INTEGRATED ELECTRICAL SERVICES INC - 10-Q Quarterly Report

Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2002

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from_____to_____.

Commission File No. 1-13783

INTEGRATED ELECTRICAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 76-0542208
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)

1800 West Loop South
Suite 500
Houston, Texas 77027-3290
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (713) 860-1500

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

The number of shares outstanding as of January 29, 2003 of the issuer's common
stock was 39,226,487 and of the issuer's restricted voting common stock was
2,605,709.

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

1

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.

2

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.

3

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.

4

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying condensed notes to consolidated financial statements are an
integral part of these financial statements.

5

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. OVERVIEW

Integrated Electrical Services, Inc. (the "Company" or "IES"), a Delaware
corporation, was founded in June 1997 to create a leading national provider of
electrical services, focusing primarily on the commercial and industrial,
residential, communications and related service and maintenance markets.

The accompanying unaudited condensed historical financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required for complete
financial statements, and therefore should be reviewed in conjunction with the
financial statements and related notes thereto contained in the Company's annual
report for the year ended September 30, 2002, filed on Form 10-K with the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Actual operating results for the three
months ended December 31, 2002, are not necessarily indicative of the results
that may be expected for the fiscal year ended September 30, 2003.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For a description of these policies, refer to Note 2 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2002.

SUBSIDIARY GUARANTIES

All of the Company's operating income and cash flows are generated by its wholly
owned subsidiaries, which are the subsidiary guarantors of the Company's
outstanding 9 3/8% senior subordinated notes due 2009 (the "Senior Subordinated
Notes"). The Company is structured as a holding company and substantially all of
its assets and operations are held by its subsidiaries. There are currently no
significant restrictions on the Company's ability to obtain funds from its
subsidiaries by dividend or loan. The separate financial statements of the
subsidiary guarantors are not included herein because (i) the subsidiary
guarantors are all of the direct and indirect subsidiaries of the Company; (ii)
the subsidiary guarantors have fully and unconditionally, jointly and severally
guaranteed the Senior Subordinated Notes; and (iii) the aggregate assets,
liabilities, earnings, and equity of the subsidiary guarantors is substantially
equivalent to the assets, liabilities, earnings and equity of the Company on a
consolidated basis. As a result, the presentation of separate financial
statements and other disclosures concerning the subsidiary guarantors is not
deemed material.

6

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are primarily used in the Company's revenue recognition of construction in
progress, fair value assumptions in analyzing goodwill impairment, allowance for
doubtful accounts receivable and self-insured claims liability.

NEW ACCOUNTING PRONOUNCEMENTS

Effective October 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on the Company's financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 establishes requirements for
recognition of a liability for a cost associated with an exit or disposal
activity based with an objective of recording the initial liability at fair
value. The Company will adopt SFAS No 146 effective January 1, 2003. The Company
does not expect the adoption of SFAS NO. 146 to impact its financial position or
results of operations.

2. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill attributable to each of
the Company's reporting units is tested for impairment by comparing the fair
value of each reporting unit with its carrying value. Fair value is determined
using discounted cash flows, market multiples and market capitalization.
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. The
Company will perform its impairment tests annually during the first fiscal
quarter absent any impairment indicators requiring more frequent impairment
tests.

Based on the Company's impairment tests performed upon adoption of SFAS No. 142,
it recognized a charge of $283.3 million ($7.13 per share) in the first quarter
of 2002 to reduce the carrying value of goodwill of its reporting units to its
implied fair value. Under SFAS No. 142,

7

the impairment adjustment recognized at adoption of the new rules was reflected
as a cumulative effect of change in accounting principle in the statement of
operations for the year ended September 30, 2002. The Company performed its
annual impairment test on October 1, 2002 and determined that there was no
impairment of recorded goodwill.

