IES Holdings, Inc. — Fiscal 2020 Third-Quarter 10-Q
Reporting period: Three and nine months ended June 30, 2020; balance-sheet comparisons are June 30, 2020 versus September 30, 2019. Dollar amounts below are in millions unless stated otherwise. IES provides electrical and mechanical contracting, communications infrastructure, industrial solutions, and residential electrical services.
Financial performance and position
| Metric | Quarter ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $293.1 vs. $282.6; +3.7% | $860.4 vs. $783.4; +9.8% |
| Gross profit / margin | $58.3 / 19.9% vs. $46.4 / 16.4% | $159.8 / 18.6% vs. $131.2 / 16.8% |
| Operating income / margin | $14.1 / 4.8% vs. $10.2 / 3.6% | $35.7 / 4.1% vs. $27.9 / 3.6% |
| Net income attributable to IES / diluted EPS | $12.3 / $0.58 vs. $11.0 / $0.52 | $27.0 / $1.26 vs. $23.3 / $1.09 |
| Operating cash flow | Not separately provided | $55.6 vs. $20.3 |
Quarterly SG&A increased 21.8% to $44.3 million, or 15.1% of revenue from 12.9%. For the nine months, SG&A rose 20.0% to $124.2 million, or 14.4% of revenue from 13.2%. Nine-month cash capital expenditures were $3.7 million; cash paid for acquisitions was $29.0 million.
At June 30, cash was $35.8 million, current assets $326.3 million, and current liabilities $222.8 million. Total assets were $525.3 million and total liabilities $251.8 million. The company had no revolving-credit borrowings and $0.3 million of other long-term debt. It reported $89.3 million of revolver availability, $125.1 million of covenant-defined liquidity, and compliance with covenants; its fixed-charge coverage ratio was 7.6x. Lease liabilities totaled $33.5 million, including $21.6 million classified as long-term.
Material changes and segment trends
- Communications: Quarterly revenue rose 6.7% to $96.5 million; operating income increased to $9.4 million. Data-center and distribution-center demand and improved gross margin supported results.
- Residential: Quarterly revenue rose 33.7% to $107.9 million and operating income to $8.9 million, supported by multifamily and single-family growth, higher volume, and favorable commodity prices.
- Commercial & Industrial: Quarterly revenue fell 24.7% to $56.8 million; the segment recorded a $4.2 million operating loss. Management cited weaker agricultural-project demand, COVID-related delays, project execution issues, employee turnover, and a doubtful-account reserve related to a commercial dispute.
- Infrastructure Solutions: Quarterly revenue declined 11.5% to $31.9 million, mainly due to customer project timing, while operating income was $3.8 million and gross margin improved.
- For the nine-month period, Communications and Residential growth more than offset revenue declines in Commercial & Industrial and Infrastructure Solutions. Consolidated gross margin improved, but Commercial & Industrial’s nine-month operating result shifted from $2.8 million income to an $8.9 million loss.
Outlook, risks, and unusual items
- Management provided no numerical earnings or revenue guidance. It said COVID-19 had adversely affected results and could continue to affect demand, job-site access, project timing, costs, staffing, supply chains, and customer collections. Most sites remained operational, with some areas seeing stronger demand, particularly data-center and communications infrastructure.
- IES completed two acquisitions in February 2020, Aerial Lighting & Electric and Plant Power & Control Systems, for aggregate cash consideration of $29.0 million. Acquisition accounting valuations were preliminary. The acquisitions added $12.7 million of revenue and $1.0 million of operating income in the nine-month period after acquisition.
- Recent operating losses prompted a quantitative goodwill impairment assessment for Commercial & Industrial as of March 31, 2020. No impairment was recorded, but management cautioned that adverse changes in assumptions or markets could lead to future impairment.
- Operating cash flow included a $4.4 million benefit from deferral of the employer payroll-tax portion under the CARES Act. Receivables allowance and bad-debt expense increased; bad-debt expense was $1.7 million versus $0.2 million in the prior-year nine-month period.
- Self-insurance liabilities were $6.2 million; construction-defect reserves were $0.03 million. Management said existing legal matters were not expected to have a material adverse effect, while noting reserve estimates are uncertain. Bonded projects had an estimated $101.2 million cost to complete.
- Controlling stockholder Tontine owned approximately 55% of outstanding shares. A change in ownership could affect tax-loss carryforwards and trigger provisions in financing, bonding, or severance arrangements. Jeffrey L. Gendell became interim CEO effective July 31, 2020, following Gary S. Matthews’s resignation.
- The filing’s remaining-performance-obligations and backlog tables show $523 and $597, respectively, but the text does not provide a clear unit for those figures. It states approximately $451 of remaining obligations is expected to be recognized within 12 months; verify the scale and units before relying on these figures.
Important facts for investors to verify
- Whether Commercial & Industrial’s project execution, lower volumes, and commercial-dispute receivable exposure improve, and whether the segment avoids further operating losses.
- COVID-19 effects on project starts, customer solvency and collections, workforce availability, and operating costs; also verify whether the $4.4 million payroll-tax deferral is temporary in cash-flow comparisons.
- Availability under the revolver and compliance with liquidity and fixed-charge covenants if operating conditions weaken.
- Acquisition integration and final purchase-accounting valuations, including goodwill and intangible assets, and the risk of future impairment.
- The units and realizability of reported backlog and remaining performance obligations, as well as any changes in contract estimates, claims, or project margins.
- Potential consequences of Tontine share sales or other ownership changes for tax attributes and contractual change-of-control provisions.