10-Q: Energy Services Reports Strong Q1 Growth, Net Income Up 198%

Energy Services of America Corporation announced a significant increase in revenue and net income for the first fiscal quarter, driven by strong performance in gas and water infrastructure projects.

Summary

• Total revenues increased by 13.4% to $114.1 million for the three months ended December 31, 2025, compared to $100.6 million in the prior year.
• Net income surged by 198.6% to $2.7 million for the three months ended December 31, 2025, up from $853,733 in the same period last year.
• Earnings per share (basic and diluted) rose to $0.16 from $0.05 year-over-year.
• Gross profit increased by 36.3% to $14.0 million, with the gross profit percentage improving from 10.2% to 12.3%.
• The company's unaudited backlog grew to $301.4 million at December 31, 2025, from $259.7 million at September 30, 2025.
• The SBA's review of $9.8 million in Paycheck Protection Program (PPP) loan forgiveness is ongoing, leading to a restatement of prior financial statements and the recording of a short-term borrowing for the full amount plus accrued interest.
• The company was in compliance with all debt covenants at December 31, 2025, except for the debt service coverage ratio, for which a waiver was received from its lender.

Sentiment

Score: 8

Explanation: StockSavvy.ai views this as a strong quarter with significant growth in key segments and improved profitability, despite some minor headwinds and ongoing PPP loan uncertainty. The increased backlog points to continued positive momentum.

Positives

• Total revenues increased by $13.5 million (13.4%) to $114.1 million for the three months ended December 31, 2025.
• Net income for the quarter was $2.7 million, a substantial increase from $854,000 in the prior year, representing a 198.6% growth.
• Earnings per share (basic and diluted) increased to $0.16 from $0.05.
• Gross profit rose by $3.7 million (36.3%) to $14.0 million, with the gross profit margin improving from 10.2% to 12.3%.
• Underground Infrastructure Construction revenues increased by $16.4 million (31.0%), driven by growth in natural gas and water distribution and two new natural gas transmission projects.
• Gas & Petroleum Transmission gross profit saw a significant increase of $2.9 million (311.9%) due to new transmission projects.
• The company's unaudited backlog increased to $301.4 million at December 31, 2025, from $259.7 million at September 30, 2025, indicating strong future project opportunities.
• Cash and cash equivalents increased by $4.4 million to $16.7 million at December 31, 2025.
• The company was in compliance with most financial covenants at December 31, 2025, and received a waiver for the debt service coverage ratio.

Negatives

• Electrical, Mechanical, & General construction services revenues decreased by $1.5 million (-3.0%) to $49.4 million.
• Industrial Construction income from operations decreased by $339,000 (-17.9%) due to less work performed and increased indirect operating expenses.
• Building Construction revenues decreased by $1.2 million (-10.0%) and income from operations decreased by $83,000 (-14.2%) due to decreased volume of work.
• Unallocated shop expenses increased by $570,000 (84.6%) to $1.2 million, primarily due to higher depreciation, insurance, and equipment repair costs without an offsetting increase in internal equipment charges.
• Interest expense increased by $506,000 to $990,000, mainly due to increased line of credit borrowings.
• Gain on sale of equipment decreased by $177,000, as no comparable sales occurred in the current quarter.
• The company did not meet the debt service coverage covenant at December 31, 2025, requiring a waiver from its lender.

Risks

• There is a possibility that the SBA could reverse its previous determination on the forgiveness of the $9.8 million PPP Loans, demanding repayment and potentially assessing penalties.
• The accuracy of revenue and profit recognition depends on estimates of contract costs, which can be affected by factors like original bid completeness, scope changes, labor/material costs, delays, subcontractor performance, site conditions, and customer administration.
• The pipeline industry is highly cyclical, and the company's business volume may be adversely affected by fluctuations in energy prices and customer capital expenditures.
• The ability to obtain bonding for future contracts is crucial, and the company may be required to post letters of credit or other collateral, reducing borrowing capabilities.
• The company is subject to credit risk from customers, although it generally has statutory lien rights.
• An ongoing withdrawal liability claim from a pension plan, totaling $41,000 in quarterly installments, is under negotiation, and while payments are suspended, the outcome is uncertain.
• Materially incorrect estimates of bad debt reserves could result in unexpected losses.
• Materially incorrect estimates of goodwill and intangible asset impairment could result in a loss in profitability.
• Materially incorrect estimates of depreciation and amortization and/or the useful lives of assets could significantly impact the value of long-lived assets and profitability.

