IES Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
IES Holdings provides electrical, mechanical, technology infrastructure and industrial services through four segments: Commercial & Industrial, Communications, Infrastructure Solutions and Residential. This report covers the fiscal third quarter and nine months ended June 30, 2018; financial statement amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Revenue | $232.6 (+11.6% year over year) | $636.6 (+5.4%) |
| Gross profit / margin | $42.5 / 18.3% (17.0% prior year) | $109.4 / 17.2% (16.9% prior year) |
| Operating income / margin | $10.1 / 4.3% (prior year $4.7 / 2.2%) | $17.2 / 2.7% (prior year $13.3 / 2.2%) |
| Net income (loss) | $8.6; diluted EPS $0.40 | $(18.6); diluted loss per share $(0.89) |
| Operating cash flow | Not separately presented for the quarter | $5.0 (prior year $10.2) |
- Cash was $21.7 at June 30, down from $28.3 at September 30, 2017. Total assets were $396.0; current assets $234.0 and current liabilities $143.2.
- Long-term debt carrying value was $29.6; the company separately reported $30.2 of outstanding borrowings in its liquidity discussion. Revolver availability was $47.2, including $6.9 of letters of credit; reported total liquidity was $68.9.
- Capital expenditures were $3.4 and acquisition cash payments were $6.0 for the nine months. Financing used $2.3, including $2.1 for share repurchases.
Changes versus prior comparable periods
- Quarterly revenue, gross profit and operating income improved. Commercial & Industrial, Infrastructure Solutions and Residential revenue grew; Communications revenue declined.
- Commercial & Industrial quarterly operating income rose to $3.3 from a prior-year loss of $0.2, reflecting improved margins, acquisitions and reduced losses at the Denver and Roanoke branches, which are being wound down. Residential gross margin fell to 20.1% from 22.6%, with higher material and labor costs.
- Year-to-date net loss contrasts with prior-year net income of $10.3, primarily because of a $31.5 preliminary noncash tax charge to remeasure deferred tax assets and liabilities following the federal corporate tax-rate reduction. Before tax, year-to-date income was $16.0, up from $12.1.
- Backlog increased to $392 at June 30 from $331 at September 30, 2017. Management cautions that backlog is not a guarantee of future revenue or profit.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cited stronger bid volume and improving conditions in some Commercial & Industrial markets, while noting competition, project timing and the variable spending cycles of Communications customers.
- Residential margins face copper and other commodity price increases and tighter labor markets. The company has no commodity-price hedges and says its ability to pass costs through depends on market conditions. Floating-rate debt also creates interest-rate exposure; a one-percentage-point increase would add an estimated $0.3 of annual pretax interest expense.
- The July 23, 2018 credit-facility amendment, after quarter-end, makes the minimum EBITDA covenant applicable only under specified low-excess-availability conditions. At June 30, the company reported covenant compliance, a 6.1:1 fixed-charge coverage ratio and $38.2 of covenant-defined trailing-four-quarter EBITDA.
- A federal tax-rate remeasurement charge drove the year-to-date loss; the company described the charge as preliminary and subject to further analysis. It also recorded a $1.8 tax benefit from reversal of an uncertain tax position.
- IES is pursuing approximately $21.0 of claims, plus an anticipated additional approximately $4.5, in litigation relating to the USAMRIID project. No recovery was recorded, and the outcome is uncertain. A separate Capstone matter was settled, resulting in a $0.2 charge and payment in the nine-month period.
- Tontine and affiliates held approximately 59% of outstanding shares. A change in ownership could affect tax-loss carryforwards and trigger provisions in financing, bonding and severance arrangements. Other operating risks include project-estimation and execution, labor availability, self-insurance claims, bonding capacity and seasonality.
Important facts for investors to verify
- Whether the $31.5 deferred-tax remeasurement is finalized and whether any further tax adjustments affect reported results or tax assets.
- Segment-level margin and revenue trends, particularly Residential cost pressures, Communications customer spending timing, and the wind-down of Denver and Roanoke.
- Cash conversion and working-capital needs: nine-month operating cash flow was $5.0 despite higher year-to-date revenue, and costs and estimated earnings in excess of billings increased.
- Revolver availability, covenant headroom and the effect of the July 2018 amendment under future liquidity scenarios.
- Progress and potential recovery in the USAMRIID litigation, and adequacy of self-insurance and construction-defect reserves.
- Acquisition performance, including Azimuth, and whether the reported backlog converts to profitable work.