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GOLDFIELD CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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; 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. 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 ended December 31, 2012 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 throughout much of the United States. For the three months ended March 31, 2013, our total consolidated revenue was $22.5 million. Through our subsidiary, Southeast Power Corporation ("Southeast Power"), we are engaged in the construction and maintenance of electric utility facilities for electric utilities and industrial customers, and the installation of fiber optic cable for fiber optic cable manufacturers, telecommunication companies, and electric utilities. Southeast Power performs electrical contracting services primarily in the southeastern, mid-Atlantic and western regions of the United States. Southeast Power is headquartered in Titusville, Florida and has additional offices in Bastrop, Texas and Spartanburg, South Carolina. 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 service organizations that employ personnel who perform some of the same types of service as those provided by us. In addition, a significant portion of our electrical construction revenue is derived from a small group of customers, several of which account for a substantial portion of our revenue in any given year. The relative revenue contribution by any single customer or group of customers may significantly fluctuate from period to period. For example, for the year ended December 31, 2012 and the three months ended March 31, 2013, three of our customers accounted for approximately 62% and 63% of our consolidated revenue, respectively. The loss of, or decrease in current demand from one or more of these customers, would, if not replaced by other business, result in a decrease in revenue, margins and profits, which could be material. Historically, we have reported real estate development activities as a separate segment. In recent years, our real estate activities reduced to a point that they are no longer significant for reporting purposes and, accordingly, results of our ongoing real estate operations are included in the income statement under the caption "Other." Revenue from real estate development included under the caption "Other" was $2,000 and $634,000 for the three months ended March 31, 2013 and 2012, respectively, representing approximately 0% and 3.6%, respectively, of our total revenue for such periods. We completed our last condominium project during 2007 and we have sold all of the condominium units as of September 30, 2012. No new condominium projects are presently planned and we do not hold any units for sale. Our only current real estate construction activity is the construction of a limited number of single family and townhome residential projects in Brevard County, Florida. 10 -------------------------------------------------------------------------------- Table of Contents 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 with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to fixed price electrical construction contracts and deferred tax assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed 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 disclosure with the Audit Committee of the Board of Directors. Percentage of Completion We recognize revenue from fixed price contracts on a percentage-of-completion basis, using primarily the cost-to-cost method based on the percentage of total cost incurred to date, in proportion to total estimated cost to complete the contract. Total estimated cost, and thus contract income, is impacted by several factors including, but not limited to: changes in productivity and scheduling, the cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, site conditions and scheduling that differ from those assumed in the original bid (to the extent contract remedies are unavailable), client needs, client delays in providing approvals, the availability and skill level of workers in the geographic location of the project, a change in the availability and proximity of materials, and governmental regulation, may also affect the progress and estimated cost of a project's completion and thus the timing of income and revenue recognition. 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. Due to our experience and our detailed approach in determining our cost estimates for all of our significant projects, we believe our estimates to be highly reliable. However, 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. Because we have a number of projects of varying levels of complexity and size in process at any given time, these changes in estimates can offset each other without materially impacting our overall profitability. If a current estimate of total costs indicates a loss on a contract, the projected loss is recognized in full when determined. Accrued contract losses as of March 31, 2013 and December 31, 2012, were minimal. The accrued contract losses for 2013 and 2012 are mainly attributable to transmission projects experiencing either adverse weather conditions or unexpected construction issues. Revenue from change orders, extra