IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2011; comparisons are with the three months ended December 31, 2010. Dollar amounts below are in millions unless stated otherwise. The 2010 comparative results and September 30, 2011 balance sheet were restated.
Business context and operating results
IES provides electrical infrastructure services through Communications, Residential, and Commercial & Industrial (C&I) segments, operating from 57 locations. Residential work is seasonal; construction demand and project timing affect results across the business.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $115.3 | $109.8 |
| Gross profit / margin | $10.9 / 9.5% | $11.1 / 10.1% |
| Operating loss | $(3.1) | $(4.4) |
| Net loss | $(3.7) | $(4.3) |
| Loss per diluted share | $(0.26) | $(0.30) |
| Cash used in operations | $(9.0) | $(15.1) |
Revenue grew 5.0%. Communications revenue rose 31.0% to $26.1 million, and Residential revenue rose 12.4% to $29.3 million. C&I revenue fell 6.1% to $59.9 million, primarily as facilities were wound down. Consolidated gross profit decreased $0.15 million and gross margin declined 0.6 percentage points. The wind-down operations recorded $1.329 million of negative gross profit; management also cited higher material costs weighing on Residential margins.
SG&A fell 28.3% to $13.4 million, contributing to the narrower operating loss. The prior-year period included a $6.729 million gain on sale of assets and a $3.551 million software impairment charge; Q1 FY2012 included $0.6 million of restructuring charges. Interest and other expense, net, was $0.472 million. The income tax provision was $0.168 million, versus a $0.676 million benefit in the prior-year quarter.
Financial position, cash flow and debt
- At December 31, 2011, cash and cash equivalents were $17.3 million, restricted cash was $8.8 million, working capital was $59.8 million, and total assets were $162.0 million. Cash and cash equivalents were $35.6 million at September 30, 2011.
- Operating activities used $9.0 million. Investing activities used $9.1 million, including $8.8 million placed in restricted cash as collateral for letters of credit; financing activities used $0.2 million. Cash declined $18.3 million during the quarter.
- Total debt was $12.4 million: a $10.0 million Tontine term loan bearing 11% interest and due May 2013, plus insurance financing and capital leases. The $40 million revolving facility had no borrowings and $21.4 million of availability. Outstanding letters of credit of $8.8 million were fully cash-collateralized. Reported total liquidity was $47.5 million.
- The revolving facility matures November 12, 2012. A fixed-charge coverage test applies if unrestricted cash plus availability falls below $25 million; the filing says IES would not have met that test had it applied at December 31. Additional borrowing conditions include EBITDA and coverage tests beginning in 2012.
Outlook, risks and unusual items
Management expected cash on hand, operating cash flows and revolver availability to cover working capital, debt service and capital spending for the next 12 months, and forecast FY2012 capital expenditures of $1.0–$1.5 million. This outlook depends on restructuring execution, demand, acceptable project margins, receivable collection and access to the credit facility; no revenue or earnings guidance was provided.
The 2011 restructuring plan targets underperforming C&I facilities, with aggregate closure costs estimated at $4.5–$5.5 million. A separate Baltimore facility was slated for sale or closure, with expected costs of $0.34–$0.48 million. Remaining projects at the planned wind-down facilities had estimated completion costs of about $4.7 million. The CFO retired in January 2012; the company expected approximately $0.43 million of related severance expense in the next quarter.
Key risks include construction cyclicality, fixed-price project estimation and execution, labor and commodity costs, customer collections, surety and credit availability, and compliance with facility covenants. IES reported $89.6 million of estimated costs to complete bonded projects. It had $6.861 million accrued for insurance liabilities and $0.410 million reserved for construction-defect claims. IES recorded no reserve for the Ward Transformer site litigation, stating responsibility was not probable and exposure was not estimable.
Tontine and affiliates controlled the company and held 57.4% of outstanding common stock, according to the filing. A change in control could affect credit, surety and employment agreements and limit tax net operating losses. The filing also disclosed a restatement related chiefly to an understated vacation accrual and software amortization. Two related material weaknesses were identified; management said remediation was completed and controls were effective as of filing, while disclosure controls were deemed ineffective as of December 31, 2011.
Important facts for investors to verify
- Whether IES maintains sufficient liquidity and meets the revolver’s covenant and borrowing conditions ahead of its November 2012 maturity.
- Whether restructuring and Baltimore wind-downs stay within estimated costs and improve C&I profitability and consolidated margins.
- Whether receivables, project claims, insurance and construction-defect exposures, and surety capacity develop as management expects.
- Whether the restatement remediation is sustained and the reported control weaknesses do not recur.
- Whether Tontine-related control and the 11% term loan create material governance, refinancing or change-of-control implications.