The carrying amount of goodwill attributable to each reportable operating unit
with goodwill balances and changes therein follows (in thousands):

3. RESTRUCTURING CHARGES

In October 2001, the Company began implementation of a workforce reduction
program. The purpose of this program was to cut costs by reducing the number of
administrative staff both in the field and at the home office. The total number
of terminated employees was approximately 450. As a result of the program
implementation, the Company recorded pre-tax restructuring charges of $4.0
million associated with 45 employees during the three months ended December 31,
2001. The charges were based on the costs of the workforce reduction program and
include severance and other special termination benefits. At December 31, 2002,
approximately $2.0 million of these charges have not been paid and are included
in accrued expenses.

4. DEBT

Credit Facility

The Company is party to a $150.0 million revolving credit facility with a
syndicate of lending institutions to be used for working capital, capital
expenditure, acquisitions and other corporate purposes that matures May 22,
2004, as amended (the "Credit Facility"). Amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate (LIBOR) plus 1.75 percent to 3.50 percent, as determined
by the ratio of the Company's total funded debt to EBITDA (as defined in the
Credit Facility) or (b) the higher of (i) the bank's prime rate or (ii) the
Federal funds rate plus 0.50 percent plus an additional 0.25 percent to 2.00
percent, as determined by the ratio of the Company's total funded debt to
EBITDA. Commitment fees of 0.50 percent are assessed on any unused borrowing
capacity under the Credit Facility. The Company's existing and future
subsidiaries guarantee the repayment of all amounts due under the facility, and
the facility is secured by the capital stock of those subsidiaries and the
accounts receivable of the Company and those subsidiaries. Borrowings under the
Credit Facility are limited to 66 2/3% of outstanding receivables (as defined in
the agreement). The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends on the common stock, restricts the ability of the
Company to repurchase shares of common stock, to incur other indebtedness and
requires the Company to comply with various affirmative and

8

negative covenants including certain financial covenants. Among other
restrictions, the financial covenants include minimum net worth requirements; a
maximum total consolidated funded debt to EBITDA ratio, a maximum senior
consolidated debt to EBITDA ratio, and a minimum interest coverage ratio. The
Company was in compliance with the financial covenants of its Credit Facility,
as amended, at December 31, 2002. As of December 31, 2002, the Company had no
borrowings outstanding under its Credit Facility, letters of credit outstanding
under its Credit Facility of $22.4 million, $0.8 million of other borrowings and
available borrowing capacity under its Credit Facility of $127.6 million.

Senior Subordinated Notes

On January 25, 1999 and May 29, 2001, the Company completed offerings of $150.0
million and $125.0 million Senior Subordinated Notes, respectively. The offering
completed on May 29, 2001 yielded $117.0 million in proceeds to the Company, net
of a $4.2 million discount and $3.9 million in offering costs. The proceeds from
the May 29, 2001, offering were used primarily to repay amounts outstanding
under the Credit Facility. The Senior Subordinated Notes bear interest at 9 3/8%
and mature on February 1, 2009. The Company pays interest on the Senior
Subordinated Notes on February 1 and August 1 of each year. The Senior
Subordinated Notes are unsecured obligations and are subordinated to all
existing and future senior indebtedness. The Senior Subordinated Notes are
guaranteed on a senior subordinated basis by all of the Company's subsidiaries.
Under the terms of the Senior Subordinated Notes, the Company is required to
comply with various affirmative and negative covenants including: (i)
restrictions on additional indebtedness, and (ii) restrictions on liens,
guarantees and dividends. During the fourth quarter of the year ended September
30, 2002, the Company retired approximately $27.1 million of these Senior
Subordinated Notes. At September 30, 2002, the cost basis of $15.6 million
notional amount of the retired Senior Subordinated Notes were classified as part
of accounts payable and accrued expenses as the settlement date occurred
subsequent to September 30, 2002 and during the three months ended December 31,
2002.

