IES Holdings, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended March 31, 2022. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted. IES provides electrical and technology systems, residential installation, and infrastructure products and services through four segments: Communications, Residential, Infrastructure Solutions, and Commercial & Industrial.
Financial performance and position
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Revenue | $501.6 million, up 51.1% year over year | $982.1 million, up 51.8% |
| Gross profit and margin | $58.5 million; 11.7% versus 19.5% | $138.2 million; 14.1% versus 19.1% |
| Operating income (loss) | $(4.9) million versus $17.1 million | $15.3 million versus $33.0 million |
| Net income (loss) | $(4.1) million consolidated; $(5.4) million attributable to IES | $11.0 million consolidated; $9.1 million attributable to IES |
| Diluted EPS attributable to common stockholders | $(0.30) versus $0.58 | $0.38 versus $1.16 |
| Operating cash flow | $(2.9) million for the six months, versus $48.4 million provided in the prior-year period |
Quarterly revenue growth reflected strong demand across all segments and acquired businesses, including Edmonson. For the six-month period, all segments grew revenue, but gross margin declined in every segment. The sharp quarterly margin contraction and operating loss reflected significant project execution losses, alongside higher material and labor costs and supply-chain and workforce disruption.
At March 31, 2022, cash was $19.3 million, current assets were $536.1 million, and current liabilities were $347.3 million. Revolver borrowings were $70.2 million; the balance sheet reported long-term debt of $69.5 million. The company reported $50.6 million of revolver availability and total liquidity of $69.9 million. Total liabilities were $455.7 million and stockholders’ equity was $351.0 million. Cash declined $3.8 million from September 30, 2021.
Working capital excluding cash increased $20.0 million in the six months. Trade receivables rose $22.7 million and days sales outstanding increased to 61 from 57; inventory increased $17.3 million. Capital expenditures were $21.6 million, principally for facilities supporting Wedlake and Residential growth. Net borrowings contributed $29.9 million during the period.
Segment results and notable changes
- Communications: Quarterly revenue rose 37.7%, but gross margin fell to 8.5% from 20.6%. Management cited $9.3 million of combined losses on a series of new adjacent-service-area projects, customer mix, and supply-chain and workforce issues. Most affected contracts were substantially complete at quarter-end.
- Residential: Quarterly revenue rose 73.2%, including $43.6 million from Edmonson, and strong housing demand. Gross margin declined to 17.5% from 20.1%, which management attributed mainly to commodity costs and reduced project efficiency.
- Infrastructure Solutions: Quarterly revenue increased 20.2%, while gross margin declined to 16.9% from 27.5%. Management cited supply constraints, labor inefficiencies, and disruption from relocating Wedlake to a larger facility.
- Commercial & Industrial: Quarterly revenue rose 32.3%, but the segment recorded a $13.6 million operating loss. A large contract required significant rework, resulting in $10.4 million of recorded expense; a separate supplier-related material delay reduced gross profit by $1.8 million.
Outlook, liquidity, risks and contingencies
The filing provides no specific revenue, earnings, or margin guidance. Management said it expects cash, operating cash flow, and revolver availability to meet cash requirements for at least the next 12 months. Remaining performance obligations were $835.5 million at March 31, of which approximately $793.0 million was expected to be recognized over the next 12 months. Backlog, including $247 million of signed agreements or letters of intent without an enforceable obligation before work starts, totaled $1.082 billion; the company cautions that backlog is not a guarantee of revenue or profit.
On April 28, 2022, after quarter-end, IES amended its Wells Fargo credit agreement, increasing the maximum revolver from $125 million to $150 million and removing certain investment and stock-repurchase caps, subject to liquidity requirements. The facility matures September 30, 2026. At March 31, the company reported covenant compliance, a 3.8:1.0 fixed-charge coverage ratio, and $69.9 million of liquidity. The amended terms require minimum liquidity of $15 million; a covenant breach could trigger default and acceleration.
Management highlighted ongoing COVID-related labor and supply-chain disruptions, elevated prices and limited availability of materials, and difficulty passing all cost increases to customers. Other key exposures include fixed-price project estimation and execution, construction demand, customer collections, commodity prices, floating-rate debt, and surety and insurance requirements. A 1-percentage-point increase in the facility interest rate would increase annual pretax interest expense by approximately $0.6 million, based on March 31 debt.
Contingencies include a Department of Labor investigation of wage-and-hour practices for certain Arizona piece-rate employees; IES recorded a $350,000 reserve for investigation and resolution costs but could not estimate the total range of costs. Contractual disputes had delayed payment of $9.7 million of receivables; a $1.8 million reserve was recorded. The filing also reports $1.4 million of reserves for legal matters related to certain Commercial & Industrial contractual disputes. Ordinary-course legal proceedings are not expected by management to have a material adverse effect. Tontine Associates and affiliates held approximately 56% of outstanding shares, giving them significant control; a change in ownership could affect tax attributes and trigger change-of-control provisions.
Important facts for investors to verify
- Whether the Communications and Commercial & Industrial project losses are fully reflected in current cost-to-complete estimates and whether further losses or rework arise.
- Whether margins recover as material availability, labor conditions, and pricing adjust, particularly in Communications and Infrastructure Solutions.
- Cash conversion and collection trends, including the increase in days sales outstanding and recovery of disputed receivables.
- Revolver availability, covenant headroom, and compliance with the amended facility’s liquidity requirements as working-capital needs and interest rates change.
- Potential costs and resolution of the DOL investigation and contractual disputes, and the terms and consequences of any controlling-stockholder share sales.