THE GOLDFIELD CORPORATION Forward-Looking Statements
We make "forward-looking statements" within the meaning of the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995 throughout this document. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," "plan," and "continue" or similar words. We have based these statements on our current expectations about future events. Although we believe that our expectations reflected in or suggested by our forward-looking statements are reasonable, we cannot assure you that these expectations will be achieved. Our actual results may differ materially from what we currently expect. Factors that may affect the results of our operations include, among others: the level of construction activities by public utilities; the concentration of revenue from a limited number of utility customers; the loss of one or more significant customers; the timing and duration of construction projects for which we are engaged; our ability to estimate accurately with respect to fixed-price construction contracts; and heightened competition in the electrical construction field, including intensification of price competition. Other factors that may affect the results of our operations include, among others: adverse weather; natural disasters; global pandemics; effects of climate changes; changes in generally accepted accounting principles; ability to obtain necessary permits from regulatory agencies; our ability to maintain or increase historical revenue and profit margins; general economic conditions, both nationally and in our region; adverse legislation or regulations; availability of skilled construction labor and materials and material increases in labor and material costs; and our ability to obtain additional and/or renew financing. Other important factors which could cause our actual results to differ materially from the forward-looking statements in this document include, but are not limited to, those discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed elsewhere in this report and as set forth from time to time in our other public filings and public statements. You should not assume that material events subsequent to the date of this Quarterly Report on Form 10-Q have or have not occurred. In addition to the other information included in this report and our other public filings and releases, a discussion of factors affecting our business is included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 under "Item 1A. Risk Factors" and should be considered while evaluating our business, financial condition, results of operations and prospects. You should read this report in its entirety and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even in the event that our situation changes in the future, except as required by law. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Overview We are a provider of electrical construction services, primarily in the Southeast, mid-Atlantic and Texas-Southwest regions ofthe United States . We are also engaged in real estate development operations of residential properties on the east coast ofCentral Florida . We report our results under two reportable segments, electrical construction and real estate development. For the nine months endedSeptember 30, 2020 , our total consolidated revenue was$141.0 million , a 3.3% increase from$136.6 million in the same period in 2019. Through our subsidiaries,Power Corporation of America ("PCA"),Southeast Power Corporation ("Southeast Power "),C and C Power Line, Inc. ("C&C") andPrecision Foundations, Inc. ("PFI"), we are engaged in the construction of electrical infrastructure for the utility industry and industrial customers.Southeast Power performs electrical contracting services including the construction of transmission lines, distribution systems, substations and other electrical services.Southeast Power is headquartered inTitusville, Florida and has additional facilities inBastrop andCresson, Texas ,Lancaster, Kentucky andSpartanburg, South Carolina . C&C, headquartered inJacksonville, Florida , is a full service electrical contractor that provides similar services asSoutheast Power with a unionized workforce. PFI, headquartered inPort Orange, Florida , acquired its operating assets fromSoutheast Power inAugust 2018 and constructs drilled pier foundations and installs concrete poles, direct embeds and vibratory casings. The electrical construction business is highly competitive and fragmented. We compete with other independent contractors, including larger regional and national firms that may have financial, operational, technical and marketing resources that exceed our own. We also face competition from existing and prospective customers establishing or augmenting in-house services and organizations that employ personnel who perform similar services as those provided by us. In addition, a significant portion of our electrical construction revenue is derived from a small group of customers that account for a substantial portion of our revenue in any given year. The revenue contribution by any single customer or group of customers may significantly fluctuate from period-to-period. For example, for the nine months endedSeptember 30, 2020 and 2019, three of our customers accounted for approximately 51.0% and 54.6% of our 18
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consolidated revenue, respectively. The loss of or decrease in current demand from one or more customers, if not replaced, may result in a material decrease in revenue, margin and profit. Through our subsidiaryBayswater Development Corporation and its various subsidiaries ("Bayswater"), we are engaged in the acquisition, development, management and disposition of land and improved properties along the east coast ofCentral Florida . Bayswater is headquartered inMelbourne, Florida . Our customers are generally pre-retirement, retirement or second home buyers seeking higher quality, low maintenance residences. When we use either of the terms "homes" or "units," we mean our residential properties, which include detached single-family homes, townhomes and condominiums. References to our homebuilding revenues and similar references refer to revenues derived from the sales of our residential properties, in each case unless otherwise expressly stated or the context otherwise requires. We believe that, to date, COVID-19 has not materially affected our electrical construction operations. We have adopted protocols to protect our customers and their employees, our field workers and office administrative personnel, such as allowing our administrative employees to work remotely from home whenever possible across our subsidiaries based on office specific needs. We closely monitor these protocols based on the evolving COVID-19 environment and will make any necessary adjustments to ensure the safety of our employees and meet the requirements of our customers. We are continuously monitoring the COVID-19 pandemic, as the effects have varied from customer to customer and region to region, and are changing almost daily. We believe our customers may face various challenges related to the COVID-19 environment, including challenges related to current regulations and the ongoing changes to those regulations. In the short term we may see some disruption to our operations, including potential project start and permitting delays. However, as our services are considered critical by both federal and state governments, and the demand on the electrical infrastructure grid has increased due to the increased number of people working from home, we believe the demand for our services will continue. Our customers have, for the most part, reiterated their capital spending plans for the foreseeable future, including continued investments in grid hardening, renewable integration and system reliability. There have been no changes to the nature of our controls, processes or procedures as a result of administrative personnel working remotely. We cannot predict with any certainty the future effects of a prolonged epidemic on our nation's economy, our utility customers or our electrical construction projects. Our capital expenditure have continued as planned. With respect to our residential real estate development construction activities, which represent a very small portion of our business, we anticipate that the economic uncertainties and damage caused by the pandemic may dampen customer demand for new units. Please refer to Item 1A. Risk Factors for additional Risk Factors we have added regarding COVID-19. Critical Accounting Estimates This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, particularly those related to electrical construction contracts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our management has discussed the selection and development of our critical accounting policies, estimates, and related disclosures with the Audit Committee of the Board of Directors.