Debt consists of the following (in thousands):

9

5. EARNINGS PER SHARE

The following table reconciles the numerators and denominators of the basic and
diluted earnings per share for the three months ended December 31, 2001 and 2002
(in thousands, except share information):

For the three months ended December 31, 2001 and 2002, stock options of 6.9
million and 5.4 million, respectively, were excluded from the computation of
diluted earnings per share because the options exercise prices were greater than
the average market price of the Company's common stock. For the three months
ended December 31, 2001, the weighted average diluted shares outstanding
excluded 25,830 shares related to employee stock options where the exercise
prices were less than the average market price of the Company's common stock.
These shares were excluded because the Company reported a loss during the
period, and including them would have had an antidilutive effect on loss per
share.

6. OPERATING SEGMENTS

The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Certain information is disclosed, per SFAS No. 131,
based on the way management organizes financial information for making operating
decisions and assessing performance.

The Company's reportable segments are strategic business units that offer
products and services to two distinct customer groups. They are managed
separately because each business requires different operating and marketing
strategies.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on income from operations of the respective business units prior to
unallocated home office expenses. Management allocates costs between segments
for selling, general and administrative expenses,

10

goodwill impairment, depreciation expense, capital expenditures and total
assets. Those methods used for allocation may change in the future.

Segment information for the three months ended December 31, 2001 and 2002 is as
follows (in thousands):

The Company does not have significant operations or long-lived assets in
countries outside of the United States.

7. 1999 INCENTIVE COMPENSATION PLAN

In November 1999, the Board of Directors adopted the 1999 Incentive Compensation
Plan (the "1999 Plan"). The 1999 Plan authorizes the Compensation Committee of
the Board of Directors or the Board of Directors to grant employees of the
Company awards in the form of options, stock appreciation rights, restricted
stock or other stock based awards. The Company has up to 5.5 million shares of
Common Stock authorized for issuance under the 1999 Plan.

11

The Company granted a restricted stock award of 400,000 shares under its 1999
Plan. The market value of the stock on the date of grant for this award was $2.3
million. The award became fully vested and was fully amortized during the three
months ended December 31, 2001. Accordingly, the Company had no amortization
expense related to this award during the three months ended December 31, 2002.

8. COMMITMENTS AND CONTINGENCIES

Subsidiaries of the Company are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty and it is possible that the
results of legal proceedings may materially adversely affect us, in the opinion
of the Company, all such proceedings are either adequately covered by insurance
or, if not so covered, should not ultimately result in any liability which would
have a material adverse effect on the financial position, liquidity or results
of operations of the Company. The Company expenses routine legal costs related
to such proceedings as incurred.

The Company has committed to invest up to $5.0 million in EnerTech Capital
Partners II L.P. ("EnerTech"). EnerTech is a private equity firm specializing in
investment opportunities emerging from the deregulation and resulting
convergence of the energy, utility and telecommunications industries. Through
December 31, 2002, the Company had invested $1.8 million under its commitment to
EnerTech.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The following should be read in conjunction with the response to Part I, Item 1
of this Report. Any capitalized terms used but not defined in this Item have the
same meaning given to them in Part I, Item 1.

This report on Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements are based on our expectations and involve risks and
uncertainties that could cause our actual results to differ materially from
those set forth in the statements. Such risks and uncertainties include, but are
not limited to, the inherent uncertainties related to estimating future results,
fluctuations in operating results because of downturns in levels of
construction, incorrect estimates used in entering into fixed price contracts,
difficulty in managing the operation and growth of existing and newly acquired
businesses, the high level of competition in the construction industry and the
effects of seasonality. The foregoing and other factors are discussed in our
filings with the SEC including our Annual Report on Form 10-K for the year ended
September 30, 2002.

In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified the
accounting principles which we believe are

12

most critical to our reported financial status by considering accounting
policies that involve the most complex or subjective decisions or assessments.
We identified our most critical accounting policies to be those related to
revenue recognition, the assessment of goodwill impairment, our allowance for
doubtful accounts receivable and the recording of our self-insurance
liabilities. These accounting policies, as well as others, are described in the
Notes to the Consolidated Financial Statements of our Annual Report on Form 10-K
for the year ended September 30, 2002 and at relevant sections in this
discussion and analysis.

