IES Holdings, Inc. (Integrated Electrical Services, Inc.) — Form 10-Q
Reporting period: Third quarter and nine months ended June 30, 2013; filed August 12, 2013. Unless noted otherwise, dollar amounts are in thousands. IES provides communications infrastructure, residential electrical installation, and commercial and industrial electrical services.
Financial results
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Nine months ended June 30, 2013 | Nine months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $121,552 | $116,128 | $370,810 | $332,734 |
| Gross profit / margin | $15,653 / 12.9% | $14,256 / 12.3% | $49,628 / 13.4% | $41,238 / 12.4% |
| Operating income (loss) | $(907) | $(691) | $1,580 | $(645) |
| Net loss from continuing operations | $(725) | $(1,213) | $(1,034) | $(2,208) |
| Net loss, including discontinued operations | $(1,138) | $(3,176) | $(1,731) | $(10,329) |
| Basic and diluted loss per share | $(0.08) | $(0.22) | $(0.12) | $(0.71) |
- Quarterly revenue grew 4.7%; nine-month revenue grew 11.4%. Higher Residential and Communications activity drove year-to-date growth. Quarterly Communications revenue fell, primarily because of reduced work on a significant high-tech manufacturing project.
- Quarterly gross profit improved, but SG&A rose 10.8% to $16,576, leaving an operating loss. For nine months, operating results improved to income of $1,580, while higher interest and other expense and taxes contributed to a continuing-operations net loss.
- Discontinued-operations losses narrowed substantially: $413 for the quarter and $697 for nine months, versus $1,963 and $8,121, respectively, in the comparable 2012 periods.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $3,660, versus cash used of $5,945 in 2012. Investing used $1,155, including $828 paid in connection with the Acro Group asset acquisition; financing used $6,100, including repayment of the Tontine loan. Cash and cash equivalents declined $3,595 to $15,134. An additional $7,052 was restricted to collateralize letters of credit.
- At June 30, total debt was $4,865, including a $4,167 Wells Fargo term loan; the remaining Tontine loan was repaid in February. The term loan’s interest rate was fixed at 7% through an interest-rate swap.
- The company reported working capital of approximately $40.8 million. The $30 million revolving facility was subject to a borrowing base and covenant thresholds; the filing gives conflicting facility-availability figures of $14.868 million in the debt note and $16.5 million in MD&A. Letters of credit totaled $7.052 million and were cash-collateralized.
- Management said cash, operating cash flow and credit availability were expected to cover working capital, debt service and capital expenditures for the next 12 months. The filing says the fixed-charge coverage test was not triggered at quarter-end because liquidity thresholds were met, but also states that IES would have failed that ratio test had it been required to test. Covenant headroom and the stated availability figures merit verification.
Material changes, outlook and risks
- Segment performance: Nine-month Communications revenue rose 13.5% and gross margin increased to 18.2%; Residential revenue rose 27.3% and gross margin reached 16.7%. Commercial & Industrial revenue was nearly flat, while its gross margin fell to 7.8% from 9.5%, reflecting project underperformance and cost increases on a large, delayed commercial project. IES expected that project to finish in early 2014 and be ultimately profitable, but provided no assurance; cost recovery remained uncertain.
- Acro acquisition: IES acquired residential solar integration assets in February 2013. The acquired business contributed $607 of revenue and a $628 net loss through June 30, including intangible amortization. Preliminary purchase accounting included $4,184 of goodwill and remained subject to valuation finalization.
- MISCOR merger: IES expected to acquire MISCOR in a stock-and-cash transaction, then anticipated to close in September 2013, subject to conditions and shareholder approvals. The agreement provided for $24 million of consideration less MISCOR debt, subject to adjustments and a stock-price collar. Wells Fargo committed up to $14 million of acquisition financing, subject to conditions. The filing cited dilution, integration, financing, transaction-cost and completion risks; estimated combined transaction costs were approximately $2 million.
- Unusual items: Nine-month results included a $1,425 reserve for a former surety receivable, partly offset by a $300 recovery, a $338 reduction in Acro contingent consideration recognized as other income, and a $200 impairment charge on real estate held for sale. The quarterly statement reports $649 of other income, principally reflecting the surety recovery and contingent-consideration adjustment.
- Other risks: Construction cyclicality and seasonality, project-estimate and execution risk, customer collections, commodity costs on fixed-price work, labor availability, surety capacity and collateral requirements, and potential changes in ownership affecting tax-loss availability. Tontine’s shelf registration was effective, allowing resale of its shares; the filing gave no indication it had sold under it as of the report date.
- No quantified earnings or revenue guidance was provided. Management said it did not necessarily expect Communications to sustain the growth experienced in 2012. The filing describes ordinary-course legal claims and two wage-and-hour matters for which no reserves were recorded because management considered losses not probable and exposure not estimable.
Important facts for investors to verify
- Reconcile reported revolving-credit availability ($14.868 million versus $16.5 million) and confirm borrowing-base availability, restricted cash and covenant status.
- Track the MISCOR transaction’s closing, final consideration, financing, debt assumed or repaid, share issuance and integration costs.
- Monitor final Acro purchase-price allocation and acquired-business performance, and any further recovery of the former surety receivable.
- Assess cost-to-complete, expected profitability and potential recoveries on the delayed Commercial & Industrial project.
- Review subsequent disclosures on Tontine share sales, NOL protection and any effects on control provisions or tax attributes.