Revenue Recognition
Our significant accounting policies are detailed in "Note 1: Organization and Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 19
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Fixed-Price Electrical Construction Contracts
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue is recorded proportionally as costs are incurred. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. We estimate variable consideration at the most likely amount which we expect to receive. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of all information (historical, current and forecasted) that is reasonably available to us. Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. We have a standard and disciplined quarterly estimated costs at completion process in which management reviews the progress and execution of our performance obligations. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), and execution by our subcontractors, among other variables. Based on this analysis, any quarterly adjustments to net revenue, cost of electrical construction revenue and the related impact to operating income are recognized as necessary in the period they become known. The accuracy of our revenue and profit recognition in a given period is almost solely dependent on the accuracy of our estimates of the cost to complete each project. Our projects can be complex and in almost every case the profit margin estimates for a project will either increase or decrease, to some extent, from the amount that was originally estimated at the time of bid. If a current estimate of total costs exceeds the total estimate of revenue to be earned, on a performance obligation, the projected loss is recognized in full when determined. Accrued contract losses were$0.2 million as ofSeptember 30, 2020 and$0.3 million as ofDecember 31, 2019 . The accrued contract losses as ofSeptember 30, 2020 resulted from various unexpected construction issues. The accrued contract losses as ofDecember 31, 2019 were mainly attributable to transmission projects experiencing unexpected construction issues. 20
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The following table disaggregates our revenue for the dates indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Electrical construction operations (1)
Southeast $ 19,010,869 $ 17,127,019 $ 59,643,565 $ 51,956,218
mid-Atlantic 15,188,972 11,897,347 39,332,883 41,366,308
Texas-Southwest 11,914,994 13,038,099 35,259,981 28,461,784
Other electrical construction (2) 1,942,062 1,119,732 3,558,478 1,989,573
Total electrical construction
operations 48,056,897 43,182,197 137,794,907 123,773,883
Real estate development operations 364,900 1,550,684 3,250,563 12,819,473
Total revenue $ 48,421,797 $ 44,732,881 $ 141,045,470 $ 136,593,356
______________________________________
(1) Principal electrical construction operations include revenue from transmission lines, distribution systems, substations and
drilled pier foundations.
(2) Other electrical construction includes revenue from storm work, fiber optics and other miscellaneous electrical construction
items.
The aggregate amount of the transaction price allocated to performance
obligations that were unsatisfied as of September 30, 2020 is $69.4 million . Of
this total, $64.9 million is expected to be satisfied within the next twelve
months and the remaining balance of $4.5 million is expected to be satisfied
thereafter.
RESULTS OF OPERATIONS
NINE MONTHS ENDED
2019
The following table presents our segment operating income from continuing
operations for the nine months ended
2020 2019
Electrical construction
Revenue $ 137,794,907 $ 123,773,883
Operating expenses
Costs of goods sold 114,042,479 105,597,926
Selling, general and administrative 2,209,336 1,544,821
Depreciation and amortization 8,839,030
7,955,556
Loss (gain) on sale of property and equipment 2,846 (46,760 ) Total costs and expenses 125,093,691 115,051,543 Operating income$ 12,701,216 $ 8,722,340 Real estate development Revenue$ 3,250,563 $ 12,819,473 Operating expenses Costs of goods sold 2,187,998 9,360,449 Selling, general and administrative 766,099
1,478,627
Depreciation and amortization 25,013
18,690
Gain on sale of property and equipment - (17,099 ) Total costs and expenses 2,979,110 10,840,667 Operating income$ 271,453 $ 1,978,806 Operating income equals total operating revenue less operating costs and expenses inclusive of depreciation and amortization, and selling, general and administrative expenses. Operating costs and expenses also include any gains or losses on the sale of property and equipment. Operating income excludes interest expense, interest income, other income and income taxes.
