IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparisons are with the three months ended December 31, 2012. The company provides electrical, communications, residential construction, and industrial and infrastructure services. Infrastructure Solutions was added following the September 2013 acquisition of MISCOR, making year-over-year comparisons less directly comparable.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $120.1 million | $127.3 million |
| Gross profit / margin | $18.1 million / 15.1% | $18.0 million / 14.1% |
| Operating income / margin | $0.6 million / 0.5% | $3.1 million / 2.4% |
| Continuing-operations net income | $0.3 million | $0.6 million |
| Net income, including discontinued operations | $0.1 million | $0.5 million |
| Basic and diluted EPS | $0.01 | $0.03 |
| Cash flow from operations | $(2.2) million | $3.3 million |
| Capital expenditures | $0.3 million | $0.4 million |
Revenue fell 5.6%. Gross margin improved, but management said the existing businesses’ margin was approximately 14.0%, comparable with the prior year; the acquired Infrastructure Solutions segment contributed a 21.9% segment gross margin. Higher SG&A—up 17.8% to $17.6 million—helped drive the decline in operating income.
Segment revenue and operating income (loss): Communications, $24.6 million and $1.0 million; Residential, $41.2 million and $1.0 million; Commercial & Industrial, $41.2 million and $0.4 million; Infrastructure Solutions, $13.0 million and $0.5 million. Communications revenue dropped 38.7%, while Residential revenue grew 14.5%; Commercial & Industrial revenue declined 19.4%. Infrastructure Solutions had no prior-year comparable segment results.
At December 31, 2013, cash was $17.3 million, working capital was $45.8 million, total debt was $12.9 million, and stockholders’ equity was $62.6 million. Cash declined $3.5 million during the quarter. Operating cash use reflected, in part, a $12.7 million reduction in accounts payable and accrued expenses. Trade receivables declined $7.0 million and days sales outstanding improved to 54 from 59 at September 30.
The $30 million revolving credit facility had no borrowings; reported availability was $5.8 million, with $6.7 million of letters of credit outstanding. The company reported liquidity above the applicable $15 million threshold and excess availability above $5 million at quarter-end. It also stated that it was not required to test its credit covenants during the period and that, had a test been required, it would have failed at December 31. Total current assets were $131.1 million and current liabilities were $85.3 million.
Material changes and management commentary
- Communications revenue and gross profit fell sharply as certain high-tech manufacturing projects did not recur and a large customer sourced its own materials. Data-center revenue also declined.
- Residential growth reflected stronger single-family and multifamily construction, particularly in Texas and rental-housing markets. Management cited higher demand and more stable copper prices as factors supporting segment margins.
- Commercial & Industrial revenue declined as large projects recognized in the prior-year quarter were completed or neared completion. Management noted that competitive conditions continued to constrain bid margins in many commercial markets.
- Infrastructure Solutions contributed $13.0 million of revenue and $2.9 million of gross profit. Its gross profit included approximately $0.4 million of additional cost from inventory fair-value adjustments made in the MISCOR acquisition accounting.
- Interest and other expense, net, fell to approximately $0.3 million from $2.3 million, principally because the prior-year quarter included a $1.7 million reserve against a receivable from a former surety. IES recognized approximately $0.1 million of recovery in the current quarter; the debtor had subsequently missed installment payments, and the amount of further recovery was uncertain.
- Management expected cash on hand, operating cash flows, and available credit capacity to fund working capital, debt service, and capital expenditures for the next 12 months. The filing provides no specific earnings or revenue guidance.
Risks, contingencies, and unusual items
- Tontine and its affiliates controlled approximately 58% of outstanding common stock and could resell registered shares. A change in ownership could restrict use of tax net operating losses and trigger provisions in financing, bonding, and employment arrangements. The company reported approximately $466 million of federal NOLs including tax-goodwill amortization, or approximately $315 million excluding it.
- Credit-facility liquidity and availability thresholds, covenant compliance, borrowing-base limits, and dependence on surety providers are significant funding and operating risks. Sureties may decline to issue bonds or require collateral; estimated cost to complete bonded projects was approximately $55.2 million.
- IES had $4.9 million accrued for insurance liabilities and $0.4 million reserved for construction-defect claims. It reported no reserve for the Ward Transformer environmental matter or three wage-and-hour class actions, stating that loss was not considered probable and exposure was not estimable.
- Residential operations are seasonal; construction activity, project timing, labor availability, commodity prices, customer financing, receivable collection, and project-estimate accuracy can affect results. Floating-rate debt and fixed-price contracts expose the company to interest-rate and commodity-price risk.
- The 2011 restructuring wind-down was substantially complete, with $0.2 million of restructuring liabilities remaining at quarter-end. Discontinued operations generated a $0.1 million net loss in the quarter.
Key facts for investors to verify
- Whether the company’s covenant status and liquidity remain adequate given its statement that it would have failed a required covenant test at quarter-end.
- Whether the $5.8 million reported revolver availability, letters of credit, and surety requirements provide sufficient practical funding and bonding capacity.
- Whether Communications and Commercial & Industrial activity stabilizes, and whether Residential growth and Infrastructure Solutions margins persist.
- Whether operating cash flow improves after the quarter’s substantial accounts-payable reduction.
- Whether the former-surety receivable is recovered and whether the MISCOR purchase-price allocation or legal and insurance exposures require future adjustments.