IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2017. Financial amounts below are in millions of dollars unless stated otherwise. IES provides communications infrastructure, residential electrical installation, commercial and industrial contracting, and industrial infrastructure solutions.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | 2017: $208.3; 2016: $179.6 (+16.0%) | 2017: $604.2; 2016: $490.3 (+23.2%) |
| Gross profit / margin | 2017: $35.4 / 17.0%; 2016: $34.0 / 18.9% | 2017: $102.4 / 16.9%; 2016: $89.4 / 18.2% |
| Operating income / margin | 2017: $4.7 / 2.2%; 2016: $8.2 / 4.6% | 2017: $13.3 / 2.2%; 2016: $15.8 / 3.1% |
| Net income | 2017: $5.9; 2016: $10.8 | 2017: $10.3; 2016: $18.8 |
| Diluted EPS | 2017: $0.27; 2016: $0.50 | 2017: $0.48; 2016: $0.87 |
- Cash flow: Nine-month operating cash flow was $10.2, down from $13.9. Investing used $18.2, including $14.7 for acquisitions and $3.8 in capital expenditures. Financing used $1.0. Cash decreased $9.1 to $23.9.
- Balance sheet and liquidity: At June 30, cash was $23.9, current assets $223.8, and current liabilities $146.9. Long-term debt was $29.4 on the balance sheet. The MD&A separately reports $30.2 of revolving-facility borrowings. Facility availability was $43.8, with $6.5 of letters of credit outstanding; reported total liquidity was $67.7.
- Debt terms: In April, IES increased its revolving credit facility limit from $70 to $100 and extended maturity to August 2021. The company reported covenant compliance at June 30, with a 14.8:1 fixed-charge coverage ratio and $42.1 of covenant-defined trailing-12-month EBITDA.
Changes and operating drivers
- Revenue increased across most segments, with acquisitions contributing $15.7 of the quarterly increase and $32.8 of the nine-month increase. Communications and Residential grew; Commercial & Industrial revenue declined slightly in the quarter, while Infrastructure Solutions growth was substantially acquisition-related.
- Profitability weakened despite higher revenue: gross margin fell 1.9 percentage points in the quarter and 1.3 points year to date. Management cited lower margins in several segments, higher activity-related costs, and underperforming Commercial & Industrial projects. SG&A rose 19.7% in the quarter and 22.9% year to date.
- Four Commercial & Industrial projects incurred labor cost overruns, primarily after customer schedule acceleration. IES recorded related estimate-change expense of $2.5 in the quarter and $3.7 year to date. Denver and Roanoke branches generated a $2.6 operating loss in the quarter; IES decided to wind down both locations. Their backlog was $16.5 at June 30, versus $31.5 a year earlier.
- Backlog declined to $314 from $341 at September 30, 2016, reflecting work performed on Residential projects and completion of Communications projects, partly offset by acquired backlog. Management cautions backlog is not a guarantee of future revenue or profit.
- IES acquired Freeman Enclosure Systems and Technical Services II during the period for aggregate consideration of $15.9. After quarter-end, it acquired an 80% interest in NEXT Electric. The July wind-down decision and subsequent facility amendments also occurred after quarter-end.
Outlook, unusual items and risks
- The filing provides no formal revenue or earnings guidance. Management said the underperforming branches’ remaining projects could continue to affect margins through completion in fiscal Q4 2017 and expected no significant wind-down costs.
- Nine-month 2017 tax expense included a $3.7 benefit from reversal of a reserve for an uncertain tax position. The 2016 comparison benefited from a $5.0 valuation-allowance release. These items materially affect year-over-year net income comparability.
- A material disputed construction-defect matter, the Capstone litigation, remains unresolved. Capstone seeks recovery of damages claimed by a project owner, including a stated $10.4 claim against Capstone. IES has not recorded a reserve, saying loss was not probable and exposure could not be reasonably estimated; it states there can be no assurance it will prevail or avoid indemnity costs.
- Other disclosed risks include fixed-price exposure to copper, aluminum, steel and fuel costs; floating-rate debt (a one-percentage-point rate increase would add about $0.3 of annual pretax interest expense); project-estimate and labor risks; seasonality; self-insurance claims; and the possibility that backlog is not realized.
- Tontine and affiliates owned approximately 58% of outstanding shares, with significant influence over company affairs. A change in ownership could affect tax-loss carryforwards and trigger provisions in financing, bonding and severance arrangements.
Most important facts for investors to verify
- Whether Commercial & Industrial project overruns and the Denver/Roanoke wind-down continue to pressure margins or require additional charges.
- Whether operating cash generation, receivable collections and working capital support liquidity and compliance with the amended credit covenants.
- How acquisition contributions, including NEXT, affect organic growth, margins, debt and integration costs.
- Developments in the Capstone litigation, self-insurance reserves and any resulting cash exposure.
- The durability of earnings excluding the tax-reserve reversal and the prior-year valuation-allowance benefit.