Revenue
Total revenue for the nine months endedSeptember 30, 2020 increased to$141.0 million , an increase of$4.5 million , or 3.3%, from$136.6 million for the same period in 2019. The increase in revenue was attributable to the increase in electrical construction revenue, partially offset by the decrease in real estate development revenue. 21
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Electrical construction operations revenue increased to$137.8 million , an increase of$14.0 million , or 11.3%, from$123.8 million for the same period in 2019. The increase in electrical construction revenue was mainly attributable to increases in projects awarded and work completed in the Southeast and Texas-Southwest regions of$7.7 million and$6.8 million , respectively. These increases were partially offset by decreases in the mid-Atlantic region of$2.0 million . The increase in the Southeast region was mainly due to increased transmission project volume under both master service agreements ("MSAs") and non-MSAs. The increases in the Texas-Southwest region were primarily due to continued growth in MSA project activity including service line expansion. Also contributing to the increases in revenue was an increase in revenue categorized as Other, mainly for storm work. The decrease in the mid-Atlantic region was due to lower MSA customer project activity, primarily for the first half of 2020. Revenue from real estate development operations decreased to$3.3 million for the nine months endedSeptember 30, 2020 from$12.8 million in the same period in 2019, due to the decrease in the number and the type of units sold and the timing of completion of units available for sale.
Backlog
Our backlog represents future services to be performed under existing project-specific fixed-price and maintenance contracts and the estimated value of future services that we expect to provide under our existing MSAs.
The following table presents our total backlog as ofSeptember 30, 2020 and 2019 along with an estimate of the backlog amounts expected to be realized within 12 months and during the life of each of the MSAs. When awarded, our MSA initial terms range from one to seven years. The existing MSAs include two one-year renewals with certain customers, representing$102.2 million , or 32.6% of our total estimated MSA backlog as ofSeptember 30, 2020 . September 30, 2020 September 30, 2019 Electrical Construction 12-Month Total 12-Month Total
Project-Specific Firm Contracts (1)
$ 48,420,612 $ 52,865,820 Estimated MSAs 85,975,136 313,911,324 47,628,669 134,645,726 Total$ 151,241,296 $ 385,183,504 $ 96,049,281 $ 187,511,546 ______________________________________ (1) Amount includes firm contract awards under MSA agreements. Our total backlog as ofSeptember 30, 2020 increased$197.7 million , or 105.4% to$385.2 million , compared to$187.5 million as ofSeptember 30, 2019 . The increase in total backlog was mainly due to the increase in the total amount of estimated MSA work, primarily attributable to the award of three new MSAs during the twelve months endingSeptember 30, 2020 . Our 12-month backlog as ofSeptember 30, 2020 increased 57.5% to$151.2 million , from$96.0 million as ofSeptember 30, 2019 , mainly due to the increase in estimated MSA work attributable to the award of new MSAs, as well as an increase in the amount of firm MSA project activity. Backlog is estimated at a particular point in time and is not determinative of total revenue in any particular period. It does not reflect future revenue from a significant number of short-term projects undertaken and completed between the estimated dates. The estimated amount of backlog for work under MSAs is calculated by using recurring historical trends inherent in current MSAs and projected customer needs based upon ongoing communications with the customer. Our estimated backlog also assumes exercise of existing customer renewal options. Certain MSAs are not exclusive to the Company and, therefore, the size and number of projects we may be awarded cannot be determined with certainty. Accordingly, the amount of future revenue from MSA contracts may vary substantially from reported backlog. Even if we realize all the revenue from the projects in our backlog, there is no guarantee of profit from the projects awarded under MSAs. As ofSeptember 30, 2020 and 2019, estimated MSAs accounted for approximately 81.5% and 71.8% of total backlog, respectively. We plan to continue to grow our MSA business. MSA contracts are generally multi-year and we believe provide improved operating efficiencies. 22
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Reconciliation of Electrical Construction Backlog to our Remaining Unsatisfied Performance Obligation
The following table presents a reconciliation of our total backlog as ofSeptember 30, 2020 to our remaining unsatisfied performance obligation as defined under GAAP: September 30, 2020 Total backlog$ 385,183,504 Estimated MSAs (313,911,324 ) Estimated firm (1) (1,836,420 ) Total unsatisfied performance obligation$ 69,435,760 ______________________________________ (1) Represents estimated backlog contract value as ofSeptember 30, 2020 , on projects awarded. Backlog is a non-GAAP financial measure however it is a common measurement used in our industry. We believe this measure enables management to more effectively forecast our future capital needs and results and better identify future operating trends that may not otherwise be apparent. We believe this measure is also useful for investors in forecasting our future results and comparing us to our competitors. While we believe that our methodology of calculation is appropriate, such methodology may not be comparable to that employed by some other companies. Given the duration of our contracts and MSAs and our method of calculating backlog, our backlog at any point in time may not accurately represent the revenue that we expect to realize during any period and our backlog as of the end of a fiscal year may not be indicative of the revenue we expect to earn in the following fiscal year and should not be viewed or relied upon as a stand-alone indicator. Consequently, we cannot provide assurance as to our customers' requirements or our estimates of backlog.
