IES Holdings, Inc. (Integrated Electrical Services, Inc.) — Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2014. Amounts below are in millions unless stated otherwise. IES provides electrical, communications, residential, commercial and industrial, and infrastructure services. The Infrastructure Solutions segment reflects the September 2013 acquisition of MISCOR and has no comparable 2013 segment results.
Financial results and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2014 / 2013 | $136.2 / $121.6 | $376.5 / $370.8 |
| Gross profit, 2014 / 2013 | $22.7 / $15.7 | $60.8 / $49.6 |
| Gross margin, 2014 / 2013 | 16.6% / 12.9% | 16.1% / 13.4% |
| Operating income, 2014 / 2013 | $3.6 / $(0.9) | $5.0 / $1.6 |
| Net income (loss), 2014 / 2013 | $2.7 / $(1.1) | $3.2 / $(1.7) |
| Diluted EPS, 2014 / 2013 | $0.14 / $(0.07) | $0.17 / $(0.11) |
| Operating cash flow, 2014 / 2013 | Not provided for quarter | $5.7 / $3.7 |
Quarterly revenue rose 12.0%; nine-month revenue increased 1.5%. For the nine months, cost of services declined to 83.9% of revenue from 86.6%, while SG&A increased to 14.8% from 13.0%. Interest expense was $1.3 million for the nine months, versus $1.4 million. Results include discontinued-operation losses of $0.1 million for the quarter and $0.3 million for the nine months.
At June 30, cash was $22.2 million, working capital $47.7 million, and total debt $11.1 million, down from $13.8 million at September 30, 2013. Current assets were $144.2 million and current liabilities $96.5 million. The company generated $5.7 million operating cash flow, used $1.4 million in investing activities and $2.8 million in financing activities; cash increased $1.5 million to $22.2 million. Capital expenditures were $1.4 million.
IES had $12.0 million available under its credit facility, with $6.9 million of letters of credit outstanding and no revolver borrowings. The facility maturity was extended to August 2017. At June 30, liquidity and excess availability exceeded the temporary $15 million and $4 million covenant thresholds, respectively. Management said IES was not required to test its fixed-charge coverage covenant during the quarter; it disclosed that it would have failed the 1.0:1.0 test had testing been required.
Material changes and operating drivers
- Communications: Quarterly revenue increased 44% to $34.8 million, led by data-center work and an expanded customer base; nine-month revenue fell 12% to $84.5 million as high-tech manufacturing projects completed. Nine-month gross margin declined to 17.5% from 18.2%.
- Residential: Revenue grew 11% for the quarter and 10.8% for the nine months, mainly from single-family construction, particularly in Texas. Nine-month gross margin improved to 18.7% from 16.7%; management cited stronger demand, more stable copper prices and improved efficiency.
- Commercial & Industrial: Revenue declined 26.5% for the quarter and 20.9% for the nine months as large projects wound down and, for the nine-month period, weather was unfavorable. Gross margins improved to 9.6% quarterly and 11.0% year to date, supported by improved project execution and branch performance.
- Infrastructure Solutions: The MISCOR segment generated $13.1 million quarterly revenue at 19.4% gross margin and $36.8 million nine-month revenue at 21.2% gross margin. The quarter included a $0.9 million purchase-accounting adjustment that increased goodwill.
Management attributed higher consolidated gross margin to improved segment margins and a greater contribution from higher-margin Communications and Residential work. SG&A rose with the acquired MISCOR business and higher personnel and incentive costs. The company completed the wind-down of certain previously closed facilities by June 30; related discontinued operations continued to generate losses.
Outlook, risks and unusual items
IES provided no specific revenue or earnings guidance. Management expected cash on hand, operating cash flows, rights-offering proceeds and facility availability to fund working capital, debt service and capital expenditures for the following 12 months. This outlook depends on demand, project margins, receivable collections and continued borrowing availability.
On August 7, 2014, after quarter-end, IES completed a fully subscribed rights offering at $5.20 per share, raising approximately $19.7 million net and issuing approximately 3.846 million shares. Tontine, the controlling shareholder, held approximately 61% after the offering. The filing gives slightly inconsistent exact share counts in different sections; the approximate amount is used here.
Key risks include construction cyclicality and seasonality, project-estimate and execution risk, commodity-price exposure under fixed-price contracts, labor availability, customer collections, surety and bonding requirements, and credit-facility covenant headroom. Approximately 85% of long-term debt was effectively floating-rate after the interest-rate hedge; a one-percentage-point rate increase was estimated to add about $0.1 million annual pretax interest expense.
Contingencies include self-insured claims (insurance liabilities accrued at $5.2 million), residential construction-defect reserves of $0.6 million, and litigation. Management reported no material adverse effect expected from disclosed legal proceedings, but recovery of amounts owed by a former surety remains uncertain: the debtors filed for bankruptcy and the amount, if any, recoverable is unclear. The company had $56.6 million of estimated costs to complete bonded projects and $2.2 million of material purchase commitments.
Tontine’s controlling position and any sale of its shares could trigger change-of-control provisions and potentially restrict tax net operating losses. The company also noted that the new revenue-recognition standard was expected to take effect in fiscal 2018 and was still being evaluated. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track whether improved gross margins persist, particularly as project mix changes and major projects conclude.
- Monitor Commercial & Industrial activity, Communications’ year-to-date revenue and margin trends, and Residential exposure to housing and seasonal conditions.
- Verify liquidity, facility availability and covenant status; the filing states the company would have failed the fixed-charge coverage test if it had been required to test at June 30.
- Assess the use of rights-offering proceeds, dilution and Tontine’s continued control, including possible change-of-control and tax effects.
- Follow receivable collections, self-insurance and construction-defect claims, and potential recovery from the bankrupt former surety.
- Confirm the final post-offering share count and reconcile the slightly differing counts reported in the filing.