IES Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. Fiscal fourth-quarter figures are unaudited. Amounts below are in U.S. dollars; financial statement figures are shown in millions unless noted.
Business context
IES provides electrical and mechanical contracting, communications infrastructure, industrial electro-mechanical products and services, and residential electrical installation through four segments: Commercial & Industrial, Communications, Infrastructure Solutions, and Residential. The company reported strong demand and organic growth across its businesses. Its CEO, Gary Matthews, began serving in March 2019.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,077.0 | $876.8 |
| Gross profit / margin | $182.1 / 16.9% | $150.0 / 17.1% |
| Operating income / margin | $41.9 / 3.9% | $26.0 / 3.0% |
| Net income (loss) attributable to IES | $33.2 | ($14.2) |
| Diluted EPS | $1.55 | ($0.67) |
| Cash provided by operations | $38.7 | $12.2 |
| Capital expenditures | $6.3 | $4.6 |
| Cash and cash equivalents at year-end | $18.9 | $26.2 |
| Total debt at year-end | $0.3 | $29.6 |
Revenue rose 22.8%; operating income increased 61.2%. FY2018 net loss included a $31.3 million deferred-tax remeasurement charge following the U.S. tax-rate change. FY2019 tax expense was $6.7 million, including a $4.0 million benefit from recognition of previously unrecognized tax benefits. Operating cash flow improved, although accounts receivable growth used $35.3 million of cash. Cash flow less capital expenditures was approximately $32.4 million, calculated from reported figures and not presented by the company as a non-GAAP measure.
Fourth-quarter results
FY2019 Q4 revenue was $293.6 million versus $240.3 million in FY2018 Q4; gross profit was $50.9 million versus $40.5 million; and net income attributable to IES was $9.9 million versus $4.7 million. Diluted EPS was $0.46 versus $0.22. Revenue increased about 22%, and gross margin was approximately 17.3%, compared with 16.9% in the prior-year quarter.
Segments and material changes
- Communications: Revenue increased 46.3% to $321.2 million, primarily on data-center demand. Operating income rose to $24.8 million from $14.2 million. Gross margin declined to 17.6% from 18.3%, partly because of a higher mix of lower-margin, lower-risk cost-plus work.
- Infrastructure Solutions: Revenue rose 40.8% to $136.8 million, led by generator enclosures for data centers and motor repair. Operating income increased to $12.4 million from $3.2 million; gross margin was broadly stable at 22.6%.
- Residential: Revenue increased 9.7% to $313.3 million, led by single- and multi-family work. Operating income rose to $17.9 million from $16.9 million; gross margin improved to 20.7%.
- Commercial & Industrial: Revenue rose 11.4% to $305.6 million, but operating income declined to $2.1 million from $2.7 million. Gross margin fell to 9.8% from 10.8%, reflecting project inefficiencies in the second half.
Backlog was $537 million at year-end versus $482 million a year earlier. The company expected $392 million to convert to revenue in FY2020 and the balance in FY2021; backlog is not a guarantee of revenue or profit. Separately, remaining performance obligations were $451.9 million.
Liquidity, debt, outlook, and risks
- IES had no revolver borrowings at September 30, 2019, $93.5 million of revolving-credit availability, and $112.5 million of covenant-defined liquidity. It reported a 4.7:1 fixed-charge coverage ratio and compliance with its covenants. The $100 million facility matures in September 2024.
- Management expected cash, operating cash flow, and available credit to cover working capital, debt service, and capital expenditure needs for the next 12 months. FY2020 fixed-asset requirements were estimated at $5–$7 million.
- Management expected FY2020 revenue from existing businesses to increase year over year, conditional on no significant deterioration in general economic conditions. It cited demand, market-share efforts, and backlog; no specific growth rate or earnings guidance was provided.
- Principal operating risks include cyclical construction and housing demand, fixed-price project estimating and execution, labor and commodity-cost increases, customer collections, and availability of surety bonds. Much revenue is recognized using percentage-of-completion estimates, so revisions to project cost estimates can affect reported results.
- Tontine and affiliates owned approximately 58% of the common stock. A sale or other ownership change could affect NOL utilization and trigger provisions in financing, surety, and executive agreements. Federal NOLs were approximately $306.3 million; the company recorded a $40.9 million net deferred tax asset, whose realization depends on future taxable income.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The company reported no significant outstanding legal matters and no goodwill impairment in FY2019.
Most important facts for investors to verify
- Whether strong growth in Communications and Infrastructure Solutions continues, particularly given customer spending cycles and the data-center exposure.
- Whether Commercial & Industrial project inefficiencies are contained and segment margins recover.
- Whether receivables, working-capital needs, and cash conversion remain manageable as the business grows.
- Whether FY2020 revenue growth and backlog conversion meet management’s conditional outlook.
- Whether Tontine ownership activity, tax rules, or Section 382 ownership changes affect NOL value or contractual arrangements.
- Whether credit availability, covenant headroom, and surety capacity remain adequate through market or project downturns.