The amount of backlog differs from the amount of our remaining unsatisfied
performance obligations partially satisfied as of
Revenue estimates included in our backlog may be subject to change as a result of project accelerations, additions, cancellations or delays due to various factors, including but not limited to: commercial issues, material deficiencies, permitting, regulatory requirements and adverse weather. Our customers are not contractually committed to a specific level of services under our MSAs. While we did not experience any material cancellations during the current period, most of our contracts may be terminated, even if we are not in default under the contract.
Operating Results
Total operating income for the nine months endedSeptember 30, 2020 increased to$7.3 million , an increase of$0.6 million , or 9.8%, from$6.6 million for the same period in 2019. This increase was primarily attributable to higher electrical construction gross profit partially offset by higher selling, general and administrative and depreciation expenses and lower real estate development gross profit. Gross margin on electrical construction operations for the nine months endedSeptember 30, 2020 grew to 17.2%, from 14.7% for the same period in 2019. The increase in gross margin was primarily attributable to increased MSA activity with transmission customers and service line expansion in the Texas-Southwest region. Also contributing to the increase in gross margin was higher foundation construction activity with improved margins. These increases were partially offset by lower transmission project activity, mainly due to the delayed start-up of a newly awarded MSA in our mid-Atlantic region, primarily in the first half of 2020. Such gross margin represents electrical construction revenue less electrical construction costs and expenses (excluding depreciation and amortization, selling, general and administrative expenses, and any gains or losses on the sale of property and equipment), divided by electrical construction revenue. Gross margin on real estate development for the nine months endedSeptember 30, 2020 increased to 32.7%, from 27.0% for the same period in 2019. This increase was due to the type of units sold in the nine months endedSeptember 30, 2020 when compared to the same period in 2019. Such gross margin represents real estate development revenue less real estate development costs and expenses (excluding depreciation and amortization, selling, general and administrative expenses, and gains or losses on sale of property and equipment), divided by real estate development revenue. 23
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The following table provides a reconciliation of our net income to EBITDA (a non-GAAP financial measure) for the nine months endedSeptember 30, 2020 and 2019: 2020 2019 Net income (GAAP as reported)$ 5,033,192 $ 3,760,745 Interest expense, net of amount capitalized 761,118 1,130,798 Provision for income taxes 1,665,769 1,902,034 Depreciation and amortization (1) 8,950,772 8,048,549 EBITDA$ 16,410,851 $ 14,842,126 ______________________________________ (1) Depreciation and amortization includes depreciation on property, plant and equipment and amortization of finite-lived intangible assets. EBITDA, a non-GAAP performance measure used by management, is defined as net income plus: interest expense, provision for income taxes and depreciation and amortization, as shown in the table above. EBITDA, a non-GAAP financial measure, does not purport to be an alternative to net income as a measure of operating performance or to net cash flows provided by operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly-titled measures of other companies. We use, and we believe investors benefit from the presentation of, EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our consolidated financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company's operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Using EBITDA as a performance measure has material limitations as compared to net income, or other financial measures as defined under GAAP as it excludes certain recurring items which may be meaningful to investors. EBITDA excludes interest expense; however, as we have borrowed money in order to finance transactions and operations, interest expense is an element of our cost structure and can affect our ability to generate revenue and returns for our stockholders. Further, EBITDA excludes depreciation and amortization; however, as we use capital and intangible assets to generate revenues, depreciation and amortization are a necessary element of our costs and ability to generate revenue. Finally, EBITDA excludes income taxes; however, as we are organized as a corporation, the payment of taxes is a necessary element of our operations. As a result of these exclusions from EBITDA, any measure that excludes interest expense, depreciation and amortization and income taxes has material limitations as compared to net income. When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA and net income in each period, so as to allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after-tax basis. Using both EBITDA and net income to evaluate the business allows management and investors to (a) assess our relative performance against our competitors and (b) monitor our capacity to generate returns for our stockholders. Costs and Expenses Total costs and expenses increased by$3.8 million to$133.8 million for the nine months endedSeptember 30, 2020 , from$130.0 million for the same period in 2019, commensurate with the higher level of electrical construction operations, as well as increases in selling, general and administrative and depreciation expenses, partially offset by lower real estate development operation expenses.
