IES Holdings, Inc. — Fiscal 2018 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2017; comparisons are with the three months ended December 31, 2016 unless otherwise noted. Amounts below are in millions except per-share data.
Business context and results
IES provides electrical, mechanical, communications, infrastructure and residential construction services through four segments: Commercial & Industrial, Communications, Infrastructure Solutions and Residential. Revenue rose 3.2%, but lower gross margins and higher SG&A reduced operating income.
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $198.3 | $192.2 |
| Gross profit / margin | $33.1 / 16.7% | $35.2 / 18.3% |
| Operating income / margin | $3.0 / 1.5% | $7.0 / 3.6% |
| Income before taxes | $2.6 | $6.6 |
| Income tax expense | $32.2 | $2.6 |
| Net income (loss) | $(29.5) | $3.9 |
| IES-attributable loss per share | $(1.39) | $0.18 |
| Operating cash flow | $5.0 provided | Cash-flow statement: $5.6 used |
The reported tax expense includes a preliminary $31.3 charge to remeasure deferred tax assets and liabilities following enactment of the Tax Cuts and Jobs Act, which lowered the federal corporate rate to 21% effective January 1, 2018. The company said its fiscal 2018 blended statutory rate would be 24.53%. The quarter’s net loss therefore substantially reflects this tax remeasurement rather than pre-tax operating performance.
Financial position and liquidity
- At December 31, cash was $31.9; current assets were $220.6 and current liabilities $135.7. Working capital excluding cash increased $0.2 from September 30.
- Long-term debt on the balance sheet was $29.5, primarily revolving-facility borrowings. The filing’s MD&A separately reports $30.2 of outstanding borrowings; the text does not explain the difference. The weighted-average borrowing rate was 3.34%.
- The $100.0 revolving facility matures in August 2021. The company reported $43.2 of excess availability, $6.4 of letters of credit, and total liquidity of $75.1. It was in compliance with covenants; reported fixed-charge coverage was 7.5:1 and covenant EBITDA was $34.7.
- Accounts receivable and retainage declined $15.7 from September 30; days sales outstanding improved to 61 from 66. Cash increased $3.6 during the quarter.
- Capital expenditures were $1.2; investing cash outflow was $1.4. No shares were repurchased under the authorized program.
Comparative and segment changes
- Revenue increased $6.1, including $12.2 contributed by businesses acquired in fiscal 2017, partly offset by a $7.2 decline at the Denver and Roanoke branches being wound down.
- Gross margin fell 1.6 percentage points. Management cited higher self-insurance costs (up $1.3 year over year), project delays, and increased labor and commodity costs. SG&A rose 6.7% to $30.1, partly due to acquired businesses and added personnel.
- Commercial & Industrial revenue declined 1.8%; the segment reported a $0.9 operating loss versus $1.8 income a year earlier. Communications revenue rose 2.2% and operating income increased to $3.0, aided by improved project execution and margins.
- Infrastructure Solutions revenue rose 17.4%, largely from the Freeman acquisition, but operating income fell to $0.1 from $1.3 as margins weakened amid project delays and higher self-insured medical expense.
- Residential revenue rose 4.1%, but operating income declined to $4.1 from $5.2. Higher copper and other commodity prices, labor costs and self-insurance expense pressured gross margin.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Backlog increased to $337 at December 31 from $331 at September 30; management cautioned that backlog is not a guarantee of revenue or profit.
- Residential activity is seasonal, and results can also vary with project timing, weather, customer-facility outages, labor availability and regional construction conditions.
- Commodity-price exposure affects fixed-price contracts; the company had no commodity hedges. Floating-rate debt creates interest-rate risk; a one-percentage-point increase was estimated to raise annual pre-tax interest expense by $0.3.
- The company settled the Capstone matter, accruing $0.7 of liability and a $0.5 insurance receivable, for a $0.2 quarterly charge. Settlement funding and release occurred in January 2018.
- In the USAMRIID project litigation, IES sought approximately $21.0 for claims incurred through August 2017 and estimated another $4.5 of expected claims through project completion. No recovery was recorded; the defendants’ motion to dismiss was pending at the filing date.
- Self-insurance liabilities were $7.0, and residential construction-defect reserves were $0.2. Management noted uncertainty in ultimate claims and payment timing. Tontine controlled approximately 58% of outstanding shares; a change in ownership could affect tax-loss availability and trigger contractual change-of-control provisions.
Important facts for investors to verify
- Reconcile the cash-flow statement’s prior-year operating cash use of $5.6 with MD&A’s statement that prior-year operating cash flow was $5.6 provided.
- Reconcile balance-sheet long-term debt of $29.5 with MD&A’s $30.2 of outstanding borrowings.
- Track the final tax-accounting impact of the Tax Cuts and Jobs Act; the $31.3 deferred-tax remeasurement was described as preliminary.
- Monitor segment margins, winding-down branch losses, self-insurance claim development, and whether the $337 backlog converts to profitable work.
- Follow the USAMRIID litigation and any subsequent settlement or recovery, as none was recognized in this filing.