We enter into contracts principally on the basis of competitive bids. We
frequently negotiate the final terms and prices of those contracts with the
customer. Although the terms of our contracts vary considerably, most are made
on either a fixed price or unit price basis in which we agree to do the work for
a fixed amount for the entire project (fixed price) or for units of work
performed (unit price). We also perform services on a cost-plus or time and
materials basis. We are generally able to achieve higher margins on fixed price
and unit price than on cost-plus contracts. We currently generate, and expect to
continue to generate, more than half of our revenues under fixed price
contracts. The cost of labor and materials, however, may vary from the costs we
originally estimated. Variations from estimated contract costs along with other
risks inherent in performing fixed price and unit price contracts may result in
actual revenue and gross profit for a project differing from those we originally
estimated and could result in losses on projects. Depending on the size of a
particular project, variations from estimated project costs could have a
significant impact on our operating results for any fiscal quarter or year. We
believe our exposure to losses on fixed price contracts is limited in aggregate
by the high volume and relatively short duration of the fixed price contracts we
undertake. Additionally, we derive a significant amount of our revenues from new
construction and from the southern part of the United States. Downturns in new
construction activity or in construction in the southern United States could
affect our results.

We complete most projects within one year, while we frequently provide service
and maintenance work under open-ended, unit price master service agreements
which are renewable annually. We recognize revenue on service and time and
material work when services are performed. Work performed under a construction
contract generally provides that the customers accept completion of progress to
date and compensate us 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 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.
We generally consider 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.

13

We evaluate goodwill for potential impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Included in this evaluation are certain assumptions and estimates to
determine the fair values of reporting units such as estimates of future cash
flows, discount rates, as well as assumptions and estimates related to the
valuation of other identified intangible assets. Changes in these assumptions
and estimates or significant changes to the market value of our common stock
could materially impact our results of operations or financial position.

We provide an allowance for doubtful accounts receivable for unknown collection
issues in addition to reserves for specific accounts receivable where collection
is considered doubtful. Inherent in the assessment of the allowance for doubtful
accounts receivable are certain judgments and estimates including, among others,
our customers' access to capital, our customers' willingness to pay, general
economic conditions and the ongoing relationships with our customers.

We are self-insured for workers' compensation, auto liability, general liability
and employee-related health care claims, subject to large deductibles. Losses up
to the deductible amounts are accrued based upon our estimates of the liability
for claims incurred and an estimate of claims incurred but not reported. The
accruals are derived from known facts, historical trends and industry averages
utilizing the assistance of an actuary to determine the best estimate of the
ultimate expected loss. We believe such accruals to be adequate. However,
insurance liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination of our liability
in proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. Therefore, if actual experience differs
from than the assumptions used in the actuarial valuation, adjustments to the
reserve may be required and would be recorded in the period that the experience
becomes known.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 2002

The following table presents selected unaudited historical financial information
for the three months ended December 31, 2001 and 2002.

14

REVENUES

Total revenues decreased $26.6 million, or 7%, from $375.2 million for the three
months ended December 31, 2001, to $348.6 million for the three months ended
December 31, 2002. This decrease in revenues is primarily the result of $14.2
million of non-recurring revenues on divested or closed companies that were
included in revenues for the three months ended December 31, 2001, but not
during the three months ended December 31, 2002. This decrease in revenues is
additionally impacted by increased competition across the country for available
work during the three months ended December 31, 2002, a decrease in revenues
from communications work and a decrease of non-residential revenues in the
Midwest .

Commercial and industrial revenues decreased $36.4 million, or 12%, from $308.0
million for the three months ended December 31, 2001, to $271.6 million for the
three months ended December 31, 2002. This decrease in revenues is primarily the
result of $14.2 million of non-recurring revenues on divested or closed
companies that were included in revenues for the three months ended December 31,
2001, but not during the three months ended December 31, 2002. This decrease in
revenues is additionally impacted by increased competition across the country
for available work during the three months ended December 31, 2002.

