IES Holdings, Inc. (Integrated Electrical Services, Inc.) — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing also reports unaudited fourth-quarter results. Unless otherwise indicated, financial amounts below are in U.S. dollars and rounded to millions.
Business context and reporting period
IES provides electrical installation, construction, maintenance, communications infrastructure, and industrial and rail services through Communications, Residential, Commercial & Industrial, and Infrastructure Solutions. Infrastructure Solutions was added following the September 2013 acquisition of MISCOR. The MISCOR business contributed results only from the acquisition date.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $494.6 million | $456.1 million |
| Gross profit / margin | $67.0 million / 13.5% | $58.1 million / 12.7% |
| Operating income (loss) | $0.4 million | ($0.4 million) |
| Net loss | ($3.6 million) | ($11.8 million) |
| Loss per share | ($0.24) | ($0.81) |
| Cash from (used in) operations | $2.0 million | ($7.4 million) |
| Cash and cash equivalents at year-end | $20.8 million | $18.7 million |
| Working capital at year-end | $45.5 million | $43.0 million |
| Total debt at year-end | Approximately $13.8 million | $10.5 million |
FY2013 investing cash use was $4.8 million, mainly for acquisitions and capital expenditures, partly offset by property-sale proceeds. Financing provided $4.8 million. The company reported $8.4 million available under its $30 million revolving facility, $6.5 million of outstanding letters of credit, and no revolver borrowings. The $13.7 million Wells Fargo term loan is payable through August 2016. The credit facility restricts dividends and limits share repurchases.
Fourth-quarter FY2013 revenue was $123.8 million and gross profit was $17.3 million. The quarter recorded a $1.1 million loss from continuing operations and a $1.8 million net loss, or $0.12 loss per share.
Material changes versus the prior comparable period
- Annual revenue rose 8.4%; gross profit increased by $8.9 million and gross margin expanded by 0.8 percentage points. Operating results improved from a small loss to a small profit.
- Net loss narrowed by $8.2 million, including a smaller discontinued-operations loss: $1.4 million versus $9.1 million.
- Residential revenue grew 25.1% to $162.6 million, led by single-family and multifamily work. Communications revenue grew 4.0% to $126.3 million, with gross margin improving to 18.8%.
- Commercial & Industrial revenue was nearly flat at $203.5 million, but gross margin fell to 7.6% from 9.4%, principally due to underperformance on four projects and revised cost estimates on a large project expected to finish in 2015.
- Backlog declined to approximately $204 million from $234 million. Management attributed the decrease partly to large 2012 projects that did not recur and said it prioritized project quality and margins over volume.
- IES acquired MISCOR for approximately $16.2 million in stock and cash, issuing about 2.8 million shares and paying approximately $4.4 million cash to MISCOR shareholders. It also acquired Acro Group solar-business assets earlier in the year.
- The company repaid the remaining $10 million Tontine Term Loan in February 2013 and increased Wells Fargo term debt to $13.7 million, including funding related to the MISCOR transaction.
Outlook, commentary, risks, and unusual items
- Management expected FY2014 revenue from existing businesses to increase year over year, assuming no significant deterioration in economic conditions. It forecast FY2014 fixed-asset requirements of $2.0–$2.5 million and anticipated available cash, operating cash flow, and credit capacity would cover the next 12 months’ needs.
- Despite meeting specified liquidity and excess-availability thresholds at September 30, 2013, the company stated it would have failed its fixed-charge coverage test had testing been required at that date. Covenant thresholds and liquidity therefore merit close attention.
- IES reported approximately $466 million in federal net operating losses, including tax-goodwill amortization amounts. A change in ownership under Section 382 could limit their use; Tontine owned approximately 58% and had an effective shelf registration allowing share resales. The NOL Rights Plan does not assure preservation of the tax benefits.
- FY2013 SG&A included $3.0 million of acquisition-related costs. A $1.7 million receivable from a former surety was reserved after collection concerns; the company reported subsequent recovery of $0.5 million through September 2013.
- Major risks include fixed-price project-estimation and execution risk, labor and commodity-cost changes, customer collections, seasonality and economic cyclicality, integration of MISCOR, access to credit and surety bonding, and potential construction-defect, environmental, and other claims. Sureties retain discretion over bonding capacity; estimated cost to complete bonded projects was approximately $49.2 million.
- Two notable legal matters were the Ward Transformer environmental clean-up litigation and three wage-and-hour class-action suits. The company recorded no reserves for these matters, stating that responsibility was not considered probable and potential exposure was not estimable. It reported other routine claims and insurance reserves.
- The filing’s independent auditor gave an unqualified opinion on the financial statements. The auditor did not audit internal control effectiveness; management concluded its financial-reporting controls were effective.
Important facts for investors to verify
- Whether FY2014 revenue growth and cash-generation expectations were achieved, and how results developed after the limited post-acquisition contribution from MISCOR in FY2013.
- Current liquidity, borrowing-base availability, covenant compliance, term-loan repayment obligations, and the effect of letters of credit and surety requirements.
- Whether the Commercial & Industrial project with revised cost estimates completed profitably, and whether project margins improved without material further write-downs.
- Final MISCOR purchase accounting, integration performance, and the return on acquisition spending and newly issued shares.
- Any Tontine share sales or other ownership changes that could affect control, credit or bonding agreements, and the Section 382 availability of NOLs.
- Subsequent developments in the former-surety receivable, legal proceedings, construction-defect claims, and other contingencies.