on the percentage of total costs incurred to date in proportion to total estimated costs at completion of the contract. Many contracts also include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer. First Quarter Overview The following is an overview for the three months ended December 31, 2012 and 2011. Three Months ended Three Months ended December 31, 2012 December 31, 2011 (In Millions) (In Millions) Continuing Operations Sales $ 27.18 $ 25.12 Cost of revenues 24.24 22.48 Gross profit 2.94 2.64 Selling & Adm. 2.55 2.69 Income from operations 0.39 (0.05 ) Other expense (0.19 ) (0.49 ) Income (loss) before income tax 0.20 (0.54 ) Income tax expense (benefit) 0.32 (0.22 ) Net loss from continuing operations $ (0.12 ) $ (0.32 ) Discontinued Operations Sales $ 1.49 $ 24.43 Cost of revenues 2.29 21.39 Gross profit (loss) (0.80 ) 3.04 Selling & Adm. 0.36 0.59 Income (loss) from operations (1.16 ) 2.45 Other income 0.21 0.01 Income (loss) before income tax (0.95 ) 2.46 Income tax expense 0.30 1.00 Net income (loss) from discontinued operations $ (0.65 ) $ 1.46 | The first quarter for the Company is typically a slower period for our business lines given the weather and climate. The Company typically has the least amount of workable days during the first quarter as compared to the remaining quarters. Quarter Ending December 31, 2012 and 2011 Comparison Revenues. Total revenues decreased by $20.9 million or 42.1% to $28.7 million for the three months ended December 31, 2012 compared to the same period in 2011. The decrease in revenue for the quarter reflects the discontinuation of ST Pipeline, Inc., which had revenue of $24.4 million for the three months ended December 31, 2011. The revenue for continuing operations increased by $2.1 million, which is primarily attributable to customer scheduled outage work in December 2012. Cost of Revenues. Total costs of Revenues decreased by $17.3 million or 39.5% to $26.5 million for the three months ended December 31, 2012 compared to the same period ending in 2011. The decrease in the cost of revenue reflects the discontinuation of ST Pipeline, Inc., which had costs of revenues of $21.4 million for the three months ended December 31, 2011. The costs of revenues for continuing operations increased by $1.8 million, which is primarily attributable to customer scheduled outage work in December 2012. Gross Profit. Total gross profit decreased by $3.5 million or 62.3% to $2.1 million for the three months ended December 31, 2012 compared to the same period ending in 2011. The decrease in gross profits reflects the discontinuation of S.T. Pipeline, Inc., which had gross profit of $3.0 million for the three months ended December 31, 2011. Gross profit for continuing operations increased by $200,000 for the three months ended December 31, 2012 compared to the same period ending in 2011. Selling and administrative expenses. Total selling and administrative expenses decreased by $743,000 or 22.6% to $2.5 million for the three months ended December 31, 2012 compared to the same period ending in 2011. This decrease was due in part to the discontinuation of ST Pipeline, Inc. which had $592,000 of selling and administrative expenses for the three month ended December 31, 2011 compared to $362,000 for the same period in 2012. With respect to continuing operations, there was also a $550,000 reduction in selling and administrative expenses that resulted from combining the management of C.J. Hughes, Inc. and Contractors Rental, Inc. The Company also incurred $363,000 in restructuring costs related to the consultant put in place under terms of the Forbearance Agreement. The restructuring costs are expected to continue through at least May 31, 2013. Interest Expense. Interest expense decreased by $26,000 or 5.1% to $483,000 for the three months ended December 31, 2012 compared to the same period ending for 2011. Net Income (Loss). The Company had a net loss of $760,000 for the three months ended December 31, 2012 compared to net income of $1.1 million for the same period ending in 2011. The current period income includes non-recurring gains associated with the disposition of equipment for Nitro Electric, C.J. Hughes, and S.T. Pipeline. As previously disclosed the Company incurred substantial losses related to two major projects. Below is the detail related to those losses. 12,000 ft 6" replacement and 14,000 ft 12" replacement At Quarter Ended 9/30/2011 12/31/2011 3/31/2012 6/30/2012 9/30/2012 12/31/2012 Completed Contract amount $ 8,612,000 $ 8,612,000 $ 9,100,000 $ 9,377,720 $ 9,647,650 $ 9,653,550 Cost to date 3,212,060 7,566,120 11,699,590 14,047,950 14,606,290 14,650,160 Est. costs to complete 4,060,500 1,200,000 2,250,000 250,000 63,000 - Est. costs at completion 7,272,560 8,766,120 13,949,590 14,297,950 14,669,290 14,650,160 Est. profit (loss) $ 1,339,440 $ (154,120 ) $ (4,849,590 ) $ (4,920,230 ) $ (5,021,640 ) $ (4,996,610 ) Percent complete 44.2 % 86.3 % 83.9 % 98.3 % 99.6 % 100 % For Quarter Ended 9/30/2011 12/31/2011 3/31/2012 6/30/2012 9/30/2012 12/31/2012 Completed Earned revenue $ 3,803,648 $ 3,608,351 $ (562,000 ) $ 2,277,720 $ 456,930 $ 68,900 Costs of revenue 3,212,060 4,354,060 4,133,470 2,348,360 558,340 43,870 Gross profit (loss) $ 591,588 $ (745,709 ) $ (4,695,470 ) $ (70,640 ) $ (101,410 ) $ 25,030 | This was a unit price project for the replacement of approximately 12,000 feet of six inch pipe and 14,000 feet of twelve inch pipe in McDowell County, West Virginia. The project began during the fourth quarter of fiscal year 2011 and was completed during the first quarter of fiscal year 2013. The contract began with an estimated value of $ 8,612,000 and through contract additions and extra work increased by $ 1,041,550 to a final contract price of $ 9,653,550. The project was billed every two weeks after actual quantities installed were agreed upon by a Company field supervisor and a customer inspector. Earned revenue for each quarter was calculated using the percent complete method of revenue recognition. Total costs to date were compared to total forecasted costs at completion as provided by the project's management team. The resulting percentage of costs completed was used to determine how much of the contract value to recognize as revenue. When the estimated costs at completion moved the project to a loss position, the full amount of the expected loss was recorded in that quarter. The Company recognized $ 592,000 of profit on the project for the quarter ended September 30, 2011. However, the project began to experience difficulties in the quarter ended December 31, 2011 due to weather based project delays. At this time, the Company recognized a $ 746,000 loss for the quarter, and a loss of $ 154,000 for the project to date. The project experienced more than anticipated weather delays and a greater than anticipated amount of underground rock during the quarter ended March 31, 2012, at which time the Company recorded an additional $ 4.7 million loss. The major components of costs overruns during this period were labor, benefits, and equipment rental, all of which were greatly impacted due to lost time and inefficient production caused by the factors mentioned above. Union contracts negotiated with the various unions involved with the projects call for rain out and/or show up time to be paid even if work is stopped due to weather conditions. Total labor and benefit costs for the quarter was $ 3.0 Million. In addition to the impact on labor costs, weather conditions also extend the amount of time outside equipment rentals are required to complete the project. Total outside equipment rental for the quarter was $ 560,000. The project was completed during the first quarter of fiscal 2013 and finished with total revenue of $ 9,653,550, costs of $ 14,650,160 and a total project loss of $ 4,996,610. The Company does not anticipate any additional losses on this project. 49,400 ft of 24" pipe At Quarter Ended 12/31/2011 3/31/2012 6/30/2012 9/30/2012 12/31/2012 Completed Contract amount $ 13,388,670 $ 18,946,437 $ 20,162,561 $ 21,174,380 $ 21,197,818 Cost to date 876,092 11,066,099 21,715,318 24,730,308 24,805,555 Est. costs to complete 11,977,031 7,673,385 926,944 25,000 - Est. costs at completion 12,853,123 18,739,484 22,642,262 24,755,308 24,805,555 Est. profit (loss) $ 535,547 $ 206,953 $ (2,479,701 ) $ (3,580,928 ) $ (3,607,737 ) Percent complete 6.8 % 59.1 % 95.9 % 99.9 % 100 % | For Quarter Ended 12/31/2011 3/31/2012 6/30/2012 9/30/2012 12/31/2012 Completed Earned revenue $ 912,596 $ 10,275,714 $ 8,047,307 $ 1,913,764 $ 48,438 Costs of revenue 876,092 10,190,007 10,649,219 3,014,990 75,247 Gross profit (loss) $ 36,504 $ 85,707 $ (2,601,912 ) $ (1,101,226 ) $ (26,809 ) | This was a unit price project for the replacement of approximately 49,400 feet of twenty four inch pipe in Wetzel County, West Virginia. The project began during the first quarter of fiscal year 2012 and was completed during the first quarter of fiscal year 2013. The contract began with an estimated value of $13,388,670 and through contract additions and extra work increased by $7,809,148 to a final contract price of $21,197,818. The project was billed every two weeks after actual quantities installed were agreed upon by a Company field supervisor and a customer inspector. Earned revenue for each quarter was calculated using the percent complete method of revenue recognition. Total costs to date were compared to total forecasted costs at completion as provided by the project's management team. The resulting percentage of costs completed was used to determine how much of the contract value to recognize as revenue. When the estimated costs at completion moved the project to a loss position, the full amount of the expected loss was recorded in that quarter. The Company recognized $ 743,000 of profit on the project through the second quarter ended March 31, 2012. However, the project began to experience difficulties in the quarter ended June 30, 2012 due to weather based project delays and inefficient production. At this time, the Company recognized a $2.5 Million loss for the quarter, and a loss of $1.7 Million for the project to date. It was during this quarter that the Company fell behind schedule on the project and made an attempt to make up for the lost and inefficient production by maintaining a higher labor force and outside equipment rentals than was originally estimated. Major components of costs of revenues for the quarter were labor and burden of $7.1 Million and outside equipment rental of $935,000. The