IES Holdings, Inc. — Form 10-Q Summary
Business context and reporting period. IES provides electrical, mechanical, communications and infrastructure services through Commercial & Industrial, Communications, Infrastructure Solutions and Residential segments. This fiscal second-quarter filing covers the three and six months ended March 31, 2018; the comparable periods are 2017. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $205.7 vs. $203.7, up 1.0% | $404.0 vs. $395.8, up 2.1% |
| Gross profit / margin | $33.8 / 16.5% vs. $31.8 / 15.6% | $66.9 / 16.6% vs. $67.0 / 16.9% |
| Operating income / margin | $4.1 / 2.0% vs. $1.6 / 0.8% | $7.1 / 1.8% vs. $8.6 / 2.2% |
| Net income (loss) | $2.3 vs. $0.6 | $(27.2) vs. $4.5 |
| IES-attributable diluted EPS | $0.11 vs. $0.02 | $(1.29) vs. $0.20 |
- The six-month loss primarily reflects a preliminary $31.5 million deferred-tax remeasurement charge following the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate to 21%. Six-month tax expense was $33.6 million, compared with $3.3 million a year earlier. The charge was preliminary and subject to further analysis.
- Six-month operating cash flow was $11.2 million, versus $2.7 million. Investing activities used $2.4 million, mainly for $2.3 million of capital expenditures; financing activities used $1.3 million, including $1.2 million for share repurchases. Cash rose to $35.7 million from $28.3 million at September 30, 2017.
- At March 31, current assets were $226.6 million and current liabilities $139.4 million; total assets were $385.0 million and total liabilities $173.6 million. Long-term debt on the balance sheet was $29.6 million. The filing separately reports $30.2 million of outstanding borrowings in its liquidity discussion.
- The $100 million revolving facility matures in August 2021. The company reported $43.7 million of excess availability, $79.5 million of liquidity, and compliance with covenants at quarter-end. The reported weighted-average borrowing rate was 3.53%; a one-percentage-point rate increase was estimated to raise annual pretax interest expense by $0.3 million.
- Backlog increased to $343 million from $331 million at September 30, 2017. Days sales outstanding fell to 59 from 66.
Material changes and segment trends
- In the quarter, Commercial & Industrial revenue rose 18.7% and operating results improved, though the segment still recorded a $0.3 million operating loss. Results benefited from fiscal 2017 acquisitions and lower losses at Denver and Roanoke branches that are winding down.
- Communications quarterly revenue fell 18.5%, largely because a prior-year school-district upgrade project was completed; gross margin improved to 18.6% and operating income was $3.2 million. Six-month operating income rose to $6.2 million despite lower revenue.
- Infrastructure Solutions quarterly revenue increased 27.0%, primarily due to the Freeman acquisition; six-month operating income declined to $0.4 million from $1.3 million, with lower six-month gross margin.
- Residential quarterly revenue declined 2.9% and operating income fell to $3.3 million from $4.6 million. For six months, revenue was nearly flat, but gross margin declined to 20.2% from 23.3%, reflecting higher copper and other commodity prices and labor costs.
- Consolidated six-month gross profit was nearly unchanged, while operating income declined. Acquisitions supported revenue growth; weakness in Residential margins and higher segment SG&A weighed on results.
Outlook, risks and unusual items
- The filing provides no quantified companywide revenue or earnings guidance. Management said backlog is not a guarantee of future revenue or profit and noted that quarterly results can vary with seasonality, project timing and customer spending cycles.
- Key exposures include fixed-price contract execution and estimation, commodity-price and labor-cost inflation, customer financing and collection risk, competition, project delays, and variable-rate debt. IES had no commodity or interest-rate hedges.
- IES reported an ongoing claim seeking approximately $21.0 million for costs incurred on the USAMRIID project through August 2017 and an additional approximately $4.5 million expected through completion. The company recorded no recovery; defendants had moved to dismiss, and the matter was awaiting a decision. Separately, a Capstone matter was settled for a $0.2 million charge and payment.
- Tontine and affiliates held approximately 58% of the company’s outstanding common stock. A change in ownership could affect tax-loss utilization and trigger provisions in financing, bonding and severance arrangements.
- After quarter-end, on April 6, 2018, IES acquired Azimuth Communications, a Portland-based communications-services provider.
Important facts for investors to verify
- The final tax-accounting impact of the Tax Cuts and Jobs Act, including whether the preliminary $31.5 million charge changes.
- Whether the company sustains Residential margins amid higher materials and labor costs, and the progress and costs of winding down Denver and Roanoke.
- The status, potential recovery and any cash-flow implications of the USAMRIID litigation and other construction-defect or self-insurance claims.
- Reconciliation of the balance-sheet long-term debt figure ($29.6 million) with the MD&A’s $30.2 million borrowing figure, and continued headroom under facility covenants and letters of credit.
- Whether backlog converts to profitable work and how the Azimuth acquisition affects Communications results and liquidity.