work, variations in the scope of work and claims is recognized when realization is probable. Deferred Tax Assets and Liabilities We account for income taxes in accordance with ASC Topic 740, Income Taxes, which establishes the recognition requirements. Deferred tax assets and liabilities are recognized for the future tax effects attributable to temporary differences and carryforwards between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. As of March 31, 2013, our deferred tax assets were largely comprised of alternative minimum tax ("AMT") credit carryforwards, real estate inventory basis differences on unsold residential units, accrued vacation and retainage payable. The carrying amounts of deferred tax assets are reduced by a valuation allowance, if based on the available evidence, it is more likely than not such assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the deferred tax assets are expected to be recovered or settled. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with loss carryforwards expiring unused, and tax planning alternatives. If we determine we will not be able to realize all or part of our deferred tax assets, a valuation allowance would be recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. Based on our assumption with respect to forecasts of future taxable income and tax planning, among others, we anticipate being able to generate sufficient taxable income to utilize our deferred tax assets. Therefore, we have not recorded a valuation allowance against deferred tax assets. The minimum amount of future taxable income required to be generated to fully realize the deferred tax assets as of March 31, 2013 is approximately $2.0 million. 11 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 The table below represents our operating income for the three months ended March 31, 2013 and 2012: 2013 2012 Revenue Electrical construction $ 22,524,301 $ 17,109,940 Other 1,762 633,600 Total revenue 22,526,063 17,743,540 Costs and expenses Electrical construction 17,551,892 12,924,484 Other 1,762 393,108Selling, general and administrative 877,765 915,525 Depreciation 1,144,569 786,257 Gain on sale of property and equipment (2,500 ) (10,565 ) Total costs and expenses 19,573,488 15,008,809 Total operating income $ 2,952,575 $ 2,734,731 Operating income is total operating revenue less operating expenses inclusive of depreciation and selling, general and administrative expenses. Operating 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 three months ended March 31, 2013, increased to $22.5 million, an increase of $4.8 million, compared to $17.7 million for the three months ended March 31, 2012, due to an increase in demand for our electrical construction services, primarily our transmission work, which represents approximately 87.6% of the total increase in electrical construction revenue. Although transmission project revenue includes several large projects throughout the Carolinas, Florida and Texas, the increase in revenue primarily occurred in Texas as a result of the South Texas Cooperative ("STEC") project. The varying magnitude and duration of electrical construction projects may result in substantial fluctuation in our backlog from time to time. Backlog represents the uncompleted portion of services to be performed under project-specific contracts and the estimated value of future services that we expect to provide under our existing service agreements, including new contractual agreements on which work has not begun. In many instances, our customers are not contractually committed to specific volumes of services and many of our contracts may be terminated with notice, therefore we do not consider any portion of our backlog to be firm. However, our customers become obligated once we provide the services they have requested. Our service agreements are typically multi-year agreements, and we include in our backlog the amount of services projected to be performed over the terms of the contracts based on our historical relationships with these customers. Our estimates of a customer's requirements during a particular future period may not be accurate at any point in time. Backlog decreased to approximately $31.9 million as of March 31, 2013, from $70.6 million as of March 31, 2012. The backlog as of March 31, 2013 included a balance of $15.1 million relating to a STEC contract awarded to Southeast Power in February 2012. As a result of Southeast Power's expansion during 2011 of its geographical footprint into Texas and establishment of permanent facilities there, Southeast Power was selected as prime contractor by STEC to build a 110 mile long 345kV transmission line, as part of a Competitive Renewable Energy Zones ("CREZ") wind generation projects. This project is scheduled to be completed in August 2013. The March 31, 2013 electrical construction operational backlog of approximately $31.9 million included approximately $28.6 million from fixed price contracts, for which revenue is recognized using percentage-of-completion, and approximately $3.3 million from service agreement contracts, for which revenue is recognized as work is performed. Of our total backlog, we expect approximately 89.3% to be completed during 2013. The March 31, 2012 backlog of $70.6 million included approximately $66.1 