IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The quarter ended March 31, 2020 is compared with the three months ended March 31, 2019; balance-sheet amounts are compared with September 30, 2019. Unless otherwise noted, amounts below are in millions.
Business context
IES provides electrical and mechanical contracting, communications infrastructure, industrial electro-mechanical solutions, and residential electrical installation through four segments: Commercial & Industrial, Communications, Infrastructure Solutions, and Residential. Results are unaudited interim results and may not indicate full-year performance.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue, 2020 | $291.3 | $567.3 |
| Revenue, 2019 | $256.9 | $500.8 |
| Gross profit / margin, 2020 | $51.3 / 17.6% | $101.5 / 17.9% |
| Gross profit / margin, 2019 | $43.2 / 16.8% | $84.8 / 16.9% |
| Operating income, 2020 | $9.2 | $21.6 |
| Net income, 2020 | $6.2 | $14.7 |
| IES-attributable diluted EPS, 2020 | $0.29 | $0.69 |
- Year-over-year revenue increased 13.4% for the quarter and 13.3% for the six-month period. Six-month operating income rose from $17.7 million to $21.6 million; IES-attributable net income rose from $12.4 million to $14.7 million.
- Gross margin improved overall, while SG&A rose 19.9% for the quarter and 19.0% for the six months. SG&A was 14.4% of quarterly revenue and 14.1% of six-month revenue, versus 13.7% and 13.4%, respectively, a year earlier.
- Segment mix was uneven: Communications and Residential led growth. For the quarter, their revenues increased 36.3% and 38.8%, respectively. Commercial & Industrial revenue fell 17.5% and the segment reported a $4.1 million operating loss; Infrastructure Solutions revenue fell 14.9%.
- Six-month operating cash flow was $32.7 million, versus $9.4 million a year earlier. Investing cash outflow was $31.8 million, including $29.0 million for acquisitions. Financing provided $23.9 million. Cash increased $24.9 million to $43.8 million.
- At March 31, cash was $43.8 million, current assets $323.8 million, and current liabilities $210.8 million. Long-term debt on the balance sheet was $29.0 million, compared with $0.3 million at September 30, 2019. The company said it repaid $15.0 million of facility borrowings after quarter-end.
- The $100 million revolving facility matures September 2024. At March 31, reported liquidity was $101.0 million, excess availability $57.2 million, and fixed-charge coverage ratio 5.9:1.0; the company reported compliance with covenants. Outstanding letters of credit were approximately $7.0 million.
Material changes and notable items
- Revenue growth came primarily from stronger data-center-related Communications work and Residential activity, especially multi-family projects. Commercial & Industrial faced weaker agricultural demand, competition, project inefficiencies, schedule changes, and employee turnover.
- IES acquired Aerial Lighting & Electric, supporting Residential expansion in the Northeast, and Plant Power & Control Systems, supporting Infrastructure Solutions expansion in the Southeast. Aggregate cash consideration was $29.0 million; the acquisitions added $9.9 million of goodwill. Purchase accounting valuations remained preliminary.
- Commercial & Industrial operating losses triggered a goodwill impairment assessment. The company recorded no impairment, but stated that estimates depend on uncertain assumptions, including COVID-19 impacts, and adverse changes could lead to a future impairment charge.
- Remaining performance obligations were $468.7 million at March 31; IES expected to recognize approximately $427.5 million over the next 12 months. Separately, reported backlog, including agreements without an enforceable obligation, was $587 million; backlog is not a guarantee of revenue.
- IES adopted lease accounting on October 1, 2019, recognizing approximately $32.4 million of right-of-use assets and $32.2 million of operating lease liabilities at adoption. The adoption did not significantly affect income or cash flows.
- The company repurchased 198,248 shares under its repurchase program during the six months, spending $4.9 million on treasury stock purchases overall, including employee tax-withholding purchases.
Outlook, risks, and contingencies
- Management provided no quantified earnings or revenue guidance. It said COVID-19 had caused only minor adverse effects on results in the first six months, but could not predict the future magnitude. Most sites remained open where services were deemed essential; project delays had affected some areas, while demand for data-center and communications infrastructure was stronger.
- COVID-19 risks include site closures or delayed projects, reduced demand, workforce disruption, supply-chain interruptions, increased costs, and customers’ inability to pay. Management said it was monitoring conditions and prioritizing employee safety and service continuity.
- Other disclosed risks include fixed-price contract estimation and execution, labor and commodity costs, customer collections, variable-rate debt, acquisition integration, and dependence on surety capacity. A one-percentage-point rise in interest rates on March 31 facility borrowings would increase annual pretax interest expense by about $0.3 million.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. Self-insurance liabilities were $5.9 million; residential construction-defect reserves were $0.1 million. Management cautioned that estimates and payment timing could differ from expectations.
- Tontine Associates controlled approximately 57.3% of common stock. A change in ownership could affect tax-loss availability and trigger change-of-control provisions in financing, bonding, and severance arrangements.
Investor verification priorities
- Track COVID-19 effects on project starts, customer-site access, demand, employee availability, and collections after March 31.
- Monitor Commercial & Industrial project execution, margins, and goodwill impairment assumptions, along with Communications and Residential growth and cost leverage.
- Verify post-quarter debt repayment, revolving-facility availability, covenant compliance, and liquidity as working-capital needs evolve.
- Assess acquisition integration and the final fair-value allocation for Aerial and PPCS, including acquired goodwill and intangible assets.
- Evaluate the quality and conversion of remaining performance obligations and backlog, including agreements that are not enforceable before work starts.