IES Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the fiscal first quarter ended December 31, 2020, compared with the three months ended December 31, 2019. IES provides electrical, technology infrastructure, residential, and industrial services through Communications, Residential, Infrastructure Solutions, and Commercial & Industrial segments. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $314.8 | $276.0 |
| Gross profit / margin | $58.7 / 18.6% | $50.2 / 18.2% |
| Operating income / margin | $15.9 / 5.1% | $12.4 / 4.5% |
| Net income | $12.2 | $8.5 |
| Net income attributable to IES | $12.1 | $8.5 |
| Diluted EPS | $0.58 | $0.39 |
| Operating cash flow | $20.3 | $11.0 |
At December 31, 2020, cash was $27.3 and restricted cash $4.8, versus cash of $53.6 at September 30, 2020. Total debt was $14.5, including $14.3 drawn on the revolving facility. The $100 million revolver matures September 30, 2024; availability was $78.7, total liquidity $105.9, and the company was in covenant compliance. Working capital excluding cash and restricted cash increased $2.4 from September 30.
Investing cash outflow was $55.9, including $54.8 for acquisitions and $1.2 of capital expenditures. Financing activities provided $14.2, including $25.1 of borrowings and $10.1 of repayments.
Material changes versus the prior comparable period
- Revenue rose 14.1%; gross margin increased 0.4 percentage points and operating margin increased 0.6 points. Net income attributable to IES grew to $12.1 from $8.5.
- Communications revenue grew 16.7%, with operating income rising to $9.2 from $7.0; higher data-center and distribution-center demand supported results.
- Residential revenue rose 28.9%, including $12.1 contributed by businesses acquired after Q1 FY2020. Gross margin fell to 19.7% from 21.7%, which management attributed largely to higher commodity prices.
- Infrastructure Solutions revenue increased 10.0%; gross margin rose to 31.8% from 24.8%, reflecting acquisitions, improved efficiency, and workers’ compensation relief from Ohio.
- Commercial & Industrial revenue declined 7.6%; the segment posted an operating loss of $0.7 versus a loss of $0.5. Management cited COVID-related project delays, weaker demand, competition, and project inefficiencies.
- Operating cash flow improved by $9.2, while cash and restricted cash declined by $21.5 during the quarter, chiefly reflecting acquisition spending.
Outlook, commentary, risks, and unusual items
- No formal revenue, earnings, or margin guidance is provided. Remaining performance obligations were $525.1; the company expects to recognize approximately $443.6 over the next 12 months. Backlog, including agreements without an enforceable obligation, was $632.0 and is not a guarantee of future revenue.
- Management said COVID-19 continued to delay project awards and progress, while demand increased in some critical data-center and communications work. Further shutdowns, labor illness, customer payment delays, and added safety costs remain possible.
- Three acquisitions were completed: Bayonet (residential HVAC and plumbing), Wedlake (generator enclosures), and K.E.P. Electric (residential electrical contracting). Preliminary purchase accounting added $32.7 of goodwill. The acquisitions contributed $9.2 of revenue and $0.8 of operating income in the quarter.
- Acquisition consideration included up to $4.5 of contingent payments for Bayonet, valued at $3.4 at acquisition. Restricted cash of $4.8 related to escrow for acquired Paycheck Protection Program loans; funds will repay loans if forgiveness is not granted, or may be released to sellers if forgiveness is approved.
- Fixed-price contracts expose results to estimation errors and rising labor and commodity costs; the company says its ability to pass costs through depends on market conditions. Other risks include customer credit and collections, project execution, surety capacity, and variable-rate debt. A 1 percentage-point rate increase on facility borrowings outstanding at quarter-end would increase annual pretax interest expense by about $0.2.
- Tontine Associates and affiliates held approximately 56% of outstanding shares. A change in ownership could affect tax net operating losses and trigger provisions in financing, bonding, and severance arrangements. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether segment demand and margins persist, particularly Residential’s commodity-cost pressure and Commercial & Industrial’s operating losses.
- Acquisition integration, final purchase-price allocations, contingent consideration, and the outcome of PPP loan forgiveness and escrow release.
- Conversion of remaining performance obligations and backlog into profitable revenue; backlog includes non-enforceable arrangements and excludes some short-term work.
- Cash generation and liquidity after acquisition spending, working-capital requirements, and any changes in revolver availability or covenant headroom.
- Exposure to COVID-19 disruptions, labor and material costs, project estimates, customer collections, insurance claims, and surety requirements.
- Potential effects of Tontine share sales or other ownership changes on control, tax attributes, and material agreements.