IES Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
IES Holdings, Inc. (Integrated Electrical Services, Inc.) filed this quarterly report for the three and nine months ended June 30, 2015. It provides electrical installation, communications infrastructure, commercial and industrial services, and infrastructure solutions through four operating segments: Communications, Residential, Commercial & Industrial, and Infrastructure Solutions. Financial amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Nine months ended June 30, 2015 | Nine months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $144.1 | $136.2 | $414.2 | $376.5 |
| Gross profit / margin | $25.1 / 17.4% | $22.7 / 16.6% | $69.5 / 16.8% | $60.8 / 16.1% |
| Operating income / margin | $4.6 / 3.1% | $3.6 / 2.6% | $10.9 / 2.6% | $5.0 / 1.3% |
| Net income | $4.0 | $2.7 | $9.1 | $3.2 |
| Diluted earnings per share | $0.19 | $0.14 | $0.42 | $0.17 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $6.2 | $5.7 |
- For the quarter, revenue rose 5.8%; operating income increased 27.7%. For the nine-month period, revenue rose 10.0% and operating income more than doubled.
- Nine-month net income includes a $0.2 million loss from discontinued operations; the comparable 2014 loss was $0.3 million. Nine-month diluted EPS from continuing operations was $0.43.
- At June 30, cash was $44.8 million, working capital was $74.0 million, and total assets were $212.5 million. Long-term debt was $10.2 million, drawn on the revolving facility.
- The $60 million revolving credit facility matures in August 2018. Availability without violating the financial covenant was $14.9 million, with $6.9 million of letters of credit outstanding. The company was in covenant compliance; its fixed-charge coverage ratio was 7.4:1.0.
- Cash declined $2.5 million from September 30, 2014. Nine-month investing outflows were $5.5 million, including $2.4 million of capital expenditures and $3.1 million for an acquisition; financing outflows were $3.2 million, primarily share repurchases.
Material changes and segment trends
- Quarterly revenue increased in Communications, Residential, and Commercial & Industrial, while Infrastructure Solutions declined. For the nine months, all but Infrastructure Solutions grew.
- Communications quarterly revenue increased 2.1%, but high-tech manufacturing and data center revenue decreased $5.6 million. Growth in other offerings and customers partly offset the decline.
- Residential quarterly revenue rose 7.2%; single-family, cable and service, multifamily, and solar activity contributed. Management cited weather-related delays and warned that sustained low oil prices could slow Texas regional growth.
- Commercial & Industrial quarterly revenue increased 14.2%, and gross margin improved to 11.8% from 9.6%, primarily reflecting improved project efficiency. Management described the market as highly competitive.
- Infrastructure Solutions quarterly revenue fell 14.8%, mainly from lower engine-components demand among large rail customers. Gross margin improved to 21.2% from 19.4%, but the segment reported a $0.1 million operating loss. The nine-month segment revenue decline was 6.2%.
- On May 21, 2015, IES acquired Southern Rewinding, a motor repair and field-services business, for $3.9 million, with $0.8 million of additional consideration scheduled through November 2016, subject to holdbacks. IES also provided $1.1 million of working capital. The business contributed $0.9 million of quarterly revenue; preliminary purchase-price allocations included $1.5 million of goodwill and $1.7 million of intangible assets.
Outlook, risks, contingencies, and unusual items
- Management said cash on hand, operating cash flows, and available credit were expected to cover working capital, debt service, and capital expenditures for the next twelve months. The filing provides no specific revenue, earnings, or margin guidance.
- IES identified seasonality and construction cyclicality, project timing and execution, fixed-price estimating, labor availability, customer financing and collections, and commodity-cost exposure as risks. It has no commodity-price hedges; management said it expects to pass through some cost increases over time, depending on market conditions.
- All facility debt bears floating interest rates, and the interest-rate hedge expired in the quarter ended March 31, 2015. A one-percentage-point increase would add an estimated $0.1 million of annual pretax interest expense at the June 30 debt level.
- Tontine Capital Partners and affiliates owned 62.1% of outstanding shares at June 30. A change in ownership could restrict use of tax-loss carryforwards and trigger change-of-control provisions in financing, bonding, and severance arrangements. The filing reported federal and state deferred-tax valuation allowances of $117.1 million and $4.8 million, respectively, at September 30, 2014; continued profitability could change the assessment and potentially produce a tax benefit.
- IES repurchased 429,541 shares under its program during the nine months for $3.1 million, including 426,091 shares purchased from one unrelated shareholder at $7.25 per share. A further 570,459 shares remained authorized for repurchase at June 30.
- Legal matters include Ward Transformer PCB contamination litigation and three wage-and-hour suits. No liability was accrued for the Ward matters or wage-and-hour suits; management did not expect the described proceedings to materially affect results or financial position. These expectations are subject to uncertainty. The company also carried $4.0 million of insurance liabilities and $0.5 million of construction-defect reserves.
- Bonded projects had an estimated $65.8 million cost to complete. Surety capacity was considered adequate, but letters of credit supporting insurance and other obligations reduce borrowing availability.
Important facts for investors to verify
- Whether improved gross margins and operating income persist, particularly given competitive markets, weather effects, and weaker rail-related demand.
- Whether customer collections, contract working capital, and available credit remain sufficient; monitor revolver availability, letters of credit, and covenant thresholds.
- How Southern Rewinding performs and whether its preliminary purchase accounting, remaining consideration, and working-capital needs change.
- Potential effects of Tontine share sales or other ownership changes on control, credit and surety agreements, and tax-loss carryforwards.
- Developments in the Ward Transformer and wage-and-hour matters, self-insured claims, and the adequacy of related reserves.