IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2012; comparisons are generally with the three months ended December 31, 2011. Amounts are in U.S. dollars; financial statement amounts below are shown in millions unless stated otherwise.
Business context and operating results
IES provides electrical infrastructure services through Communications, Residential, and Commercial & Industrial segments. It reported operations from 61 U.S. locations. Residential activity is seasonal, and construction markets are cyclical.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $127.3 | $109.0 |
| Gross profit / margin | $18.0 / 14.1% | $13.2 / 12.1% |
| Operating income / margin | $3.1 / 2.4% | $0.7 / 0.6% |
| Income from continuing operations | $0.6 | $0.2 |
| Net income (loss), including discontinued operations | $0.5 | ($3.7) |
| Basic and diluted EPS | $0.03 | ($0.26) |
Revenue rose 16.8%, while gross profit increased $4.8 million. Management attributed the improvement to higher project volume, better execution and cost management. SG&A increased 17.9% to $14.9 million, reflecting additional staffing, performance-based incentives and an unusual increase in equity compensation expense.
Segments and changes versus prior year
- Communications: Revenue increased 59.4% to $40.1 million; operating income was $3.7 million. Data-center and high-tech manufacturing work drove growth. Management cautioned that large-project awards are periodic and this growth rate may not continue.
- Residential: Revenue rose 23.0% to $36.0 million; operating income was $0.9 million. Higher single-family and multifamily activity supported results. Management withheld recognition of $1.9 million of revenue and deferred $1.5 million of related costs because collection from a solar customer was uncertain.
- Commercial & Industrial: Revenue declined 6.3% to $51.1 million; operating income was $0.9 million. Gross margin remained 9.1%. Management cited competition and a deliberate focus on projects within its expertise and with better margin prospects.
Discontinued operations generated a net loss of $0.1 million, versus $3.9 million in the prior-year quarter, as the company wound down previously closed facilities. A $1.7 million reserve for a former surety settlement receivable was recorded as other expense and materially increased reported other expense.
Cash flow, balance sheet and liquidity
- Operating cash flow was $3.3 million, compared with cash use of $9.0 million a year earlier. Investing activities used $0.4 million and financing activities used $0.8 million. Cash increased $2.1 million to $20.9 million.
- At December 31, cash was $20.9 million, restricted cash $7.6 million, total assets $165.2 million and stockholders’ equity $53.8 million. Current assets were $149.5 million and current liabilities $101.6 million.
- Total debt was $12.5 million, including the $10.0 million related-party Tontine Term Loan bearing 11% interest. The company reported no borrowings under its $30 million Wells Fargo revolver, $21.6 million available capacity and $7.3 million of Wells Fargo letters of credit; an additional $0.25 million of letters of credit remained under the terminated prior facility.
- In February 2013, Wells Fargo provided a $5 million term loan, the revolving facility maturity was extended to August 9, 2016, and IES repaid the $10 million Tontine loan using term-loan proceeds and cash. The new loan has a 24-month repayment schedule and a stated rate of LIBOR plus 6%; the parties intended to fix the rate at 7% through a swap.
- Management said cash, operating cash flow and facility availability should fund working capital, debt service and capital spending for the next 12 months, subject to collections, project demand, acceptable margins and borrowing access.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance was provided. Management cited improving activity and project execution but warned that construction is cyclical, Residential is seasonal, and large Communications projects may not recur at the same level.
- Credit-facility covenants depend on liquidity and excess availability. The filing contains inconsistent statements about covenant testing at quarter-end: one section says liquidity thresholds were exceeded and the fixed-charge test was not triggered; another says covenant testing was not required but the company would have failed if tested. This should be reconciled.
- IES agreed to acquire assets of the Acro Group’s residential solar integration business, subject to closing conditions. Consideration includes release of a $3.8 million receivable, up to $2.0 million tied to future revenue and $0.7–$0.8 million of operating-expense funding. The purchase-price allocation was not yet determined.
- Tontine held approximately 57.4% of the company’s shares and indicated it might register some or all of its shares for sale. A change in ownership could restrict use of tax net operating losses (reported as approximately $452 million including, or $313 million excluding, tax-goodwill amortization NOLs) and trigger provisions in financing, surety and employment agreements. An NOL rights plan was adopted, but its effectiveness is not assured.
- Other exposures include self-insured claims of $4.6 million, construction-defect reserves of $0.6 million, and surety bonding requirements; the estimated cost to complete bonded projects was $70.2 million. The company reported no reserve for the Ward Transformer environmental matter or wage-and-hour suits because loss was not considered probable and/or estimable.
Key facts for investors to verify
- Reconcile the MD&A working-capital figure of $53.9 million with current assets less current liabilities, which equals approximately $47.9 million using the balance-sheet totals.
- Clarify the conflicting disclosure on whether the company would have met its fixed-charge coverage covenant if tested at December 31, 2012.
- Track collection or resolution of the solar-customer receivable and the accounting and final consideration for the Acro asset acquisition.
- Assess the cash impact of repaying Tontine, the terms and repayment of the Wells Fargo term loan, and ongoing revolver availability and letter-of-credit collateral needs.
- Monitor the $1.7 million former-surety receivable write-off, bonding capacity, legal exposures and any ownership change that could limit NOL utilization.