IES Holdings, Inc. — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2019. IES provides electrical and mechanical contracting, technology infrastructure, industrial solutions, and residential electrical installation services through four segments: Commercial & Industrial, Communications, Infrastructure Solutions, and Residential. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $282.6 | $232.6 | $783.4 | $636.6 |
| Gross profit / margin | $46.4 / 16.4% | $42.5 / 18.3% | $131.2 / 16.8% | $109.4 / 17.2% |
| Operating income / margin | $10.2 / 3.6% | $10.1 / 4.3% | $27.9 / 3.6% | $17.2 / 2.7% |
| Net income attributable to IES | $11.0 | $8.5 | $23.3 | $(18.8) |
| Diluted EPS | $0.52 | $0.40 | $1.09 | $(0.89) |
- Quarterly revenue rose 21.5%; nine-month revenue rose 23.1%. Gross profit increased, but consolidated gross margin contracted, particularly in the quarter.
- Nine-month net income improved from a prior-year loss, but the comparison is substantially affected by a $31.5 million tax charge in 2018 to remeasure deferred tax balances after U.S. tax reform. 2019 results include a $4.0 million benefit from recognizing previously unrecognized tax benefits. Q3 2019 included a $1.2 million income tax benefit.
- Nine-month operating cash flow was $20.3 million, versus $5.0 million a year earlier. Investing used $5.1 million, principally for $5.2 million of capital expenditures; financing used $28.3 million, including debt repayments and share repurchases. Cash declined $13.1 million to $13.1 million.
- At June 30, total assets were $438.4 million, current assets $285.0 million, and current liabilities $186.3 million. Long-term debt on the balance sheet was $9.9 million, down from $29.6 million at September 30, 2018. MD&A separately reports $10.4 million of revolving-credit borrowings; the filing does not clearly reconcile this difference.
- The $100 million revolving facility matures August 2021. Reported liquidity was $98.1 million, with $85.0 million of excess availability; the fixed-charge coverage ratio was 4.7:1.0, and the company was in covenant compliance. Outstanding letters of credit were $6.6 million.
Material changes and operating trends
- Communications: Q3 revenue grew 66.3% to $90.4 million, led by data-center demand. Gross margin fell to 17.0% from 20.1%, reflecting a greater mix of typically lower-margin, lower-risk cost-plus work. Segment operating income increased to $7.0 million.
- Infrastructure Solutions: Q3 revenue grew 45.3% to $36.1 million, driven by generator enclosures for data centers. Segment operating income rose to $3.7 million; gross margin declined to 23.4% as enclosures, generally lower margin than motor repair, represented a larger share of work.
- Residential: Q3 revenue increased 7.3% to $80.7 million. Gross margin edged up to 20.3%, while segment operating income rose to $4.6 million.
- Commercial & Industrial: Q3 revenue declined 3.6% to $75.4 million amid lower time-and-material work and completion of large projects. Weather and other project inefficiencies contributed to gross margin falling to 8.2% from 13.2%; the segment recorded a $0.6 million operating loss.
- Backlog was $546 million at June 30, up from $482 million at September 30, 2018; $487 million represented remaining performance obligations, with approximately $387 million expected to be recognized over the next 12 months. Backlog is not a guarantee of revenue or profit.
- Working capital excluding cash increased $13.6 million during the nine months, reflecting investment in growth. Receivables rose $24.9 million; days sales outstanding improved to 61 from 62.
Outlook, risks, and unusual items
- The filing provides no formal earnings or revenue guidance. Management cited strong demand across segments for the nine-month period, particularly data-center-related work, while noting quarter-to-quarter variability in customer spending and project timing.
- Management expects the bonding capacity available to the company to remain adequate for the foreseeable future. Estimated cost to complete bonded projects was $89.8 million.
- In May 2019, IES completed the sale of substantially all operating assets at an Infrastructure Solutions facility. It recorded a $0.1 million loss on writing down the assets before sale.
- IES repurchased 398,947 shares under its program during the nine months, spending $8.3 million on treasury-stock purchases overall, including employee tax-withholding repurchases. An amendment permitted repurchases of up to 1.0 million additional shares, within a $25 million aggregate program limit.
- Key disclosed risks include fixed-price contract estimation and execution, labor and commodity-cost pressures, customer credit and collection risk, seasonality, variable-rate debt, bonding availability, and the potential for litigation or self-insured claims to exceed reserves. The company reported $6.2 million of self-insurance liabilities and $0.1 million reserved for construction-defect claims.
- Tontine Associates and affiliates held approximately 57.4% of common stock, giving the controlling stockholder significant influence. A change in ownership could affect tax attributes and trigger provisions in financing, surety, or severance arrangements.
- The company planned to adopt lease accounting on October 1, 2019 and anticipated recording significant right-of-use assets and corresponding lease liabilities.
Important facts for investors to verify
- Whether gross-margin pressure persists, especially in Commercial & Industrial and in the growing cost-plus and generator-enclosure businesses.
- How much of the $546 million backlog converts into revenue and profit, and whether the $387 million near-term recognition expectation is achieved.
- Cash conversion and working-capital needs as revenue grows, including collections and contract billing positions.
- The debt presentation difference between $9.9 million of balance-sheet long-term debt and $10.4 million of borrowings in MD&A, as well as continued covenant headroom and credit availability.
- The durability of reported earnings excluding tax benefits and the prior-year deferred-tax remeasurement charge.
- Potential effects of controlling-stockholder transactions, the share-repurchase program, and adoption of lease accounting.