million from fixed price contracts and approximately $4.5 million from service agreements. Operating Results Total operating income increased by $218,000 to $3.0 million for the three months ended March 31, 2013, from $2.7 million in 2012. Electrical construction operations operating income increased by $460,000 to $3.8 million for the three months ended March 31, 2013, from $3.3 million for the three months ended March 31, 2012. Operating margins on electrical construction 12 -------------------------------------------------------------------------------- Table of Contents operations decreased to 16.9% for the three months ended March 31, 2013, from 19.6% for the three months ended March 31, 2012. This decrease was largely the result of project delays on the STEC project during the three months ended March 31, 2013, compared to no such delays during the same period in 2012. Costs and Expenses Total costs and expenses, and the components thereof, increased by $4.6 million to $19.6 million for the three months ended March 31, 2013, from $15.0 million for the three months ended March 31, 2012. Electrical construction operations cost of goods sold increased by $4.6 million to $17.6 million for the three months ended March 31, 2013, from $12.9 million for the three months ended March 31, 2012. This increase in costs corresponds to the aforementioned increase in revenue. The following table sets forth selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2013 and 2012: 2013 2012 Electrical construction operations $ 36,741 $ 74,657 Other 83,556 115,802 Corporate 757,468 725,066 Total $ 877,765 $ 915,525 SG&A expenses decreased 4.1% to $878,000 for the three months ended March 31, 2013, from $916,000 for the three months ended March 31, 2012. The decrease in SG&A expenses was mainly attributable to decreases in professional services within our electrical construction operations, as well as a decrease in selling expenses, during the three months ended March 31, 2013, when compared to 2012. These decreases were slightly offset by increases in corporate salaries and compensation, mainly attributable to the Company's expansion. As a percentage of revenue, SG&A expenses decreased to 3.9% for 2013, from 5.2% in 2012, due primarily to the aforementioned increase in revenue and decrease in SG&A expenses, during the three months ended March 31, 2013, when compared to the same period in 2012. The following table sets forth depreciation expense for the three months ended March 31, 2013 and 2012: 2013 2012 Electrical construction operations $ 1,134,424 $ 777,203 Other 2,857 576 Corporate 7,288 8,478 Total $ 1,144,569 $ 786,257 Depreciation expense increased to $1.1 million for the three months ended March 31, 2013, from $786,000 for the three months ended March 31, 2012, an increase of 45.6%. The increase in depreciation is mainly due to the increase in fixed assets purchases for new equipment, primarily for our electrical construction operations, as a result of our growth and expansion. Income Taxes The following table presents our provision for income tax and effective income tax rate from continuing operations for the three months ended March 31, 2013 and 2012: 2013 2012 Income tax provision $ 1,045,111 $ 51,232 Effective income tax rate 36.8 % 1.9 % Our expected tax rate for the year ending December 31, 2013, which was calculated based on the estimated annual operating results for the year, is 36.8%. The expected tax rate differs from the federal statutory rate of 34% primarily due to state income taxes. Our effective tax rate for the three months ended March 31, 2013, was 36.8% and reflects the annual expected tax rate. Our effective tax rate for the three months ended March 31, 2012, was 1.9%. Our income tax provision consisted of state income tax expense attributable to a subsidiary and did not reflect the federal statutory rate of 34%, due to previously unrecognized NOL and AMT credit carryforwards available to offset taxable income. Due to the impact of the deferred tax valuation allowance and the volatility in estimated future deferred taxes, our effective tax rate was based on a year-to-date income tax calculation. 13 -------------------------------------------------------------------------------- Table of Contents 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 of March 31, 2013, we had cash and cash equivalents of $2.2 million and working capital of $14.4 million, as compared to cash and cash equivalents of $7.8 million, and working capital of $18.8 million as of December 31, 2012. In addition, we had $5.0 million in an unused revolving line of credit as of March 31, 2013. This revolving line of credit is used as a Working Capital Loan, as discussed in note 4 to the consolidated financial statements. 