Residential revenues increased $9.8 million, or 15%, from $67.2 million for the
three months ended December 31, 2001, to $77.0 million for the three months
ended December 31, 2002, primarily as a result of increased awards of
construction contracts in markets we serve.

GROSS PROFIT

15

Gross profit decreased $5.8 million, or 10%, from $57.2 million for the three
months ended December 31, 2001, to $51.4 million for the three months ended
December 31, 2002. Gross profit margin as a percentage of revenues remained the
same at 15% for the three months ended December 31, 2001 and 2002.

Commercial and industrial gross profit decreased $8.6 million, or 20%, from
$43.0 million for the three months ended December 31, 2001, to $34.4 million for
the three months ended December 31, 2002. Commercial and industrial gross profit
margin as a percentage of revenues decreased from 14% for the three months ended
December 31, 2001, to 13% for the three months ended December 31, 2002. This
decrease in gross profit margin as a percentage of revenues was primarily the
result of increased competition for available work and lower margins on work in
the communications market.

Residential gross profit increased $2.8 million, or 20%, from $14.2 million for
the three months ended December 31, 2001, to $17.0 million for the three months
ended December 31, 2002. Residential gross profit margin as a percentage of
revenues increased from 21% for the three months ended December 31, 2001 to 22%
for the three months ended December 31, 2002. This increase in gross profit
margin as a percentage of revenues was primarily the result of increased
available work and higher margins on awarded work in the residential market.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased $11.1 million, or 22%,
from $49.7 million for the three months ended December 31, 2001, to $38.6
million for the three months ended December 31, 2002. Selling, general and
administrative expenses as a percentage of revenues decreased 2% from 13% for
the three months ended December 31, 2001 to 11% for the three months ended
December 31, 2002. This decrease results from the elimination of certain
administrative field and home office personnel expenses during the three months
ended December 31, 2001 as compared to the three months ended December 31, 2002.

RESTRUCTURING CHARGE

In October 2001, we began implementation of a workforce reduction program. The
purpose of this program was to reduce the number of administrative staff both in
the field and in the home office. As a result of the program implementation, we
recorded a pre-tax restructuring charge of $4.0 million during the quarter ended
December 31, 2001. The charge was based on the cost of the workforce reduction
program, including severance and other special termination benefits. At December
31, 2002, approximately $2.0 million of these charges have not been paid and are
included in accounts payable and accrued expenses.

INCOME FROM OPERATIONS

Income from operations increased $9.3 million, or 266%, from $3.5 million for
the three months ended December 31, 2001, to $12.8 million for the three months
ended December 31, 2002. This increase in income from operations was primarily
attributed to decreased selling, general and administrative expenses year over
year and a non-recurring restructuring charge of $4.0

16

million incurred during the three months ended December 31, 2001, offset by
decreased revenues year over year and decreased margins earned on those
revenues.

NET INTEREST AND OTHER EXPENSE

Interest and other expense, net decreased from $6.9 million for the three months
ended December 31, 2001, to $6.6 million for the three months ended December 31,
2002, primarily as a result of decreased interest expense attributable to
decreased average borrowings over the period.

PROVISION FOR INCOME TAXES

During the three months ended December 31, 2002, we recorded a tax provision of
38.5%. We recorded a tax benefit of 47.2% for the three months ended December
31, 2001. This benefit is the result of a loss before income taxes recorded
during the three months ended December 31, 2001 and includes the impact of the
projected utilization of certain net operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2002, we had cash and cash equivalents of $19.1 million,
working capital of $251.6 million, no outstanding borrowings under our credit
facility, $22.4 million of letters of credit outstanding, and available capacity
under our credit facility of $127.6 million. The amount outstanding under our
senior subordinated notes was $247.9 million. All debt obligations are on our
balance sheet.

