IES Holdings, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparison is with the three months ended December 31, 2015 unless otherwise noted. Amounts below are in millions of dollars unless stated. IES provides communications infrastructure, residential electrical installation, commercial and industrial contracting, and industrial infrastructure solutions.
Financial results
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $192.2 | $150.8 |
| Gross profit / margin | $35.2 / 18.3% | $27.6 / 18.3% |
| SG&A | $28.2 | $22.5 |
| Operating income / margin | $7.0 / 3.6% | $5.1 / 3.4% |
| Income before taxes | $6.6 | $4.9 |
| Income tax provision (benefit) | $2.6 | ($0.9) |
| Net income | $3.9 | $5.8 |
| IES-attributable income / diluted EPS | $3.9 / $0.18 | $5.8 / $0.27 |
| Operating cash flow | ($5.6) | $4.9 |
| Capital expenditures | $1.8 | $0.4 |
- Revenue increased 27.5%; the four fiscal 2016 acquisitions contributed $12.5 million of the increase. Gross profit rose $7.5 million, while gross margin held at 18.3%.
- SG&A increased 25.2%, mainly with higher activity, staffing, acquisition-related costs and $1.4 million more incentive compensation. SG&A as a share of revenue improved to 14.7% from 14.9%.
- Net income fell despite higher operating income, chiefly because taxes shifted from a $0.9 million benefit to a $2.6 million provision. Management attributed the prior-period benefit primarily to a valuation-allowance release related to a business combination; the current-period expense followed a valuation-allowance release in September 2016.
Segments and material changes
| Segment | Revenue | Operating income | Notable change |
|---|---|---|---|
| Communications | $53.3 million, up 30.8% | $2.3 million, versus $3.4 million | Gross margin declined to 15.0% from 20.0%, reflecting inefficiencies on large jobs, more lower-margin cost-plus work and nonrecurring prior-year efficiencies. |
| Residential | $66.4 million, up 27.5% | $5.2 million, versus $3.0 million | Higher multifamily and single-family activity; gross margin improved to 23.7% from 22.4%. |
| Commercial & Industrial | $54.0 million, up 19.2% | $1.8 million, versus $1.2 million | Growth included $5.2 million from acquired businesses; gross margin improved to 11.3% from 10.7%. |
| Infrastructure Solutions | $18.5 million, up 46.5% | $1.3 million, versus $0.2 million | Acquisitions and improved motor-repair performance contributed; sale of the engine-components business partly offset revenue growth. |
Backlog declined to $328 million at December 31, 2016 from $341 million at September 30, 2016, primarily following completion of large Communications projects. The company cautions that backlog is not a guarantee of future revenue or profit.
Cash, debt and liquidity
- Cash and cash equivalents were $25.7 million at December 31, 2016, down from $33.0 million at September 30, 2016. Current assets were $209.5 million and current liabilities $125.8 million; working capital was approximately $83.7 million.
- Operating activities used $5.6 million, compared with $4.9 million provided a year earlier. Management cited increased working-capital needs, especially Communications cost-plus projects; prepaid expenses and costs/earnings in excess of billings also increased. Days sales outstanding rose to 65 from 60 at fiscal year-end.
- The balance sheet reports $29.3 million of long-term debt, net of current maturities, consisting of revolving-facility borrowings. MD&A reports $30.2 million of outstanding borrowings. The filing does not reconcile these figures in the provided text.
- The $70 million revolving credit facility matures in August 2019. At quarter-end, outstanding letters of credit were $6.6 million and facility availability was $33.2 million; reported liquidity was $58.9 million. The company said it was compliant with all covenants and reported a 17.0:1.0 fixed-charge coverage ratio, although that ratio was not then required. The borrowing rate was 2.86%.
- Investing activities used $1.8 million, primarily for property and equipment. Financing activities provided $0.2 million. No shares were repurchased under the repurchase program during the quarter.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management notes that residential work is seasonal, quarterly results can vary with project timing and weather, and Infrastructure Solutions results can depend on customer facility outages.
- Management said current surety capacity was adequate for operations. Estimated cost to complete bonded projects was $53.3 million. Letters of credit and surety requirements reduce borrowing availability.
- A one-percentage-point increase in borrowing rates would increase annual pretax interest expense by approximately $0.3 million. The company has exposure to copper, aluminum, steel and fuel prices and had no commodity-price hedges.
- IES disclosed ongoing Capstone construction-defect litigation concerning work performed by former subsidiaries. A Texas appellate court reinstated indemnity claims; IES petitioned the Texas Supreme Court. No reserve was recorded because management considered a loss not probable and the exposure not reasonably estimable. The project owner’s claim against Capstone was $10.4 million plus fees and costs; that amount is not a stated estimate of IES’s exposure.
- Tontine and affiliates controlled approximately 58% of outstanding shares. A substantial ownership change could affect tax NOL availability and trigger provisions in financing, surety and severance arrangements. The company adopted an NOL rights plan, but gave no assurance it would protect the NOLs.
- IES early-adopted the stock-compensation standard in the quarter, recording cumulative retained-earnings adjustments of $58 thousand lower for forfeitures and $362 thousand higher for a related deferred tax asset.
- Management reported disclosure controls and procedures were effective at December 31, 2016 and no material change in internal control over financial reporting during the quarter.
Key investor verification points
- Reconcile the reported $29.3 million net debt carrying value with MD&A’s $30.2 million borrowings figure, and monitor facility availability and covenant headroom.
- Assess whether the Communications margin decline and higher cost-plus working-capital requirements persist; track DSO and operating cash conversion.
- Review the sustainability of segment growth and margins, including acquisition contributions, integration performance and the lower backlog.
- Track the Capstone litigation, self-insurance and construction-defect reserves, and any effect on cash, bonding capacity or liquidity.
- Evaluate Tontine’s ownership activity and potential consequences for NOLs and change-of-control provisions; also monitor tax expense and deferred-tax-asset assumptions.