IES Holdings, Inc. (Integrated Electrical Services, Inc.) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
IES provides communications infrastructure, residential electrical installation, commercial and industrial electrical services, and infrastructure/industrial and rail services. Infrastructure Solutions reflects the September 2013 acquisition of MISCOR and was not included in the prior-year comparable results.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $120.3 vs. $122.0 in 2013 | $240.3 vs. $249.3 in 2013 |
| Gross profit / margin | $20.0 / 16.7%, vs. $16.0 / 13.1% | $38.1 / 15.9%, vs. $34.0 / 13.6% |
| Operating income (loss) | $0.9 vs. $(0.6) | $1.5 vs. $2.5 |
| Continuing-operations net income (loss) | $0.4 vs. $(0.9) | $0.7 vs. $(0.3) |
| Net income (loss), including discontinued operations | $0.4 vs. $(1.1) | $0.5 vs. $(0.6) |
| Operating cash flow | Not reported for the quarter alone | $2.6 vs. $1.1 |
- Quarterly diluted EPS was $0.02, compared with a $0.07 loss; six-month diluted EPS was $0.03, compared with a $0.04 loss.
- For the six months, SG&A rose 16.5% to $36.7 million, exceeding the increase in gross profit and contributing to lower operating income. Interest expense fell to $0.9 million from $1.1 million; other income/expense improved principally because the prior-year period included a $1.7 million reserve against a surety receivable.
- At March 31, cash was $20.5 million, working capital was $45.7 million, total debt was $12.0 million, and revolving borrowings were zero. Credit-facility availability was $8.5 million, with $6.9 million of letters of credit outstanding. Total assets were $170.3 million and stockholders’ equity was $63.3 million.
- Six-month investing cash use was $0.9 million; financing cash use was $1.9 million, including $1.8 million of term-loan repayments. Cash declined $0.2 million over the six months.
Material changes and operating trends
- Revenue declined 1.4% in the quarter and 3.6% year to date. Communications and Commercial & Industrial revenue fell, partly offset by Residential growth and MISCOR’s contribution of $10.6 million for the quarter and $23.6 million year to date.
- Gross margin improved overall. Management attributed gains in Residential and Commercial & Industrial to better project performance, while Communications margins weakened. MISCOR contributed margins of 22.5% for the quarter and 22.1% year to date, including acquisition-related inventory fair-value costs.
- Communications revenue fell 20.9% in the quarter and 30.8% year to date, largely reflecting completed high-tech manufacturing work and lower data-center revenue. Commercial & Industrial revenue fell 16.7% and 18.1%, respectively, as large projects were completed or neared completion and weather affected activity. Residential revenue increased 7.2% and 10.7%, respectively, led by single-family work, particularly in Texas.
- Current assets fell to $136.4 million from $144.0 million at September 30, 2013; current liabilities decreased to $90.7 million from $98.6 million. Trade receivables declined $7.7 million and days sales outstanding improved to 56 from 59.
- Facilities previously designated for closure were fully wound down by March 31, 2014. Discontinued operations generated net losses of $0.05 million for the quarter and $0.19 million for the six-month period.
Outlook, risks, contingencies and unusual items
- Management expects cash on hand, operating cash flow and available credit capacity to fund working capital, debt service and capital expenditures for the next 12 months. This depends on demand, project margins, collections and continued borrowing access; no numerical earnings or revenue guidance was provided.
- In February 2014, Wells Fargo extended the term and revolving facility maturities to August 2017 and reduced stated interest margins by one percentage point, effective February 1. Covenant-trigger thresholds were temporarily lowered through June 30, 2014, then return to prior levels. The fixed-charge coverage requirement is 1.0:1.0 when specified liquidity or availability thresholds are breached.
- The filing states that the company was not required to test covenants at March 31 because it exceeded the applicable thresholds, but also says it would have failed the fixed-charge coverage test had a test been required. The company said it was monitoring liquidity and covenant compliance.
- Risks include construction cyclicality and seasonality, project estimation and execution, customer financing and collections, labor and commodity costs, surety and bonding capacity, acquisition integration, interest rates, and potential restrictions on tax benefits if ownership changes. Tontine was the controlling shareholder; a change in ownership could affect NOLs and trigger provisions in financing, bonding and employment arrangements.
- Legal matters include the Ward Transformer environmental site and three wage-and-hour class-action suits; management had recorded no reserves for these matters, citing its assessment that loss was not probable and exposure was not estimable. The company had $4.96 million accrued for insurance liabilities and $0.54 million for construction-defect claims. Surety defendants had defaulted on payments due from November 2013 through March 2014; recovery of the remaining balance was uncertain.
- Other notable items: $0.3 million of search and severance costs related to replacement of the MISCOR president; the Acro acquisition contingency was resolved with no further payment; and $4.4 million of firm material purchase orders were outstanding.
Most important facts for investors to verify
- Whether revenue and operating performance in Communications and Commercial & Industrial stabilize as prior projects roll off, and whether Residential growth continues.
- Liquidity, borrowing availability, letters of credit and compliance with the facility’s covenant thresholds, especially after the temporary threshold relief expires.
- Cash conversion and collection trends, including the sustainability of the improvement in receivables and days sales outstanding.
- Recovery prospects for the defaulted surety receivable and any changes in environmental, wage-and-hour, insurance or construction-defect exposures.
- Integration and profitability of MISCOR, including the impact of its facility upgrades and acquisition-related costs.