During the three months ended December 31, 2002, we generated $3.3 million of
net cash from operating activities. This net cash provided by operating
activities was comprised of net income of $3.8 million, increased by $4.1
million of non-cash charges related primarily to depreciation expense and
provision for allowance for doubtful accounts, and decreased by changes in
working capital. Working capital changes consisted of a $8.4 million decrease in
accounts receivable due to the timing of collections, offset by a $10.1 million
decrease in accounts payable and accrued expenses as a result of the timing of
payments made. Working capital changes also included a $6.1 million decrease in
billings in excess of costs and estimated earnings on uncompleted projects and a
$0.1 million increase in costs and estimated earnings in excess of billings on
uncompleted contracts, with the balance of the change due to other working
capital changes. Net cash used in investing activities was $0.4 million,
consisting primarily of $2.5 million used for capital expenditures, offset by
$1.1 million received from divestitures and $1.0 million in proceeds from the
sale of fixed assets. Net cash used in financing activities was $16.6 million,
resulting primarily from repurchases of the senior subordinated notes.

On May 22, 2001, we replaced our $175.0 million credit facility with a new
$150.0 million revolving credit facility with a syndicate of lending
institutions to be used for working capital, capital expenditure, acquisitions
and other corporate purposes that matures May 22, 2004. Amounts borrowed under
our credit facility bear interest at an annual rate equal to either (a) the
London interbank offered rate (LIBOR) plus 1.75 percent to 3.50 percent, as
determined by the

17

ratio of our total funded debt to EBITDA (as defined in our credit facility) or
(b) the higher of (i) the bank's prime rate or (ii) the Federal funds rate plus
0.50 percent plus an additional 0.25 percent to 2.00 percent, as determined by
the ratio of our total funded debt to EBITDA. Commitment fees of 0.50 percent
are assessed on any unused borrowing capacity under our credit facility. Our
existing and future subsidiaries guarantee the repayment of all amounts due
under our facility, and our facility is secured by the capital stock of those
subsidiaries, our accounts receivable and the accounts receivable of those
subsidiaries. Borrowings under our credit facility are limited to 66 2/3% of
outstanding receivables (as defined in the agreement). Our credit facility
requires the consent of the lenders for acquisitions exceeding a certain level
of cash consideration, prohibits the payment of cash dividends on our common
stock, restricts our ability to repurchase shares of common stock, to incur
other indebtedness and requires us to comply with various affirmative and
negative covenants including certain financial covenants. Among other
restrictions, the financial covenants include minimum net worth requirements, a
maximum total consolidated funded debt to EBITDA ratio, a maximum senior
consolidated debt to EBITDA ratio, and a minimum interest coverage ratio. We
were in compliance with the financial covenants of our credit facility, as
amended, at December 31, 2002. At January 29, 2003, we had no outstanding
borrowings on our credit facility.

On January 25, 1999 and May 29, 2001, we completed our offerings of $150.0
million and $125.0 million senior subordinated notes, respectively. The offering
completed on May 29, 2001 yielded $117.0 million in proceeds, net of a $4.2
million discount and $3.9 million in offering costs. The proceeds from the May
29, 2001 offering were used primarily to repay amounts outstanding under our
credit facility. The notes bear interest at 9 3/8% and will mature on February
1, 2009. We pay interest on the notes on February 1 and August 1 of each year.
The notes are unsecured senior subordinated obligations and are subordinated to
all of our existing and future senior indebtedness. The notes are guaranteed on
a senior subordinated basis by all of our subsidiaries. Under the terms of the
notes, we are required to comply with various affirmative and negative covenants
including (1) restrictions on additional indebtedness, and (2) restrictions on
liens, guarantees and dividends. During the fourth quarter of the year ended
September 30, 2002, we retired approximately $27.1 million of these senior
subordinated notes. At December 31, 2002, we have $247.9 million in outstanding
senior subordinated notes.

