PTCK.. $0.13.. DD
From the 10K..
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 2010, Compared to Fiscal Year Ended December 31, 2009
Revenue
Revenues were $13,890,892 for the year ended December 31, 2010, an increase of $266,906, or 2%, from revenues of $13,623,986 for the year ended December 31, 2009. The increase was pretty flat compared to prior year and represents the results of a slow economy. The increase came primarily from our Fire Life Safety division offset by a decrease in our Telecommunications division.
Fire Life Safety segment revenue for the year ended December 31, 2010 and 2009 were approximately $10,681,000 or 77% and $9,342,000 or 69% of total revenue, respectively. The increase in revenue was hard work and diligence by our sales group in mining new markets and customers previously not worked with. We hope to continue looking and winning opportunities in these markets, as well as expansion in to some other related market segments. Management believes, but cannot guarantee, that this segment’s revenues will increase steadily in the following quarters.
Telecommunication segment revenue for the year ended December 31, 2010 and 2009 was approximately $3,209,000 or 23% and $4,282,000 or 31% of total revenue, respectively. The large contract that has supported this group is starting to wind down. While there could be additional opportunities with this customer, management is reviewing how to gain traction into other areas where this segment has specialized licensing opportunities that some of the competition does not have at its disposable. Management is exploring the means to leverage these opportunities and relationships in these trying times.
Cost of Revenue
Cost of revenue consists of direct costs on contracts such as direct labor, design, materials, third party subcontractors, and certain other direct overhead costs. Our cost of revenue was $9,119,909 or 66% of revenue for the year ended December 31, 2010, compared to $8,064,534 or 59% for the same period of the prior year. The dollar increase in our total cost of revenue is due primarily to the corresponding increase in the percentage of cost of sales during the year ended December 31, 2010. The cost of revenue percentage is expected to vary depending on our mix of project revenue and segment revenue. The cost increase is representative of current economic conditions tightening margins, especially on contract type jobs. The Company feels it is imperative that they be competitive without underbidding to win jobs.
Fire Life Safety segment cost of revenue and cost of revenue as a percentage of revenue for the year ended December 31, 2010 and 2009 was approximately $6,117,000 and 57% and $4,789,000 and 51%, respectively. The dollar increase in our cost of revenue is primarily due to the corresponding increase in revenues during the year ended December 31, 2010, as well as an increase in dollars due to higher cost of sales as a percentage of sales. The change in cost of revenue as a percentage of revenue was due to the blend of project revenue attributable to our existing operations and the more competitive bid environment reducing the margins available on work won.
Telecommunication segment cost of revenue and cost of revenue as a percentage of revenue for the year ended December 31, 2010 and 2009 was approximately $3,002,000 and 94% and $3,276,000 and 77%, respectively. The dollar decrease in cost of revenue is primarily due to the reduction in sales. The increase in cost of revenue as a percentage of revenue was due to the blend of project revenue attributable to our existing operations, plus the cost of initial expansion into additional segments of the telecommunications market. The division is also review some cost recuperation credits with two of its subcontractors in relation to incorrect billings during 2010. We are also addressing recuperating costs from a major customer in relation to billing and cost issues on a project. Management hopes to solve some of these issues during the first and second quarters of 2011. Management believes, but cannot guarantee, that some of the administrative costs should be better leveraged as this division grows.
Selling, general and administrative
Selling, general and administrative expenses were $4,314,596 for the year ended December 31, 2010 compared to $5,821,543 for the year ended December 31, 2009, a reduction of $1,506,947. The selling, general and administrative cost related to revenues decreased to 31% for year ended December 31, 2010 as compared to 43% for the year ended December 31, 2009. The Company is working hard on keeping these costs controlled in order to keep leveraged as revenues increased. We also recognize the importance of being staffed appropriately to allow for timely and accurate distribution of information to allow management to properly do their jobs.
The decrease is primarily a result of a decrease in legal and accounting expense of approximately $144,000 due to defense of the union and bank lawsuits, for which the union suit has been settled and decrease in accounting fees associated with review and reporting requirements. Prior to the merger, we were not required to have annual audits or quarterly reviews, causing extra costs the reviews and audits of 2009 to catch up the past reporting periods. The remainder of the decrease was primarily attributable to salaries and benefits of reduced staffing levels, consolidation of rents and an older fleet which has reduced our vehicle leasing costs.
Depreciation and amortization
Depreciation and amortization expense increased to $263,784 for the year ended December 31, 2010 compared to $245,090 in the year ended December 31, 2009. The increase came primarily from the amortization related to deferred finance costs of the capital raise in April 2010, plus increase in depreciation due to the leasehold improvements from 2009, offset by the reduction in the amortization of the intangibles from the Conesco purchase. This amortization finalized in August 2010.
Interest
Net interest expense increased to $139,351 for the year ended December 31, 2010 compared expense of $94,900 for the year ended December 31, 2009. This change was primarily due to the increase in interest expense due to full use of the line of credit for working capital purposes, notes payable and fees and costs of late payments due to tight cash constraints.
Income Tax
Income tax benefit decreased to $80,490 for the year ended December 31, 2010 from $174,901 for the year ended December 31, 2009. This is a $94,411 decrease in benefit due mainly to the movement of the section 481a adjustment of $424,814 from deferred status at December 31, 2009 to current at December 31, 2010.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. A summary of the critical accounting policies and the judgments that we make in the application of those policies is presented in Note C to our consolidated financial statements.
Our consolidated financial statements are based on the selection of accounting policies and the application of accounting estimates, some of which require management to make significant assumptions. Actual results could differ materially from the estimated amounts. The following accounting policies are critical to understanding and evaluating our reported financial results:
Revenue Recognition
We recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. We also recognizes revenue from non-fixed price (time and materials) contracts. The revenue from these contracts is billed monthly and is based on actual time and material costs which have occurred on the job for the billing period.
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. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.
Revenue on contracts can be derived from different disciplines and is accounted for on a consolidated basis by job to see overall performance, as well as the ability to break the job down by discipline to see how each contributes to the overall performance of the job.
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts”, represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” or “accruals on uncompleted contracts” represents billings in excess of revenues recognized.
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