IES Holdings, Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2022. This is an annual filing; it does not provide standalone fourth-quarter results. IES designs and installs electrical and technology systems and provides infrastructure products and services through Communications, Residential, Infrastructure Solutions, and Commercial & Industrial segments.
Financial results and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $2.167 billion | $1.536 billion |
| Gross profit / margin | $318.9 million / 14.7% | $288.0 million / 18.7% |
| Operating income / margin | $56.0 million / 2.6% | $85.6 million / 5.6% |
| Net income attributable to IES | $34.8 million | $66.7 million |
| Basic / diluted EPS | $1.45 / $1.44 | $3.19 / $3.15 |
| Cash from operating activities | $16.3 million | $37.9 million |
Revenue increased 41.0%, driven by strong demand across segments and a full-year contribution from fiscal 2021 acquisitions. Profitability weakened: gross margin contracted 4.0 percentage points and operating income fell 34.6%, reflecting project losses, cost inflation, supply-chain constraints, and labor inefficiencies. SG&A increased 29.9% to $262.7 million, but declined as a share of revenue to 12.1% from 13.2%.
Segment revenue: Communications $559.8 million; Residential $1.131 billion; Infrastructure Solutions $167.1 million; Commercial & Industrial $308.5 million. Residential was the largest segment, contributing 52.2% of consolidated revenue.
Cash, debt, and liquidity: At September 30, 2022, cash and equivalents were $24.8 million; revolving-credit borrowings were $82.7 million, with $63.3 million of availability. Reported liquidity was $88.1 million, and the fixed-charge coverage ratio was 1.6:1.0, above the 1.1:1.0 minimum covenant. The credit facility matures in September 2026 and bears floating-rate interest; the year-end rate was 4.98%. A one-percentage-point rate increase on year-end borrowings would add about $0.8 million in annual pretax interest expense.
Operating cash flow declined as earnings fell and working capital increased, particularly accounts receivable and inventory; the company also paid $7.0 million of previously deferred payroll taxes. Capital expenditures were $29.3 million. IES repurchased 511,600 shares for $16.4 million during FY2022. In December 2022, the board authorized a new $40 million repurchase program.
Material changes and unusual items
- Communications: Revenue rose 25.5%, but gross margin fell to 12.3% from 19.0%. Execution problems in an adjacent service area generated combined project losses of $19.9 million; IES said the work was substantially complete and it would no longer pursue that service area.
- Commercial & Industrial: Revenue rose 20.4%, but the segment reported an operating loss of $12.3 million. Two projects at one branch reduced gross profit by $16.7 million, including rework on a large contract and costs from supplier delays. SG&A included $2.3 million of reserves tied to contractual disputes.
- Infrastructure Solutions: Revenue rose 13.7%, while gross margin dropped to 17.2% from 27.8%, reflecting supply disruptions, labor inefficiencies, and the relocation of the Wedlake business; FY2021 had also benefited from workers’ compensation refunds.
- Residential: Revenue rose 64.6%, including $233.1 million of growth from businesses acquired in FY2021. Gross margin declined to 18.0% from 19.5%, mainly due to commodity costs and supply-chain-related inefficiencies.
- Operating cash flow was less than net income, with working-capital demands elevated by growth, higher material prices, and inventory purchases to mitigate supply risk.
Outlook, risks, and contingencies
Management reported strong backlog across all segments but expected weaker housing affordability to reduce single-family demand in FY2023. It expected that a decline in single-family revenue could offset, or more than offset, growth in multi-family and other backlog-driven businesses. Planned FY2023 capital expenditures were $12–$17 million. Management said cash, operating cash flow, and available credit were expected to cover working capital, debt service, and capital expenditure needs for the next 12 months.
Backlog at September 30, 2022 was $1.286 billion, including $967 million of remaining performance obligations and $319 million of agreements without enforceable obligations. IES expected about $777 million of backlog to convert to revenue in FY2023. Backlog is not a guarantee of revenue or profit and may be changed or cancelled.
- Key operating risks include fixed-price project estimating and execution, labor availability and wages, commodity-cost increases, supply delays, project claims, and the possibility that higher costs cannot be passed on to customers.
- Residential demand is exposed to housing cycles and rising mortgage rates. Other segments face cyclical construction and customer capital-spending patterns.
- Receivables included $10.5 million delayed by contractual disputes; IES recorded a $3.1 million reserve against them and intends to pursue recovery. The filing says ordinary-course legal matters were not expected to have a material adverse effect.
- A Department of Labor wage-and-hour investigation was settled in November 2022; related costs were accrued and were not expected to materially affect results.
- Tontine Associates and affiliates owned approximately 57% of outstanding shares. A change in control could affect financing and surety arrangements and could restrict use of tax-loss carryforwards. IES reported approximately $61.0 million of federal NOLs.
- In October 2022, IES sold STR Mechanical and expected to record an approximately $13 million pretax gain in FY2023’s first quarter; the company said the sale would not materially affect ongoing results or financial position.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls.
Important facts for investors to verify
- Whether project execution and margins recover, especially in Communications and Commercial & Industrial, and whether any further costs arise on the FY2022 loss-making projects.
- How quickly backlog converts to revenue, the enforceability and cancellation terms of backlog agreements, and actual FY2023 housing demand.
- Whether working-capital growth, receivable collections, and inventory levels improve enough to support operating cash flow and reduce reliance on revolving borrowings.
- Compliance with credit-facility covenants as interest rates and operating conditions change, and the continued availability of surety bonding.
- The timing and amount of the STR sale gain, execution of the new share repurchase authorization, and any Tontine share sales or resulting control and tax consequences.