Effective October 1, 2001, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective October 1, 2001. Goodwill attributable to each of
our reporting units is tested for impairment by comparing the fair value of each
reporting unit with its carrying value. Fair value is determined using
discounted cash flows, market multiples and market capitalization. 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. We will
perform our impairment tests annually during the first fiscal quarter absent any
impairment indicators requiring more frequent impairment tests.

Based on our impairment tests performed upon adoption of SFAS No. 142, we
recognized a charge of $283.3 million ($7.13 per share) in the first quarter of
2002 to reduce the carrying value of goodwill of our reporting units to its
implied fair value. Under SFAS No. 142, the

18

impairment adjustment recognized at adoption of the new rules was reflected as a
cumulative effect of change in accounting principle in the statement of
operations for the year ended September 30, 2002. We performed our annual
impairment test on October 1, 2002 and determined that there was no impairment
of recorded goodwill.

All of our operating income and cash flows are generated by our wholly owned
subsidiaries, which are the subsidiary guarantors of our outstanding senior
subordinated notes. The separate financial statements of the subsidiary
guarantors are not included herein because (i) the subsidiary guarantors are all
of the direct and indirect subsidiaries of the Company; (ii) the subsidiary
guarantors have fully and unconditionally, jointly and severally guaranteed the
senior subordinated notes; (iii) the aggregate assets, liabilities, earnings,
and equity of the subsidiary guarantors is substantially equivalent to the
assets, liabilities, earnings and equity of the Company on a consolidated basis;
and (iv) the presentation of separate financial statements and other disclosures
concerning the subsidiary guarantors is not deemed material.

Other Commitments. As is common in our industry, we have entered into certain
off balance sheet arrangements that expose us to increased risk. Our significant
off balance sheet transactions include liabilities associated with noncancelable
operating leases, letter of credit obligations and surety guarantees.

We enter into noncancelable operating leases for many of our vehicle and
equipment needs. These leases allow us to retain our cash when we do not own the
vehicles or equipment and we pay a monthly lease rental fee. At the end of the
lease, we have no further obligation to the lessor. We may determine to cancel
or terminate a lease before the end of its term. Typically we are liable to the
lessor for various lease cancellation or termination costs and the difference
between the then fair market value of the leased asset and the implied book
value of the leased asset as calculated in accordance with the lease agreement.

Some of our customers require us to post letters of credit as a means of
guaranteeing performance under our contracts and ensuring payment by us to
subcontractors and vendors. If our customer has reasonable cause to effect
payment under a letter of credit, we would be required to reimburse our creditor
for the letter of credit. Depending on the circumstances surrounding a
reimbursement to our creditor, we may have a charge to earnings in that period.
To date we have not had a situation where a customer has had reasonable cause to
effect payment under a letter of credit.

Many of our customers require us to post performance and payment bonds issued by
a surety. Those bonds guarantee the customer that we will perform under the
terms of a contract and that we will pay subcontractors and vendors. In the
event that we fail to perform under a contract or pay subcontractors and
vendors, the customer may demand the surety to pay or perform under our bond.
Our relationship with our surety is such that we will indemnify the surety for
any expenses it incurs in connection with any of the bonds it issues on our
behalf. To date, we have not incurred significant expenses to indemnify our
surety for expenses it incurred on our behalf.

We have committed to invest up to $5.0 million in EnerTech Capital Partners II,
L.P. ("EnerTech"). EnerTech is a private equity firm specializing in investment
opportunities

19

emerging from deregulation and resulting convergence of the energy, utility and
telecommunications industries. Through December 31, 2002, we had invested $1.8
million under our commitment to EnerTech.

Our future contractual obligations include (in thousands):

Our other commercial commitments expire as follows (in thousands):

(1) Balance of investment commitment in EnerTech.