The following table sets forth selling, general and administrative ("SG&A")
expenses for the nine months ended
2020 2019
Electrical construction $ 2,209,336 $ 1,544,821
Real estate development 766,099 1,478,627
Corporate 5,605,930 4,009,796
Total $ 8,581,365 $ 7,033,244
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SG&A expenses increased 22.0% to$8.6 million for the nine months endedSeptember 30, 2020 , from$7.0 million for the same period in 2019. Approximately$1.4 million of the increase in SG&A expenses was due to the settlement of amounts owed, including employment agreement and death benefits, to the estate of our former Chief Executive Officer who passed away inAugust 2020 . As a percentage of revenue, SG&A expenses increased to 6.1% from 5.1% for the same period in 2019, due primarily to the aforementioned increase in SG&A expenses.
The following table sets forth depreciation and amortization expense for the
nine months ended
2020 2019
Electrical construction $ 8,839,030 $ 7,955,556
Real estate development 25,013 18,690
Corporate 86,729 74,303
Total $ 8,950,772 $ 8,048,549
Depreciation and amortization expense increased $0.9 million , or 11.2%, to $9.0
million for the nine months ended September 30, 2020 , from $8.0 million for the
nine months ended September 30, 2019 , as a result of an increase in capital
expenditures.
Income Taxes
The following table presents our provision for income tax and effective income tax rate from continuing operations for the nine months endedSeptember 30, 2020 and 2019: 2020 2019 Income tax provision$ 1,665,769 $ 1,902,034 Effective income tax rate 24.9 % 33.6 % Prior to adjustments to reflect the impact of the enactment of the CARES Act inMarch 2020 , our expected tax rate for the year endingDecember 31, 2020 , calculated based on our estimated annual operating results for the year, was 32.2%. However, due to the favorable impact of discrete items of 4.9%, the majority of which are related to the CARES Act, our resulting expected annual rate is 27.3%. Our expected tax rate differs from the federal statutory rate of 21% due to nondeductible expenses and state income taxes offset by the discrete items. Our effective tax rate for the nine months endedSeptember 30, 2020 was 24.9% and differs from the federal statutory rate of 21% due to nondeductible expenses and state income taxes offset by the impact of discrete items totaling$492,000 . The discrete items were recorded in connection with the net operating loss carryback provisions of the CARES Act and to a lesser extent a state mandated income tax refund. Our effective tax rate is lower than our expected annual tax rate of 27.3% due to the impact of discrete items reported, which will reduce over the year. Our effective tax rate for the nine months endedSeptember 30, 2019 was 33.6% and differs from the federal statutory rate of 21% due to nondeductible expenses and state income taxes. The decrease in our 2020 expected tax rate when compared to 2019 is attributable to the effects of the CARES Act and other discrete items. 25
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THREE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2019 The following table presents our operating income (loss) from continuing
operations for the three months ended
2020 2019
Electrical construction
Revenue $ 48,056,897 $ 43,182,197
Operating expenses
Costs of goods sold 39,640,718 36,789,515
Selling, general and administrative 573,488 523,899
Depreciation and amortization 3,018,610 2,695,012
Gain on sale of property and equipment (25,831 ) (45,504 )
Total costs and expenses 43,206,985 39,962,922
Operating income $ 4,849,912 $ 3,219,275
Real estate development
Revenue $ 364,900 $ 1,550,684
Operating expenses
Costs of goods sold 244,813 1,031,373
Selling, general and administrative 218,453 351,242
Depreciation and amortization 8,411 6,926
Total costs and expenses 471,677 1,389,541
Operating (loss) income $ (106,777 ) $ 161,143
Operating income (loss) equals total operating revenue less operating costs and
expenses inclusive of depreciation and amortization, and selling, general and
administrative expenses. Operating costs and expenses also include any gains or
losses on the sale of property and equipment. Operating income (loss) excludes
interest expense, interest income, other income and income taxes.
Revenue
Total revenue for the three months endedSeptember 30, 2020 increased to$48.4 million , an increase of$3.7 million , or 8.2%, from$44.7 million for the same period in 2019, due to the increase in electrical construction operations revenue, partially offset by the decline in real estate development activity. Electrical construction operations revenue increased to$48.1 million , an increase of$4.9 million , or 11.3%, from$43.2 million for the same period in 2019. The increase in electrical construction revenue was mainly attributable to increases in projects awarded and work completed in the mid-Atlantic region of$3.3 million and the Southeast region of$1.9 million , partially offset by a decrease in the Texas-Southwest region of$1.1 million . The increase in the mid-Atlantic region was primarily due to an increase in MSA project activity across all service lines. The increase in the Southeast region was mainly due to increases in both MSA and non-MSA project activity. Also contributing to the increases in revenue was an increase in revenue categorized as Other, primarily for storm work. The decrease in the Texas-Southwest region was primarily due to a decrease in MSA project volume, mainly transmission work, for the three months endedSeptember 30, 2020 , compared to the same period in 2019. Revenue from real estate development operations decreased to$0.4 million for the three months endedSeptember 30, 2020 from$1.6 million in the same period in 2019, due to the decrease in the number of units sold and the timing of completion of units available for sale.
