IES Holdings, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended June 30, 2011; the quarter is the third quarter of the fiscal year. The unaudited filing covers an electrical and communications services contractor operating in Communications, Residential, and Commercial & Industrial markets. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $123.2 | $121.4 | $355.2 | $349.3 |
| Gross profit / margin | $9.5 / 7.7% | $15.1 / 12.4% | $26.1 / 7.3% | $48.6 / 13.9% |
| Operating loss | $(9.7) | $(5.9) | $(21.2) | $(18.1) |
| Net loss | $(10.2) | $(6.6) | $(23.1) | $(20.6) |
| Loss per share, diluted | $(0.70) | $(0.45) | $(1.59) | $(1.43) |
- For the nine months, operating cash flow was negative $23.7, investing cash flow positive $14.5, and financing cash flow negative $0.7. Investing cash flow included $16.5 in proceeds from facility sales and $2.1 in capital expenditures. Cash declined $9.9 to $23.0.
- At June 30, cash was $23.0, working capital $71.5 (down from $83.3 at September 30, 2010), and total liquidity $40.7. The revolving facility had $17.7 available, with no borrowings and $8.1 of letters of credit outstanding. Receivable days outstanding improved to 77 from 83.
- Total debt was $10.6, including a $10.0 related-party term loan bearing 11% and due May 2013. The $60.0 revolving credit facility matures May 2012; management intended to discuss an extension, with no assurance it could do so.
- Management expected available cash, operating cash flows, and revolving capacity to cover working capital, debt service, and capital expenditures for the next 12 months; it expected FY2011 capital expenditures not to exceed $2.5.
Changes and operating drivers
- Revenue rose modestly, but gross profit and margins deteriorated sharply. Management cited lower-margin and difficult-to-execute projects, competitive bidding, higher copper, steel, and fuel costs, and increased healthcare and unemployment costs. Wind-down operations contributed $4.3 of negative gross profit in Q3 and $5.6 for the nine-month period.
- Q3 segment revenue was $23.5 Communications, $30.1 Residential, and $69.6 Commercial & Industrial. Nine-month revenue was $66.8, $82.5, and $205.9, respectively. Communications revenue grew, while Residential revenue declined; Commercial & Industrial revenue was slightly higher.
- Nine-month Commercial & Industrial gross profit fell to $4.5 from $18.6, including $4.3 of negative impact from execution difficulties on six projects. Residential gross profit fell to $13.2 from $19.4, and Communications gross profit to $8.4 from $10.6.
- SG&A declined to $48.8 from $66.1 for the nine months, reflecting cost reductions and prior-period bad-debt charges; the comparison also includes a $2.9 recovery related to the Centerpoint project. The company recorded a $6.8 gain on sale of a manufacturing facility and a $3.6 non-cash impairment of internally developed software. The software was no longer in use.
- Facility sales included the manufacturing business sold for an adjusted purchase price of about $10.7, generating the $6.8 gain, and a non-core electrical distribution business sold for about $6.7, with an immaterial gain.
Outlook, risks, and contingencies
- The 2011 restructuring plan targets underperforming Commercial & Industrial facilities for sale or closure in Arizona, Florida, Iowa, Massachusetts, Nevada, and Texas. Estimated total closure costs were $4.5–$5.5; $1.7 had been recorded through June 30. Management said the plan was part of its effort to return to profitability.
- For 95 remaining projects at the affected facilities, estimated completion costs were $22.5. Work totaling $8.5 had been subcontracted and $7.5 assigned; about $6.4 remained for IES to execute, with most expected to finish by September 30, 2011. Release acknowledgement remained outstanding for one assigned contract.
- The company reported $3.8 of revenue associated with three contract claims, which it considered collectible but acknowledged carried some risk and remained in various stages of litigation. In a separate Centerpoint matter, it recorded a $2.9 settlement recovery in SG&A during the period.
- Self-insurance liabilities accrued were $6.0; construction-defect reserves were $0.4. The company had no reserve for the Ward Transformer environmental matter, stating responsibility was not probable and exposure could not be estimated.
- Bonded projects had an estimated $113.6 cost to complete, including $12.9 for restructuring wind-down operations. Surety capacity is discretionary, and $4.0 of cash remained collateral for obligations to former sureties.
- Key risks include weak and cyclical construction demand, project execution and estimation risk, competitive pressure, commodity and labor costs, customer collections, availability of surety bonds and credit, and the need to extend the revolving facility. Tontine controlled 58.1% of outstanding common stock; its affiliate James M. Lindstrom became interim CEO and President on June 30. A change of control could affect agreements and tax-loss availability.
- Management reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting during the nine months.
Important facts for investors to verify
- Whether gross margins recover, particularly in Commercial & Industrial, and whether the troubled projects and restructuring wind-down complete within the stated cost and timing expectations.
- Whether operating cash use can be reduced and liquidity preserved; confirm the revolving facility extension, borrowing-base availability, and covenant requirements. The filing states the fixed-charge coverage test was not required while liquidity remained above its trigger, and that the company would not have met the ratio test if it had been required to test at June 30.
- Collectability and resolution of the three contract claims, Centerpoint settlement accounting, and any exposure from the Ward Transformer matter, self-insurance, or construction-defect claims.
- How much of reported earnings and cash generation reflects non-recurring facility-sale gains, asset impairment, restructuring charges, and prior-period receivable recoveries rather than ongoing operations.
- Whether surety providers continue to provide adequate bonding capacity and whether Tontine’s control or a potential ownership change affects financing, contracts, or tax attributes.