IES Holdings, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; comparisons are to the three months ended December 31, 2021 unless stated otherwise. Financial amounts below are in millions of dollars, rounded. IES provides electrical and technology systems, residential installation services, and industrial infrastructure products through four segments: Communications, Residential, Infrastructure Solutions, and Commercial & Industrial.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change / context |
|---|---|---|---|
| Revenue | $574.9 | $480.5 | Up 19.6% |
| Gross profit / margin | $95.4 / 16.6% | $79.7 / 16.6% | Gross profit up $15.7; margin unchanged |
| Operating income / margin | $40.7 / 7.1% | $20.3 / 4.2% | Includes $13.1 gain on STR sale |
| Net income | $28.8 | $15.1 | Consolidated net income; $26.4 attributable to IES, versus $14.5 |
| Diluted EPS | $1.14 | $0.69 | Up from prior period |
| Operating cash flow | $14.3 provided | $24.5 used | Improved with higher earnings and less cash used in working capital |
| Capital expenditures | $2.7 | $12.3 | Lower spending than prior period |
| Cash and cash equivalents | $5.2 at Dec. 31 | $24.8 at Sept. 30, 2022 | Quarterly decrease of $19.6 |
| Revolver borrowings | $43.0 at Dec. 31 | $82.7 at Sept. 30, 2022 | Net repayments of $39.7 during the quarter |
Gross margin was flat overall, while SG&A fell to 11.8% of revenue from 12.4%, reflecting operating scale. Interest expense rose to $1.2 million from $0.4 million, primarily because of higher borrowing rates. The effective tax rate was approximately 25.9% in Q1 FY2023, compared with approximately 20.9% in the prior-year quarter.
At December 31, the $150 million revolving facility had $5.9 million of letters of credit and $101.1 million of excess availability. Covenant-defined liquidity was $106.4 million, and the fixed-charge coverage ratio was 1.9:1.0 against a 1.1:1.0 minimum. IES reported compliance with its financial covenants. Current assets were $589.3 million and current liabilities were $376.9 million.
Material changes and segment trends
- Residential: Revenue rose 31.6% to $318.1 million, supported by price increases and demand, particularly in multi-family and Florida single-family markets. Gross margin improved to 18.7% from 17.6%.
- Communications: Revenue increased 15.6% to $147.2 million, driven by data-center and high-tech manufacturing demand. Gross margin declined to 14.8% from 16.1%, reflecting hiring and training costs and competitive pricing.
- Infrastructure Solutions: Revenue grew 17.1% to $49.3 million, principally on generator-enclosure demand. Gross margin rose to 21.2% from 18.3%, partly as prior-year supply-chain, labor, and facility-relocation inefficiencies eased.
- Commercial & Industrial: Revenue decreased 13.0% to $60.3 million. Gross margin fell to 6.0% from 12.8%, with continuing losses at one branch. Segment operating income of $11.0 million included a $13.0 million gain from the STR divestiture; excluding that gain, the segment recorded an operating loss.
IES sold STR Mechanical and its subsidiary on October 7, 2022, recognizing a preliminary pre-tax gain of $13.0 million and receiving $19.2 million of proceeds from asset sales during the quarter. The purchase price remains subject to a working-capital true-up expected in fiscal Q2 2023. The company repaid debt and spent $7.5 million on treasury-stock purchases; the board approved a new $40 million repurchase program in December.
Outlook, risks, and other notable items
- Management expects near-term lower demand in single-family housing as higher mortgage rates and elevated labor and material costs weigh on affordability, while citing household formation and population growth as longer-term demand supports in key markets.
- Remaining performance obligations were $1.011 billion at December 31; approximately $921.8 million was expected to be recognized over the next 12 months. Backlog was $1.327 billion, including $316 million of signed agreements or letters of intent without an enforceable obligation before work starts. Backlog is not a guarantee of revenue or profit.
- Management expected cash, operating cash flow, and revolver availability to meet cash requirements for at least the next 12 months. Outstanding revolving debt bears floating SOFR-based interest and is not hedged; a one-percentage-point rate increase on the quarter-end balance would add an estimated $0.4 million of annual pre-tax interest expense.
- Risks highlighted include housing and construction demand, labor availability and costs, supply-chain delays, commodity-price exposure on fixed-price contracts, project estimating and execution, customer collections, and covenant compliance. Management noted that materials procurement and workforce disruptions remained areas of focus.
- The DOL wage-and-hour investigation concerning recordkeeping for certain Arizona piece-rate employees was settled in November 2022; associated costs were previously accrued and were not material to results. Net receivables and retainage associated with contractual disputes were $2.4 million at quarter-end. Self-insurance liabilities were $7.7 million; ultimate claims could differ from estimates.
- Tontine Associates and affiliates owned approximately 58% of outstanding common stock, giving them significant influence. A change in ownership could affect tax-loss carryforwards and trigger provisions in financing, bonding, and other agreements.
Key facts investors should verify
- How much of reported operating-income growth reflects ongoing operations versus the $13.1 million STR sale gain, including any fiscal Q2 true-up.
- Whether Residential demand and margins hold up as housing affordability weakens, and how the segment mix affects consolidated performance.
- Whether the Commercial & Industrial branch experiencing losses improves, and whether segment margins recover after the STR divestiture.
- Cash conversion and working-capital needs, given quarter-end cash of $5.2 million despite substantial reported revolver availability.
- Execution and profitability of the $1.011 billion of remaining performance obligations, while distinguishing enforceable obligations from the broader backlog.
- Use of the new $40 million repurchase authorization relative to liquidity, debt, and covenant requirements.