Operating Results
Total operating income for the three months endedSeptember 30, 2020 was$1.9 million , a decrease of$0.2 million , from$2.1 million for the same period in 2019. This decrease was primarily attributable to higher selling, general and administrative and depreciation expenses, as well as lower real estate development gross profit, partially offset by higher electrical construction gross profit. 26
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Gross margin on electrical construction operations for the three months endedSeptember 30, 2020 grew to 17.5%, from 14.8% for the same period in 2019. The increase in gross margin was primarily attributable to the increase in project activity in our expanded service lines at higher margins across all regions. Such gross margin represents electrical construction revenue less electrical construction costs and expenses (excluding depreciation and amortization, selling, general and administrative expenses, and any gains or losses on the sale of property and equipment), divided by electrical construction revenue. Gross margin on real estate development for the three months endedSeptember 30, 2020 decreased to 32.9%, from 33.5% for the same period in 2019. This decrease was due to the type of units sold in the three months endedSeptember 30, 2020 , when compared to the same period in 2019.
Such gross margin represents real estate development revenue less real estate development costs and expenses (excluding depreciation and amortization, selling, general and administrative expenses, and (gain) loss on sale of property and equipment), divided by real estate development revenue.
The following table provides a reconciliation of our net income to EBITDA (a non-GAAP financial measure) for the three months endedSeptember 30, 2020 and 2019: 2020 2019 Net income (GAAP as reported)$ 1,091,751 $ 1,162,002 Interest expense, net of amount capitalized 215,063 367,244 Provision for income taxes 632,467 592,413 Depreciation and amortization (1) 3,056,457 2,728,988 EBITDA$ 4,995,738 $ 4,850,647 ______________________________________ (1) Depreciation and amortization includes depreciation on property, plant and equipment and amortization of finite-lived intangible assets. EBITDA, a non-GAAP performance measure used by management, is defined as net income plus: interest expense, provision (benefit) for income taxes and depreciation and amortization, as shown in the table above. EBITDA, a non-GAAP financial measure, does not purport to be an alternative to net income as a measure of operating performance or to net cash flows provided by operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly-titled measures of other companies. We use, and we believe investors benefit from the presentation of, EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company's operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Using EBITDA as a performance measure has material limitations as compared to net income, or other financial measures as defined under GAAP as it excludes certain recurring items which may be meaningful to investors. EBITDA excludes interest expense; however, as we have borrowed money in order to finance transactions and operations, interest expense is an element of our cost structure and can affect our ability to generate revenue and returns for our stockholders. Further, EBITDA excludes depreciation and amortization; however, as we use capital and intangible assets to generate revenues, depreciation and amortization are a necessary element of our costs and ability to generate revenue. Finally, EBITDA excludes income taxes; however, as we are organized as a corporation, the payment of taxes is a necessary element of our operations. As a result of these exclusions from EBITDA, any measure that excludes interest expense, depreciation and amortization and income taxes has material limitations as compared to net income. When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA and net income in each period, so as to allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after-tax basis. Using both EBITDA and net income to evaluate the business allows management and investors to (a) assess our relative performance against our competitors and (b) monitor our capacity to generate returns for our stockholders. 27
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Table of Contents Costs and Expenses Total costs and expenses increased by$3.9 million to$46.5 million for the three months endedSeptember 30, 2020 , from$42.7 million for the same period in 2019, commensurate with the higher level of electrical construction operations, as well as increases in selling, general and administrative and depreciation expenses, partially offset by lower real estate development operation expenses.
The following table sets forth selling, general and administrative ("SG&A")
expenses for the three months ended
2020 2019
Electrical construction $ 573,488 $ 523,899
Real estate development 218,453 351,242
Corporate 2,841,858 1,287,219
Total $ 3,633,799 $ 2,162,360
SG&A expenses increased by $1.5 million to $3.6 million from $2.2 million for
the three months ended September 30, 2020 , when compared to the same period in
2019. Approximately $1.4 million of the increase in SG&A expenses was due to the
settlement of amounts owed, including employment agreement and death benefits,
to the estate of our former Chief Executive Officer who passed away in August
2020 . As a percentage of revenue, SG&A expenses increased to 7.5% for 2020, from
4.8% for the same period in 2019, due primarily to the aforementioned increase
in SG&A expenses.
The following table sets forth depreciation and amortization expense for the
three months ended
2020 2019
Electrical construction $ 3,018,610 $ 2,695,012
Real estate development 8,411 6,926
Corporate 29,436 27,050
Total $ 3,056,457 $ 2,728,988
Depreciation and amortization expense increased $0.3 million , or 12.0%, to $3.1
million for the three months ended September 30, 2020 , from $2.7 million for the
three months ended September 30, 2019 , as a result of an increase in capital
expenditures.
