IES Holdings, Inc. annual report, FY2016

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IES Holdings, Inc. — FY2016 Form 10-K

Reporting period: Fiscal year ended September 30, 2016. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.

Business context

IES is a holding company with four operating segments: Communications, Residential, Commercial & Industrial, and Infrastructure Solutions. It provides technology infrastructure, residential electrical installation, commercial and industrial contracting, and electro-mechanical services. In May 2016, the company changed its name from Integrated Electrical Services, Inc. to IES Holdings, Inc.

Financial performance and liquidity

  • Revenue: $696.0 million, up 21.3% from $573.9 million in FY2015. All segments grew; acquisitions contributed $34.4 million of revenue.
  • Profit and margins: Gross profit was $127.0 million, with gross margin of 18.2% versus 17.4%. Operating income was $25.0 million (3.6% margin), compared with $18.5 million (3.2%) in FY2015. Net income attributable to IES was $120.8 million, or $5.63 per diluted share, versus $16.5 million, or $0.77 per diluted share.
  • Tax item: FY2016 net income included a $109.0 million income tax benefit, primarily from releasing valuation allowances on deferred tax assets. Pretax income was $23.8 million; cash income taxes paid, net, were $1.4 million. The valuation allowance release did not itself generate cash.
  • Cash flow: Operating activities provided $25.0 million, versus $11.5 million in FY2015. Investing activities used $60.7 million, including $59.5 million for acquisitions; financing activities provided $19.4 million. Cash declined to $33.0 million from $49.4 million.
  • Liquidity and debt: Working capital was $43.7 million. Reported total debt was $29.3 million; cash was $33.0 million. The company reported $33.1 million of revolver availability and $66.0 million of liquidity at year-end. The amended revolving facility has a $70 million maximum and matures August 9, 2019.
  • Other metrics: Total assets were $394.3 million and stockholders’ equity was $223.4 million. Days sales outstanding increased to 60 from 56. Backlog was $341 million, compared with $270 million a year earlier.

Material changes versus FY2015

  • Communications revenue rose 33.7% to $189.6 million, led by data-center work; its gross margin fell to 17.2% from 18.2%, partly due to a greater share of lower-margin cost-plus projects.
  • Residential revenue increased 9.5% to $225.9 million and gross margin improved to 23.9% from 20.3%. Single-family growth and favorable commodity prices helped; multi-family revenue weakened amid labor shortages and softer Houston demand.
  • Commercial & Industrial revenue increased 24.4% to $222.5 million, including contributions from Shanahan and STR. Gross margin declined to 11.1% from 12.0%, with insurance costs cited as a factor.
  • Infrastructure Solutions revenue rose 23.9% to $58.0 million, reflecting acquisitions, partly offset by the sale of the engine-components operation. Gross margin increased to 27.0% from 22.7%.
  • IES acquired Calumet, Shanahan, an 80% interest in STR Mechanical, and Technibus for aggregate consideration of approximately $59.6 million. It sold substantially all operating assets of HK Engine Components and recorded an $0.8 million loss related to the sale and asset write-down.

Outlook, risks and unusual items

  • Management expected FY2017 revenue from existing businesses to increase year over year, assuming no significant deterioration in economic conditions. It forecast FY2017 fixed-asset requirements of $4–5 million and expected cash, operating cash flow, and facility capacity to cover needs for the next twelve months.
  • Management expected $305 million of year-end backlog to convert to FY2017 revenue and the remaining $36 million in FY2018, while cautioning that backlog may be delayed, canceled, or unprofitable.
  • Federal NOLs were estimated at $404.0 million, including amounts related to additional tax goodwill amortization. A change in ownership under Section 382 could significantly limit their use. Tontine held approximately 58% of the common stock as of its October 2016 filing; a sale could also trigger change-of-control provisions in financing, surety, and severance arrangements. IES adopted a new NOL Rights Plan in November 2016.
  • Key operating risks include cyclical construction and housing demand, project estimation and execution, fixed-price contract cost overruns, labor and commodity costs, customer collections, competition, access to surety bonding, and potential litigation or construction-defect claims.
  • The Capstone construction-defect matter was remanded for further proceedings on indemnity claims after an appellate ruling. IES sought review by the Texas Supreme Court; the company had not recorded a reserve because it judged loss not probable and the exposure not reasonably estimable.
  • The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded the four FY2016 acquisitions from their internal-control evaluations.

Investor verification priorities

  • Assess recurring earnings and cash-generation capacity separately from the $109.0 million noncash tax benefit; verify the assumptions supporting realization of deferred tax assets.
  • Review acquisition performance, integration, purchase accounting, and contingent consideration, particularly for Calumet and Technibus.
  • Monitor receivables, DSO, working-capital needs, and conversion of backlog into profitable work.
  • Check revolver availability, borrowing-base constraints, covenant headroom, and surety capacity as activity and acquisition-related debt evolve.
  • Track the Capstone litigation, insurance and construction-defect reserves, and any Tontine ownership changes that could affect NOLs or contractual obligations.