IES Holdings, Inc. (then Integrated Electrical Services, Inc.) — Form 10-Q
Reporting period: Second fiscal quarter and six months ended March 31, 2016; comparisons are with the corresponding 2015 periods. Financial amounts below are in millions unless stated otherwise.
Business context
IES provides communications infrastructure, residential electrical installation, commercial and industrial contracting, and infrastructure solutions. Results include acquisitions completed during the period. The company announced a proposed name change to IES Holdings, Inc., subject to shareholder and regulatory approval.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2016 | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2016 | Six months ended Mar. 31, 2015 |
|---|---|---|---|---|
| Revenue | $160.0 | $133.8 | $310.7 | $270.1 |
| Gross profit / margin | $27.8 / 17.4% | $21.7 / 16.2% | $55.4 / 17.8% | $44.4 / 16.4% |
| Operating income / margin | $2.5 / 1.5% | $2.3 / 1.7% | $7.6 / 2.4% | $6.3 / 2.3% |
| Net income | $2.2 | $1.8 | $8.0 | $5.1 |
| Diluted EPS | $0.10 | $0.08 | $0.37 | $0.24 |
- Quarterly revenue rose 19.6%; six-month revenue rose 15.1%. Management attributed growth to higher activity across all segments and $8.5 million of quarterly revenue from acquired businesses (Southern Rewinding, Calumet and Shanahan); those businesses contributed $12.9 million for the six-month period.
- Quarterly SG&A rose 25.0% to $24.3 million, faster than revenue, reflecting added staffing, higher incentive compensation and acquisition-related costs. Six-month SG&A rose 22.8% to $46.8 million.
- Quarterly gross margin improved year over year, while operating margin eased from 1.7% to 1.5%. For six months, operating margin edged up from 2.3% to 2.4%. Six-month net income includes a $1.4 million tax benefit from releasing valuation allowance in connection with acquired deferred tax liabilities.
- Operating cash flow was $18.3 million for the six months, versus $4.7 million in 2015. Cash increased $8.9 million to $58.3 million. Investing used $9.4 million, including $8.3 million for acquisitions; financing used $0.02 million. The MD&A describes operating cash flow as $18.4 million, while the cash flow statement reports $18.321 million.
- At March 31, cash was $58.3 million, total current assets $193.2 million and current liabilities $108.8 million. Working capital excluding cash was $26.1 million; DSOs improved to 50 from 56 at September 30, 2015.
- Long-term revolving debt was $10.2 million, with no current maturities. The company reported $22.6 million of availability under the facility without violating its financial covenant, $6.9 million of outstanding letters of credit, and covenant compliance. The reported fixed-charge coverage ratio was 15.1:1.0.
Material changes and segment developments
- Communications quarterly revenue increased 40.8% to $39.4 million, led in part by data-center work; gross margin slipped to 16.7% from 17.1% due to inefficiencies on projects nearing completion.
- Residential revenue grew 6.4% to $53.4 million. Stronger single-family activity and better margins offset lower multifamily revenue, which management attributed largely to project delays. Quarterly gross margin rose to 23.9% from 19.3%.
- Commercial & Industrial revenue grew 21.7% to $54.1 million, including $3.9 million from Shanahan. Quarterly gross margin declined to 9.6% from 10.8%, reflecting inefficiencies, higher insurance costs and a $0.5 million prior-project dispute settlement.
- Infrastructure Solutions revenue increased 17.6% to $13.1 million, with acquired-business contributions partly offset by weaker engine-components demand. In February, the company approved the sale of substantially all HK Engine Components assets; it recorded a $0.8 million write-down and completed the sale on April 15, 2016.
- In the first fiscal quarter, IES acquired Calumet and Shanahan for aggregate consideration of $8.6 million. Calumet contingent consideration was remeasured to $0.7 million, with $0.3 million of expense recorded. On April 27, 2016, a subsidiary acquired an 80% interest in STR Mechanical; purchase price details are not provided in this filing text.
Outlook, risks and unusual items
- Management said cash, operating cash flow and available credit were expected to meet working-capital, debt-service and capital-expenditure needs for the next twelve months. No numerical earnings or revenue guidance is provided.
- On May 3, 2016, the company amended its revolving credit facility: maximum capacity increased from $60 million to $70 million, maturity was extended to August 2019, pricing margins were reduced, and borrowing-base availability was expanded. The amendment requires minimum liquidity of $8.75 million, at least half of which must be excess availability.
- Management cited risks including construction cyclicality and seasonality, project delays and execution, fixed-price estimating, labor availability, customer collections, commodity prices, surety requirements, and credit-facility covenant compliance. A prolonged low-oil-price downturn could affect housing demand in Texas. Floating-rate debt exposes the company to rate increases; a one-percentage-point increase was estimated to add $0.1 million of annual pretax interest expense at period-end debt levels.
- Tontine and affiliates controlled approximately 62.4% of outstanding shares. A change in ownership could restrict tax-loss carryforwards and trigger change-of-control provisions in financing, bonding and severance arrangements.
- The Ward Transformer private-action settlement was accrued previously and paid in the quarter. For separate EPA offsite remediation, costs remained unknown; IES expected release for a nominal amount and had recorded no additional reserve. Insurance liabilities were $4.3 million and construction-defect reserves $0.4 million at March 31; management cautioned that actual outcomes and payment timing could differ from estimates.
- The company maintained a full valuation allowance against deferred tax assets, citing cumulative historical losses despite recent profitability. It said future sustained profitability could change the assessment. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much reported growth and margin improvement is sustainable after separating acquisition contributions and the one-time tax benefit.
- Whether commercial and industrial project margins recover, and whether residential multifamily delays or Texas housing softness worsen.
- Final acquisition accounting and contingent consideration for Calumet and Shanahan, as well as the economics and integration of STR Mechanical.
- Post-amendment borrowing availability, covenant thresholds and compliance; confirm the facility’s revised terms alongside the period-end figures reported under the prior terms.
- Outcome and potential exposure from EPA remediation, self-insured claims and construction-defect matters; also monitor the proposed name-change approval and controlling shareholder activity.