Income Taxes
The following table presents our provision for income tax and effective income
tax rate from continuing operations for the three months ended September 30,
2020 and 2019:
2020 2019
Income tax provision
Our effective tax rate for the three months endedSeptember 30, 2020 was 36.7% and differs from the federal statutory rate of 21% due to nondeductible expenses and state income taxes offset by the impact of discrete items. It is higher than our expected annual tax rate of 27.3% due to current quarter increases in discrete items and nondeductible expenses in relation to expected income from prior quarters. Our effective tax rate for the three months endedSeptember 30, 2019 was 33.8% and differs from the federal statutory rate of 21% due to nondeductible expenses and state income taxes. Liquidity and Capital Resources
Working Capital Analysis
Our primary cash needs have been for capital expenditures and working capital. Our primary sources of cash have been cash flow from operations and borrowings under our lines of credit and equipment financing. As ofSeptember 30, 2020 , we had cash and cash equivalents of$20.6 million and working capital of$40.2 million , as compared to cash and cash equivalents of$23.3 million , and working capital of$36.7 million as ofDecember 31, 2019 . In addition to cash flow from operations, we have a$23.0 million revolving line of credit, of which$12.3 million was available for borrowing as ofSeptember 30, 2020 . This revolving line of credit is used as a Working Capital Loan, as discussed in note 5 to the consolidated financial statements. As a credit guarantor toTruist Bank , we are contingently liable for the guaranty of a subsidiary obligation under an irrevocable letter of credit primarily related to workers' compensation. The amount of this letter of credit was$0.7 28
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million and$0.6 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, and is deducted from the amount available for borrowing under the Working Capital Loan. OnOctober 5, 2020 , the Company made a payment of$5.0 million on the Working Capital Loan. We anticipate that this cash on hand, our credit facilities and our future cash flows from operating activities will provide sufficient cash to enable us to meet our operating needs and debt requirements for the next twelve months.
Cash Flow Analysis
The following table presents our net cash flows for each of the nine months
ended
2020 2019
Net cash provided by operating activities$ 1,948,222 $
20,372,833
Net cash used in investing activities (12,713,999 ) (15,757,076 ) Net cash provided by financing activities 8,087,500
4,601,233
Net (decrease) increase in cash and cash equivalents
9,216,990 Operating Activities Cash flows from operating activities are comprised of net income, adjusted to reflect the timing of cash receipts and disbursements therefrom. Our cash flows are influenced by the level of operations, operating margins and the types of services we provide, as well as the stages of our electrical construction projects. Cash provided by our operating activities totaled$1.9 million for the nine months endedSeptember 30, 2020 , compared to cash provided by operating activities of$20.4 million for the same period in 2019. The decrease in cash flows from operating activities was approximately$18.4 million and was mainly due to the changes in our costs and estimated earnings in excess of billings on uncompleted contracts, which totaled a decrease of$13.9 million and the changes in our residential properties under construction which totaled a decrease of$5.7 million . Operating cash flows normally fluctuate relative to the needs of our electrical construction and real estate development projects.
Investing Activities
Cash used in investing activities for the nine months endedSeptember 30, 2020 , was$12.7 million , compared to cash used in investing activities of$15.8 million for the same period in 2019. The decrease in cash used in our investing activities for the nine months endedSeptember 30, 2020 , when compared to 2019, is primarily attributable to the decrease in capital expenditures for the nine months endedSeptember 30, 2020 , when compared to the same period in 2019. Capital expenditures for the nine months endedSeptember 30, 2020 were$13.0 million , compared to capital expenditures of$16.2 million for the same period in 2019. Our capital spending for the nine months endedSeptember 30, 2020 of$13.0 million includes assets placed in service in 2019 but not paid until 2020 totaling$0.1 million . Our capital spending for the nine months endedSeptember 30, 2019 of$16.2 million includes assets placed in service in 2018, but not paid until 2019 totaling$2.5 million . Our capital spending for 2020 is expected to total approximately$16.2 million . Our capital expenditures are mainly for the purchases of equipment, primarily trucks and heavy machinery, used by our electrical construction operations for the upgrading and replacement of equipment. The majority of our capital budget is for continued expansion and upgrading of our fleet and the conversion of leases for our electrical construction operations. We plan to fund these purchases through our cash on hand and equipment financing, consistent with past practices.
