IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. Unless stated otherwise, dollar amounts are in millions. The company changed its name from Integrated Electrical Services, Inc. to IES Holdings, Inc. on May 24, 2016.
Business context and results
IES provides communications infrastructure, residential electrical installation, commercial and industrial contracting, and infrastructure solutions through four operating segments. Results include four acquisitions completed in fiscal 2016, so reported growth reflects both acquired and existing operations.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $179.6; up 24.7% year over year | $490.3; up 18.4% |
| Gross profit / margin | $34.0 / 18.9%, versus $25.1 / 17.4% | $89.4 / 18.2%, versus $69.5 / 16.8% |
| Operating income / margin | $8.2 / 4.6%, versus $4.6 / 3.1% | $15.8 / 3.1%, versus $10.9 / 2.6% |
| Net income | $10.8, versus $4.0 | $18.8, versus $9.1 |
| EPS attributable to IES | $0.50 basic and diluted | $0.88 basic; $0.87 diluted |
Net income included significant income tax benefits from releasing valuation allowances against deferred tax assets associated with acquired deferred tax liabilities: $3.6 million for the quarter and $5.0 million for the nine-month period. These benefits materially lifted reported earnings.
Cash flow, debt and liquidity
- Cash from operations was $13.9 million for the nine months, versus $6.2 million a year earlier. Cash used in investing was $59.7 million, principally for acquisitions; financing provided $19.2 million, including $20.0 million of borrowings.
- Cash and cash equivalents were $22.8 million at June 30, down from $49.4 million at September 30, 2015. Long-term debt was $30.2 million, compared with $10.2 million at fiscal year-end.
- Working capital excluding cash was $43.6 million. Reported liquidity under the credit agreement was $53.2 million, with $30.4 million of excess availability. The company reported a 14.2:1 fixed-charge coverage ratio.
- The May 2016 credit amendment raised the revolver limit from $60 million to $70 million, extended maturity to August 9, 2019, reduced the interest-rate margin and changed borrowing-base terms. Minimum liquidity and excess-availability requirements apply; covenant breaches could accelerate debt.
- Operating cash flow benefited from higher earnings, while receivables used cash. Days sales outstanding rose to 57 from 56 at September 30, 2015. Management expected cash, operating flows and available credit to cover needs for the next 12 months.
Material changes and segment trends
- IES acquired Calumet, Shanahan, 80% of STR Mechanical and Technibus for aggregate consideration of approximately $59.6 million. Acquisitions contributed $10.6 million of quarterly revenue and $19.6 million for the nine-month period. Preliminary purchase accounting included $23.0 million of goodwill and $29.9 million of intangible assets.
- Communications revenue grew 37.1% in the quarter, led by data-center work, but gross margin declined to 16.9% from 19.9%, partly due to a greater share of lower-margin cost-plus projects and nonrecurring prior-year efficiencies.
- Residential quarterly revenue rose 7.3%; gross margin improved to 23.7% from 19.6%, driven by single-family work and project efficiency. Multi-family work was delayed by labor constraints affecting other trades.
- Commercial & Industrial quarterly revenue rose 34.0%, with acquired businesses contributing. Nine-month gross margin fell to 11.1% from 11.6%, reflecting project delays, inefficiencies, insurance costs and a $0.5 million prior-project settlement charge.
- Infrastructure Solutions quarterly revenue rose 30.0%, including acquired-company contributions. Nine-month results included an $0.8 million loss on the sale of HK Engine Components assets; substantially all operating assets were sold in April 2016.
- Backlog increased to $361 million from $270 million at September 30, 2015. Management cautioned that backlog is not a guarantee of future revenue or profit.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management stated that liquidity sources should be sufficient for working capital, debt service and capital spending over the next 12 months.
- Management cited seasonality in Residential, timing of construction projects and customer facility outages, competitive markets, labor availability and project execution as factors affecting results. A prolonged low-oil-price environment could weaken housing demand in Texas.
- Capstone construction-defect litigation was revived in part on appeal after the company had obtained summary judgment. IES intended to seek Texas Supreme Court review; no reserve was recorded because loss was not considered probable and exposure was not reasonably estimable.
- Insurance and construction-defect reserves were $4.8 million and $0.3 million, respectively. The company noted uncertainty in ultimate claims and payment timing. It also had $6.3 million of letters of credit supporting its insurance program and $55.7 million of estimated costs to complete bonded projects.
- Floating-rate debt exposes IES to rate increases; a one-percentage-point rise on June 30 debt would increase annual pretax interest expense by an estimated $0.3 million. Commodity-price changes may also affect fixed-price contracts; the company had no commodity hedges.
- Tontine and affiliates held approximately 62.4% of outstanding shares, giving them significant shareholder influence. A change in ownership could affect tax-loss availability and trigger provisions in financing, bonding and severance arrangements.
Key facts for investors to verify
- How much of revenue and operating improvement is organic versus attributable to acquisitions, and whether acquired businesses sustain expected margins.
- The sustainability of earnings excluding acquisition-related tax benefits, asset-sale effects and other unusual items.
- Cash conversion, receivables collection and working-capital needs as backlog and project activity grow.
- Credit-facility headroom, borrowing-base availability, covenant compliance and the cost of floating-rate debt.
- Progress on acquired-asset valuations and integration, contingent consideration, and the unresolved Capstone and other claims.