Outlook. The following statements are based on current expectations. These
statements are forward-looking and actual results may differ materially.
Economic conditions across the country are challenging. We continue to focus on
collecting receivables and reducing days sales outstanding. To improve our
position for continued success, we continue to take steps to reduce costs. We
have made significant cuts in administrative overhead at the home office and in
the field. Although we have seen signs of improvement in our quarter ended
December 31, 2002, the economic outlook for the remainder of fiscal 2003 is
still somewhat uncertain. We expect earnings per share in the second quarter of
fiscal 2003 to range between $0.08 and $0.14 per share. For the year ended
September 30, 2003, we expect earnings to range between $0.53 and $0.60 per
share excluding any potential goodwill impairment charges.

We expect to generate cash flow from operations. Our cash flows from operations
tend to track with the seasonality of our business and historically have
improved in the latter part of our fiscal year. We anticipate that our cash flow
from operations will provide sufficient cash to enable us to meet our working
capital needs, debt service requirements and planned capital expenditures for
property and equipment through the next twelve months. Our ability to generate
cash flow from operations is dependent on many factors, including demand for our
products and services, the availability of work at margins acceptable to us and
the ultimate collectibility of our receivables.

SEASONALITY AND QUARTERLY FLUCTUATIONS

Our results of operations, particularly from residential construction, are
seasonal, depending on weather trends, with typically higher revenues generated
during the spring and summer and lower revenues during the fall and winter. The
commercial and industrial aspect of our business is less subject to seasonal
trends, as this work generally is performed inside structures protected from the
weather. Our service business is generally not affected by seasonality. In
addition, the

20

construction industry has historically been highly cyclical. Our volume of
business may be adversely affected by declines in construction projects
resulting from adverse regional or national economic conditions. Quarterly
results may also be materially affected by gross margins for both bid and
negotiated projects, the timing of new construction projects and any
acquisitions. Accordingly, operating results for any fiscal period are not
necessarily indicative of results that may be achieved for any subsequent fiscal
period.

NEW ACCOUNTING PRONOUNCEMENTS

Effective October 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. The adoption had no impact
on our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 establishes requirements for
recognition of a liability for a cost associated with an exit or disposal
activity based with an objective of recording the initial liability at fair
value. We will adopt SFAS No 146 effective January 1, 2003. We do not expect the
adoption of SFAS NO. 146 to impact our financial position or results of
operations.

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management is actively involved in monitoring exposure to market risk and
continues to develop and utilize appropriate risk management techniques. We are
not exposed to any significant market risks from commodity price risk or foreign
currency exchange risk. Our exposure to significant market risks includes
outstanding borrowings under our floating rate credit facility. Management does
not use derivative financial instruments for trading purposes or to speculate on
changes in interest rates or commodity prices.

As a result, our exposure to changes in interest rates results from our
short-term and long-term debt with both fixed and floating interest rates. The
following table presents principal or notional amounts (stated in thousands) and
related interest rates by year of maturity for our debt obligations and their
indicated fair market value at December 31, 2002:

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report on Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
principal executive officer and principal financial officer concluded, based on
this evaluation, that the Company's disclosure controls and procedures are
effective in alerting them timely to material information relating to the
Company required to be included in the Company's periodic SEC filings.

Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.

22

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

A. EXHIBITS

10.1 Integrated Electrical Services, Inc. Executive
Savings Plan

99.1 Certification of Herbert R. Allen, Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted to Section 906 of The Sarbanes-Oxley Act of
2002.

99.2 Certification of William W. Reynolds, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted to Section 906 of The Sarbanes-Oxley Act of
2002.

23

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.

INTEGRATED ELECTRICAL SERVICES, INC.

Date: January 30, 2003 By: /s/ William W. Reynolds
--------------------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer

24

CERTIFICATION

I, Herbert R. Allen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integrated
Electrical Services, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

25

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: January 29, 2003

/s/ Herbert R. Allen
----------------------------------
Herbert R. Allen
Chief Executive Officer

26

CERTIFICATION

I, William W. Reynolds, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integrated
Electrical Services, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

27

6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: January 29, 2003

/s/ William W. Reynolds
-----------------------------
William W. Reynolds
Chief Financial Officer

28

EXHIBIT INDEX