IES Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018; filed December 7, 2018. The filing also reports fourth-quarter results. IES provides electrical, mechanical, communications infrastructure, industrial repair and residential installation services through four segments.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $876.8 million | $810.7 million |
| Gross profit / margin | $150.0 million / 17.1% | $140.5 million / 17.3% |
| Operating income / margin | $26.0 million / 3.0% | $20.3 million / 2.5% |
| Income before taxes | $24.3 million | $18.8 million |
| Net income (loss) attributable to IES | $(14.2) million | $13.4 million |
| EPS attributable to IES | $(0.67) | $0.62 |
| Cash from operating activities | $12.2 million | $22.3 million |
Fiscal 2018 tax expense was $38.2 million, including a $31.3 million charge to remeasure deferred tax assets and liabilities after the Tax Cuts and Jobs Act lowered the federal corporate tax rate. The resulting reported net loss therefore contrasts with positive pretax income and operating income. Cash capital expenditures were $4.6 million; operating cash flow less capital expenditures was approximately $7.7 million.
At September 30, 2018, cash was $26.2 million, reported total debt was $29.6 million, working capital excluding cash was $72.0 million, and revolving-credit availability was $48.1 million. Reported liquidity was $74.4 million. The company reported compliance with its credit covenants, a 7.9:1.0 fixed-charge coverage ratio, and credit-agreement EBITDA of approximately $37.0 million. Its $100 million credit facility matures in August 2021.
Changes versus the prior comparable period
- Revenue rose 8.2%; management attributed growth to demand, acquisitions and market-share gains. Acquisitions contributed $61.0 million of the year-over-year revenue increase; the Denver and Roanoke branch wind-downs reduced revenue by $23.7 million.
- Gross profit increased, but gross margin eased to 17.1% from 17.3%. SG&A rose 2.9% in dollars and fell to 14.1% of revenue from 14.8%.
- Operating income improved to $26.0 million from $20.3 million. Operating cash flow declined to $12.2 million from $22.3 million, largely due to working-capital investment, including higher costs and estimated earnings in excess of billings.
- FY2018 revenue by segment was Commercial & Industrial $274.3 million, Communications $219.7 million, Infrastructure Solutions $97.2 million and Residential $285.7 million. Segment operating income was $2.7 million, $14.2 million, $3.2 million and $16.9 million, respectively, before $11.2 million of corporate costs.
- Commercial & Industrial revenue grew 20.5% and operating results turned positive; Communications revenue fell 2.5%, but operating income rose to $14.2 million; Infrastructure Solutions revenue grew 15.9%, with margin pressured by business mix; Residential revenue grew 4.3%, while gross margin fell to 20.4% from 23.1%, mainly from higher labor and commodity costs.
- Backlog increased to $482 million from $331 million. IES expected $369 million to convert to revenue in FY2019 and $113 million in FY2020; backlog is not guaranteed revenue or profit.
Fourth-quarter results
FY2018 fourth-quarter revenue was $240.3 million, gross profit was $40.5 million, and net income attributable to IES was $4.7 million, or $0.22 per share. In the prior-year fourth quarter, revenue was $206.6 million, gross profit was $38.1 million, and attributable net income was $3.1 million, or $0.15 per share.
Outlook, risks and unusual items
- Management expected FY2019 revenue from existing businesses to increase year over year, assuming no significant economic deterioration, citing demand, market-share efforts and backlog. Expected FY2019 fixed-asset requirements were $5.5 million to $7.5 million.
- IES settled its USAMRIID project claim through a binding memorandum of agreement: it would receive $2.5 million, including $1.5 million contingent on completing remaining work, in exchange for dismissing the suit and completing limited work. IES recorded a $1.9 million charge in FY2018 to adjust remaining contract value and scope.
- Tontine and affiliates owned approximately 59% of the common stock. A substantial sale could affect share liquidity, trigger change-of-control provisions in financing, surety and severance arrangements, and potentially limit tax NOLs under Section 382. Tontine received a board-observer right after the fiscal year, under stated conditions.
- Key operating risks include cyclical construction and housing demand; fixed-price project estimating and percentage-of-completion judgments; labor shortages and wage increases; commodity-price exposure; customer collections; acquisition integration; and availability of surety bonds. Backlog may be canceled, delayed or unprofitable.
- IES reported approximately $355.3 million of federal NOL carryforwards, including $133.3 million from additional tax-goodwill amortization. The company also disclosed a federal tax audit for FY2016 and anticipated approximately $5.7 million of unrecognized tax-benefit liabilities could reverse within twelve months.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of September 30, 2018.
Important facts for investors to verify
- Whether FY2019 revenue growth and backlog conversion materialize, and whether the backlog produces acceptable margins.
- How operating cash flow and working capital perform as costs in excess of billings and receivables evolve.
- Whether residential and Infrastructure Solutions margins recover amid labor, commodity and business-mix pressures.
- The final USAMRIID settlement terms, completion of remaining work and receipt of the contingent payment.
- Use and realizability of deferred tax assets and NOLs, including effects of tax audits, future taxable income and any ownership change.
- Credit-facility availability, covenant headroom, floating-rate exposure and surety capacity; IES estimated a one-percentage-point rate increase would add about $0.3 million in annual pretax interest expense.