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 three months ended March 31, 2013 and 2012: 2013 2012 Net cash provided by operating activities $ 1,712,553 $ 395,553 Net cash used in investing activities (6,354,568 ) (2,792,587 ) Net cash (used in) provided by financing activities (1,008,232 ) 963,381 Net decrease in cash and cash equivalents $ (5,650,247 ) $ (1,433,653 ) Operating Activities Cash flows from operating activities are comprised of the 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 $1.7 million for the three months ended March 31, 2013, compared to cash provided by operating activities of $396,000 for 2012. The increase in cash flows from operating activities is primarily due to the changes in our "accounts receivable and accrued billings" and the changes in the item "costs and estimated earnings in excess of billings on uncompleted contracts" during the current year. The changes reflected in the accounts receivable and accrued billings changed from $(2.7 million) for the three months ended March 31, 2012 to $(1.6 million) for the three months ended March 31, 2013. The changes reflected in the item "costs and estimated earnings in excess of billings on uncompleted contracts" changed from $(1.9 million) for the three months ended March 31, 2012 to $744,000 for the three months ended March 31, 2013. These increases in the changes to cash provided by operating activities were offset by the changes in accounts payable and accrued liabilities. The changes reflected in the item "accounts payable and accrued liabilities" changed from $3.1 million for the three months ended March 31, 2012 to $551,000 for the three months ended March 31, 2013, primarily due to the status of our accounts payable during the current period. Operating cash flows normally fluctuate relative to the status of our electrical construction projects. Days of Sales Outstanding Analysis We evaluate fluctuations in our accounts receivable 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 March 31, 2013 and 2012, our DSO for accounts receivable were 59 and 62, respectively, and our DSO for costs and estimated earnings in excess of billings on uncompleted contracts were 27 and 15, respectively. The increase in our DSO for costs and estimated earnings in excess of billings on uncompleted contracts was mainly due to an increase in costs incurred on uncompleted contracts, primarily due to costs commensurate with larger contracts. As of May 6, 2013, we have received approximately 83.8% of our March 31, 2013 outstanding trade accounts receivable and have billed 88.4% of our costs and estimated earnings in excess of billings balance. Investing Activities Cash used in investing activities for the three months ended March 31, 2013, was $6.4 million, compared to cash used of $2.8 million for 2012. The increase in cash used in our investing activities for the three months ended March 31, 2013, when 14 -------------------------------------------------------------------------------- Table of Contents compared to 2012, is primarily due to the increase in capital expenditures during the current year period. These capital expenditures are mainly attributable to purchases of equipment, primarily trucks and heavy machinery, used by our electrical construction operations for the upgrading and replacement of equipment as well as expansion efforts. Our capital budget for 2013 is expected to total approximately $10.0 million, the majority of which is for upgrading and purchases of equipment, 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 used in financing activities for the three months ended March 31, 2013, was $1.0 million, compared to cash provided by financing activities of $1.0 million for the three months ended March 31, 2012. Our financing activities for the current year consisted mainly of net repayments on our equipment loans totaling $1.0 million. Our financing activities for the three months ended March 31, 2012 consisted mainly of borrowings on our Working Capital Loan of $1.0 million, and net borrowings on our equipment loans totaling $211,000, offset by net repayments on our equipment loans totaling $248,000. See note 4 to the consolidated financial statements for more information regarding these loans. 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. 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 a minimum tangible net worth, an outside debt limitation, and a maximum debt to tangible net worth ratio. We must maintain a tangible net worth of at least $18.0 million, no more than $500,000 in outside debt (with certain exceptions), and a maximum debt to tangible net worth ratio of no greater than 2.25:1.00. We were in compliance with all of our covenants as of March 31, 2013. The following are computations of these most restrictive financial covenants: Actual as of Covenant March 31, 2013 Tangible net worth minimum $ 18,000,000 $ 29,088,937 Outside debt not to exceed 500,000 - Maximum debt/worth ratio not to exceed 2.25:1.00 1.01:1.00 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. 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, and adverse weather conditions. The transmission projects associated with CREZ are typically much larger and of greater duration than those usually undertaken by Southeast Power. These projects will require greater resources (including equipment, bank lines of credit, bonding and personnel) than encountered in our typical projects. The Company believes that it will have available adequate resources to complete any work it undertakes. Inflation As a result of relatively low levels of inflation experienced during the three months ended March 31, 2013 and 2012, inflation did not have a significant effect on our results. 15 -------------------------------------------------------------------------------- Table of Contents |