IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013; comparisons are to the corresponding 2012 periods. Unless stated otherwise, amounts below are in millions of dollars. IES provides electrical and related infrastructure services through Communications, Residential, and Commercial & Industrial segments.
Financial performance
| Metric | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Six months ended March 31, 2013 | Six months ended March 31, 2012 |
|---|---|---|---|---|
| Revenue | $122.0 | $107.6 | $249.3 | $216.6 |
| Gross profit / margin | $16.0 / 13.1% | $13.8 / 12.8% | $34.0 / 13.6% | $27.0 / 12.5% |
| Operating income (loss) | $(0.6) | $(0.6) | $2.5 | $0.05 |
| Net loss from continuing operations | $(0.9) | $(1.2) | $(0.3) | $(1.0) |
| Net loss, including discontinued operations | $(1.1) | $(3.4) | $(0.6) | $(7.2) |
| Diluted loss per share | $(0.07) | $(0.23) | $(0.04) | $(0.49) |
For the quarter, revenue rose 13.4%; higher Communications and Residential activity drove growth. Gross margin improved, but SG&A increased 15.3% to $16.6 million, including increased staffing, incentive compensation, and $0.9 million in acquisition-related costs. For the six months, revenue rose 15.1%, while SG&A rose 16.4% to $31.5 million. The improvement in net loss largely reflects lower discontinued-operation losses; discontinued operations lost $0.3 million in the first half of 2013 versus $6.2 million in 2012.
- Communications: Six-month revenue increased 34.2% to $71.9 million and gross margin rose to 18.2% from 14.2%, aided by data-center and high-tech manufacturing projects. Management cautioned that large projects are awarded periodically and this growth may not continue.
- Residential: Six-month revenue increased 27.9% to $75.3 million; gross margin improved to 17.1% from 15.6%. Higher single- and multi-family construction activity helped, while solar margins were affected by delays in third-party financing.
- Commercial & Industrial: Six-month revenue decreased 2.0% to $102.0 million and gross margin fell to 7.9% from 9.8%. A large commercial project had lower-than-estimated productivity and higher projected costs; management expects completion in early 2014 and says it is pursuing cost recovery, whose likelihood it cannot quantify.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was positive $1.1 million, compared with cash used of $7.8 million in 2012. Investing used $0.9 million and financing used $5.5 million. Cash declined $5.3 million to $13.5 million; restricted cash was $7.1 million.
- At March 31, current assets were $132.6 million and current liabilities were $91.1 million. Their difference is $41.5 million, while MD&A separately reports working capital of $40.4 million; the filing does not clearly reconcile these figures. Total assets were $153.3 million and stockholders’ equity was $53.0 million.
- Total debt was $6.5 million, including a $4.8 million Wells Fargo term loan. IES repaid its $10.0 million related-party Tontine term loan in February, using cash and a $5.0 million Wells Fargo term loan. The Wells Fargo loan’s rate was fixed at 7.0% through an interest-rate swap.
- The $30 million revolving facility had $16.5 million of availability and $7.1 million of outstanding letters of credit at quarter-end. Letters of credit were fully cash-collateralized. The facility matures in August 2016 and includes a fixed-charge coverage covenant subject to liquidity and availability triggers.
- Days sales outstanding improved to 59 from 67 at September 30, 2012. The filing says collections improved, but cash and cash equivalents declined during the half-year.
Developments, outlook, and risks
- IES acquired assets of the Acro Group’s residential solar integration business on February 15 for estimated consideration of $4.8 million, including contingent consideration. The acquired assets contributed $0.05 million in revenue and a $0.4 million net loss through March 31; purchase-price valuations remained preliminary.
- On March 13, IES agreed to acquire MISCOR in a stock-and-cash merger. The stated consideration is $24 million less MISCOR debt, subject to stock-price and debt adjustments; shareholder approvals and other closing conditions remained outstanding. Wells Fargo committed, subject to conditions, to an acquisition term loan of up to $14 million. The merger could add debt, dilute existing shareholders, and entail integration costs and execution risk.
- Management said cash, operating cash flows, and available credit were expected to fund working capital, debt service, and capital expenditures for the next 12 months. No specific revenue or earnings guidance was provided. Management also warned that results are affected by construction cyclicality, seasonality, project timing, labor and commodity costs, customer collections, and access to surety bonds.
- The filing gives inconsistent descriptions of covenant status: the debt note says quarter-end liquidity and excess availability exceeded the thresholds that trigger the fixed-charge test, while MD&A says the test was not required and that IES would have failed it if required. Management expected to meet future covenants and stated that cash would be adequate for operations and letter-of-credit collateral if a waiver were unavailable.
- IES reserved $1.7 million against a receivable from a former surety after concluding collection was not probable. It was pursuing collateral and legal remedies; any recovery was uncertain. Other disclosed matters include a transformer-site environmental claim and wage-and-hour suits, for which IES recorded no reserves because it assessed liability as not probable and exposure as not estimable.
- A new surety agreement entered May 7, 2013 gives the surety rights to receivables and proceeds from bonded contracts and permits it to demand additional collateral. Tontine, the controlling shareholder, had requested registration of its shares for resale; the shelf registration statement was not yet effective. A sale could affect ownership-related tax benefits and trigger contractual change-of-control provisions.
Key facts for investors to verify
- Reconcile the reported $40.4 million working-capital figure with balance-sheet current assets less current liabilities.
- Clarify the credit-facility covenant testing and compliance statements, including whether any test or waiver was required during the period.
- Track the Commercial & Industrial project’s remaining cost, completion, and any recoveries, as well as Communications project concentration and Residential solar financing and margins.
- Confirm final Acro purchase-price allocations and contingent consideration, and monitor MISCOR approvals, final consideration, financing, dilution, and integration outcomes.
- Assess actual liquidity after restricted cash and letters of credit, future borrowing availability, surety requirements, and any recovery of the reserved former-surety receivable.