Future Outlook

The company anticipates continued growth, citing significant bid opportunities for water and wastewater projects, natural gas transmission and distribution projects, and electrical, mechanical, and general construction projects. The increased backlog of $301.4 million at December 31, 2025, supports this positive outlook, with specific projections for Gas & Water Distribution and Gas & Petroleum Transmission backlog at $161.7 million and Electrical, Mechanical, & General backlog at $139.7 million. However, the company cautions that there is no assurance of successful bids or that awarded projects will proceed.

Management Comments

• Management is focused on growing the natural gas and water distribution business lines, which contributed to a $16.4 million increase in Underground Infrastructure Construction revenues.
• The increase in Gas & Petroleum Transmission gross profit was primarily due to two new transmission projects awarded in the first quarter of fiscal year 2026.
• Management believes its experience allows it to create materially reliable estimates for revenue and profit recognition, despite factors that can contribute to changes in contract cost and profitability.
• Management projects to meet all non-waived covenant requirements for the next twelve months.

Industry Context

StockSavvy.ai notes that the company's strong performance in natural gas and water distribution aligns with ongoing infrastructure investment trends in the mid-Atlantic and central U.S., particularly for utility upgrades and new transmission projects. The significant increase in backlog suggests a robust demand environment for these essential services. The slight decline in electrical, mechanical, and general construction revenues could reflect project cycle variations or increased competition in that specific sub-segment, but the projected backlog in this area indicates potential for recovery. The company's diversified service offerings across various industries (natural gas, petroleum, water, automotive, chemical, power) provide a degree of resilience against fluctuations in any single sector.

Management Changes

Legal Proceedings

• An ongoing withdrawal liability claim from a pension plan, initiated on November 12, 2021, demands thirty-four quarterly installment payments of $41,000. The company disputes the claim, believing it is covered by a federal exemption, and all future payments have been suspended as part of negotiations.
• The company is a party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of business, but management does not believe any, separately or in aggregate, would have a material adverse effect on financial position, results of operations, or cash flows.

Related Party Transactions

• A $1.0 million promissory note agreement with Corns Enterprises (a related party, as David E. Corns was President of Tri-State Paving Subsidiary until May 2025) for the purchase of Tri-State Paving, requiring $250,000 annual principal payments at 3.5% interest. $750,000 in principal payments have been made as of December 31, 2025.
• SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC, a variable interest entity (VIE) in which SQP is a 25% owner but not the primary beneficiary. SQP and 1030 Quarrier Ventures, LLC (75% owner) jointly provided an unconditional guarantee for $5.0 million in loans from United Bank to fund a commercial development project for which SQP was awarded the construction contract.
• C.J. Hughes rents equipment from Construction Specialty Services (CSS), owned by Chuck Austin (President of C.J. Hughes), at rates below those of unaffiliated rental companies. Rental amounts for the three months ended December 31, 2025, were $146,000, compared to $53,000 in the prior year period.

Stakeholder Impact

• Shareholders: Positive impact due to increased net income, EPS, and backlog, along with a declared quarterly dividend. Share repurchases also benefit shareholders.
• Employees: The company's growth and increased project volume likely support employment stability and opportunities, particularly for union members subject to collective bargaining agreements.
• Customers: Continued service provision in natural gas, petroleum, water distribution, automotive, chemical, and power industries, with new transmission projects and increased water distribution services.
• Creditors: The company's compliance with most debt covenants and projected ability to meet non-waived covenants for the next twelve months indicates a stable credit profile, despite the waiver for debt service coverage.

Next Steps

• Continue negotiations with the pension fund to resolve the withdrawal liability claim.
• Evaluate whether to renew operating leases for additional periods, including those for SQP office space, Hurricane, West Virginia facility, and Winchester, Kentucky facility.
• Assess the effect of new FASB accounting pronouncements on incremental expense disclosures (effective fiscal years beginning after December 15, 2026) and tax rate reconciliation tables (effective fiscal years beginning after December 15, 2024).
• Focus on bidding for significant new water and wastewater projects, natural gas transmission and distribution projects, and electrical, mechanical, and general construction projects.

Key Dates

Recommendation

The company demonstrated exceptional financial performance in the first fiscal quarter, with substantial revenue growth across its core infrastructure segments and a nearly 200% increase in net income. The significant expansion of its backlog indicates robust future project opportunities. While the ongoing PPP loan review and a waived debt covenant present minor concerns, the overall operational strength, improved margins, and strategic acquisitions position the company for continued strong performance. The stock repurchase program also signals management's confidence.

Keywords

Energy Services of America, ESOA, Quarterly Report, SEC Filing, Natural Gas Pipelines, Water Distribution, Industrial Construction, Infrastructure, Financial Results, Revenue Growth, Net Income, Backlog, PPP Loan, Debt Covenants, Construction Services