Company recognized another $1.1 Million loss on the project during the quarter ended September 30, 2012. Costs for the quarter exceeded the estimated costs to complete as of June 30, 2012 by $2.1 Million; however, the estimated contract amount increased by $1.0 Million. Major costs components of costs for the quarter were labor and burden of $1.4 Million and outside equipment rentals of $500,000. The project was completed during the quarter ended December 31, 2012 and finished with a total loss of $3.6 Million. The Company does not anticipate any additional losses on this project. The Company is not engaged in any major projects at this time that losses are expected. Comparison of Financial Condition The Company had total assets at December 31, 2012 of $58.3 million, a decrease of $1.4 million from September 30, 2012. Some of the primary components of the balance sheet were accounts receivable which totaled $21.3 million, an increase of $2.8 million from September 30, 2012. This increase resulted from consistent revenue during the quarter and the completion of major projects causing retention to be billed and reclassed as accounts receivable. Other major categories of assets at December 31, 2012 included cash of $3.5 million and fixed assets less accumulated depreciation of $17.5 million. Liabilities totaled $52.6 million, a decrease of $700,000 from September 30, 2012. This decrease was primarily due to a decrease in accounts payable and accrued expenses. Stockholders' Equity. Stockholders' equity decreased from $6.4 million at September 30, 2012 to $5.7 million at December 31, 2012. This decrease was due to the net loss of $760,000. We have not paid any cash or stock dividends on our common stock, nor have we repurchased shares of our common stock. Liquidity and Capital Resources Cash Requirements The Forbearance Agreement, among other things, does not allow for additional draws on our revolving line of credit. We can apply for a separate forbearance line of credit, but approval by our lenders is at their discretion. We prepare weekly cash forecasts for our own benefit and for submission to our lenders. We anticipate that our current cash and the cash to be generated from collection of our receivables will be adequate for our cash needs for the second quarter of the Company's fiscal year. However, starting with the commencement of our more active work period in the spring, we will be limited in our ability to fund contract work. We are currently working with a restructuring agent to determine the best course of action for the Company and its shareholders, including refinancing opportunities. We are also exploring opportunities to raise equity capital. Sources and Uses of Cash The net loss for the three months ended December 31, 2012 was $760,000, which includes depreciation expense of $1.4 million. Contracts, other receivables, and prepaids provided $3.8 million while decreases in accounts payable and accrued expenses used $1.6 million. Net cash provided by operating activities was $2.3 million for the three month period ended December 31, 2012. Investing activities provided $692,000. Financing activities consumed $2.1 million. As of December 31, 2012, we had $3.5 million in cash, a working capital deficiency of $2.8 million and long term debt, net of current maturities of $2.6 million. Loan Covenants The Company has established an eighteen million ($18,000,000) Line of Credit agreement with a regional bank. The line of credit is subject to the terms of the Forbearance Agreement discussed above. Interest during the forbearance period is 6.5% which expires May 31, 2012. Cash available under the line is calculated based on a percentage of the Company's accounts receivable with certain exclusions. Major items excluded from calculation are certain percentages of receivables from bonded jobs and retainage as well as items greater than one hundred twenty (120) days old. At December 31, 2012 the Company had borrowed $17.5 million on the line of credit. The debt covenants with respect to the Company's current ratio and debt to tangible net worth have been waived under the Forbearance Agreement. The Company is in compliance with the remaining debt covenants at December 31, 2012. In accordance with the terms of the Forbearance Agreement, the lenders have agreed to forbear from exercising and enforcing its default-related rights under the notes. Off-Balance Sheet transactions Due to the nature of our industry, we often enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Though for the most part not material in nature, some of these are: Leases Our work often requires us to lease various facilities, equipment and vehicles. These leases usually are short term in nature, one year or less though at times we may enter into longer term leases when warranted. By leasing equipment, vehicles and facilities, we are able to reduce our capital outlay requirements for equipment vehicles and facilities that we may only need for short periods of time. The Company currently rents two pieces of real estate from stockholders-directors of the Company under long-term lease agreements. The agreement calls for monthly rental payments of $5,000 and extends through August . . .
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