IES Holdings, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019, compared with the three months ended December 31, 2018, unless otherwise noted. Dollar amounts are in millions except per-share data. IES provides commercial and industrial electrical/mechanical services, communications infrastructure, infrastructure solutions, and residential electrical installation.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $276.0 | $243.8 |
| Gross profit / margin | $50.2 / 18.2% | $41.6 / 17.1% |
| Operating income / margin | $12.4 / 4.5% | $9.5 / 3.9% |
| Net income | $8.5 | $7.0 |
| Net income attributable to IES | $8.5 | $6.9 |
| Diluted EPS | $0.39 | $0.32 |
| Operating cash flow | $11.0 provided | $1.4 used |
Cash and cash equivalents were $27.3 million at December 31, 2019, versus $18.9 million at September 30, 2019. Investing activities used $1.3 million, mainly for $1.4 million of capital expenditures. Financing activities used $1.3 million; the company drew and repaid $104.2 million under its revolver during the quarter. Long-term debt was $0.3 million, with no revolver borrowings outstanding at quarter-end.
At December 31, IES reported $109.9 million of liquidity, including $82.7 million of excess availability under its $100 million revolving credit facility, and was in compliance with its covenants. Its fixed-charge coverage ratio was 5.2:1.0 against a minimum of 1.1:1.0. Current assets were $289.7 million and current liabilities $185.9 million.
Changes and segment performance
Revenue increased 13.2%, gross profit rose $8.6 million, and operating income increased $2.9 million year over year. Gross margin improved by 1.1 percentage points. SG&A rose 18.0% to $37.9 million, driven by personnel costs associated with growth and higher stock-based compensation; SG&A increased to 13.7% of revenue from 13.2%.
| Segment | Revenue | Change versus prior year | Operating income |
|---|---|---|---|
| Commercial & Industrial | $67.7 million | Down 6.7%; lower time-and-material work and Midwest agricultural demand | Loss of $0.5 million, versus income of $2.0 million |
| Communications | $84.3 million | Up 21.6%; demand from large data-center customers | $7.0 million, versus $5.0 million |
| Infrastructure Solutions | $31.3 million | Up 6.1%; stronger generator-enclosure demand | $3.3 million, versus $1.4 million |
| Residential | $92.7 million | Up 28.0%; led by multi-family work | $6.4 million, versus $3.9 million |
Commercial & Industrial gross margin fell to 9.9% from 12.0%, reflecting lower volume, project inefficiencies at the Nebraska branch, and weather-related and other factors. Margins improved in Communications, Infrastructure Solutions, and Residential.
Liquidity, backlog, outlook and risks
Remaining performance obligations were $430.1 million at quarter-end; IES expected to recognize approximately $380.0 million over the next 12 months. Reported backlog, including agreements without an enforceable obligation, was $509 million, down from $537 million at September 30, 2019. The filing cautions that backlog is not a guarantee of future revenue or profit. The company provided no specific earnings or revenue guidance.
Management attributed stronger consolidated results to demand in Communications, Infrastructure Solutions, and Residential, while noting that Commercial & Industrial markets remained highly competitive. Residential activity is seasonal, and quarterly results may also vary with project timing and customer-facility outages.
IES adopted lease accounting on October 1, 2019, recognizing operating lease assets and liabilities of approximately $32.4 million and $32.2 million, respectively, at adoption. At December 31, operating right-of-use assets were $34.9 million and operating lease liabilities were $34.8 million. The adoption did not significantly affect reported earnings or cash flows.
- Key operating risks include project-estimate and fixed-price contract risk, labor availability and costs, commodity-price changes, customer financing and collections, and variable construction demand. The company has no commodity-price hedges.
- At quarter-end, self-insurance liabilities were $6.1 million; construction-defect reserves were $0.1 million. Management said ordinary-course legal matters were not expected to materially affect results, but reserves and payment timing remain estimates.
- IES had $7.7 million of letters of credit outstanding under its revolver, plus other letters of credit used for insurance and vendor collateral. Estimated costs to complete bonded projects were $98.7 million; management considered bonding capacity adequate.
- Tontine Associates and affiliates held approximately 56.9% of IES shares. A change in ownership could affect tax-loss availability and trigger change-of-control provisions in financing, surety, and severance arrangements.
- Management identified liquidity and covenant compliance, customer and supplier credit conditions, backlog conversion, litigation and warranty claims, and potential goodwill or other asset impairments among relevant risks. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether growth and margin gains in Communications, Infrastructure Solutions, and Residential continue, and whether Commercial & Industrial performance recovers.
- Whether the $430.1 million of remaining performance obligations and broader $509 million backlog convert to revenue and profit on expected timing.
- Whether operating cash generation and liquidity remain adequate as working-capital needs, customer collections, and project activity fluctuate.
- Whether IES maintains revolver covenant compliance and sufficient excess availability, including under weaker operating conditions.
- Whether self-insurance, construction-defect, and other legal or warranty exposures remain within recorded reserves, and whether any controlling-stockholder sale affects tax attributes or material agreements.