Financing Activities
Cash provided by financing activities for the nine months endedSeptember 30, 2020 was$8.1 million , compared to cash provided by financing activities of$4.6 million for the same period in 2019. Our financing activities for the nine months endedSeptember 30, 2020 consisted of borrowings of$10.0 million on our Working Capital Loan, borrowings of$4.5 million on our$4.5 Million Equipment Loan, repayments of$5.9 million on our$38.2 Million Equipment Loan and repayments of$0.6 million on our$4.5 Million Equipment Loan (as these loans are defined in note 5 to the consolidated financial statements). Our financing activities for the nine months endedSeptember 30, 2019 consisted of borrowings of$15.5 million and repayments of$5.4 million on our$38.2 Million Equipment Loan, repayments of$5.0 million (as these loans are defined in note 5 to the consolidated financial statements) and repayments of$0.3 million on our other long-term debt, as well as debt issuance costs of$58,000 . Our financing activities for the nine months endedSeptember 30, 2019 , also included the repurchase of 67,709 shares of common stock totaling$161,000 . 29
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We have paid no cash dividends on our Common Stock since 1933, and it is not expected that we will pay any cash dividends on our Common Stock in the immediate future.
Days of Sales Outstanding Analysis
We evaluate fluctuations in our "accounts receivable and accrued billings" and
"costs and estimated earnings in excess of billings on uncompleted contracts,"
for our electrical construction operations, by comparing days of sales
outstanding ("DSO"). We calculate DSO as of the end of any period by utilizing
the respective quarter's electrical construction revenue to determine sales per
day. We then divide "accounts receivable and accrued billings, net of allowance
for doubtful accounts" at the end of the period, by sales per day, to calculate
DSO for accounts receivable. To calculate DSO for costs and estimated earnings
in excess of billings, we divide "costs and estimated earnings in excess of
billings on uncompleted contracts," by sales per day.
For the quarters ended September 30, 2020 and 2019, our DSO for accounts
receivable and accrued billings were 52 and 49, respectively, and our DSO for
costs and estimated earnings in excess of billings on uncompleted contracts were
47 and 28, respectively. The increase in our DSO for costs and estimated
earnings in excess of billings and the increase in our DSO for accounts
receivable for the quarter ended September 30, 2020 , when compared to the same
quarterly period in 2019, was mainly due to the timing of project billings and
cash collections. As of November 3, 2020 , we have received approximately 92.1%
of our September 30, 2020 outstanding trade accounts receivable and have billed
40.6% of our costs and estimated earnings in excess of billings balance.
Income Taxes Paid
Net income tax refunded was$324,000 for the nine months endedSeptember 30, 2020 due to$2.1 million refunded for prior year income tax liability payments offset by payments of$1.7 million for the 2020 estimated tax liability and$72,000 for the 2019 tax liability. Refunds include$823,000 for the 2018 net operating loss carryback,$1.2 million for the 2018 federal tax overpayment and a state mandated$74,000 for the 2018 income tax year. Income tax payments were$480,000 for the nine months endedSeptember 30, 2019 of which$355,000 was for the 2019 estimated tax liability and the remaining$125,000 for the 2018 income tax liability. Debt Covenants Our debt arrangements contain various financial and other covenants including cross-default provisions whereby any default under any loans of the Company (or its subsidiaries) with the lender, will constitute a default under all of the other loans of the Company (and its subsidiaries) with the lender. The most significant of the covenants are: maximum debt to tangible net worth ratio and fixed charge coverage ratio. We must maintain: a tangible net worth of at least$20.0 million calculated quarterly; no more than$2.0 million in outside debt (with certain exceptions); a maximum debt to tangible net worth ratio of no greater than 2.5 : 1.0 and a fixed charge coverage ratio that is to equal or exceed 1.3 : 1.0. The fixed charge coverage ratio is calculated annually using EBITDAR (earnings before interest, taxes, depreciation, amortization and rental expense) divided by the sum of CPLTD (current portion of long-term debt), interest expense and rental expense. We were in compliance with all of our covenants as ofSeptember 30, 2020 . The following are computations of these most significant financial covenants: Actual as of Covenants Measured at Each Quarter End: Covenant September 30, 2020 Tangible net worth minimum$ 20,000,000 $ 70,588,941 Outside debt not to exceed$ 2,000,000 $ -
Maximum debt/tangible net worth ratio not to exceed 2.50 : 1.00
1.25 : 1.00
Covenants Measured Only at Year End:
Earnings to fixed charge coverage ratio must equal
or exceed 1.30 : 1.00 2.37 : 1.00
Forecast
We anticipate our cash on hand and cash flows from operations and credit
facilities will provide sufficient cash to enable us to meet our working capital
needs, debt service requirements and planned capital expenditures, for at least
the next twelve months. The amount of our planned capital expenditures will
depend, to some extent, on the results of our future performance. Currently, our
capital expenditures have continued as planned. However, our revenue, results of
operations and cash flows, as well as our ability to seek additional financing,
may be negatively impacted by factors including, but not limited to: a decline
in demand for electrical construction services, general economic conditions,
heightened competition, availability of construction materials, increased
interest rates, adverse weather conditions and any adverse effects of the
COVID-19 pandemic.
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Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
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