IES Holdings, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended March 31, 2023. The quarter is the company’s fiscal second quarter. Financial amounts below are in U.S. dollars; “million” is used for readability.
Business context and results
IES designs and installs electrical and technology systems and provides infrastructure products and services. Its four segments are Communications, Residential, Infrastructure Solutions, and Commercial & Industrial.
| Metric | Three months ended Mar. 31, 2023 | Three months ended Mar. 31, 2022 | Six months ended Mar. 31, 2023 | Six months ended Mar. 31, 2022 |
|---|---|---|---|---|
| Revenue | $568.9m | $501.6m | $1,143.8m | $982.1m |
| Gross profit / margin | $100.9m / 17.7% | $58.5m / 11.7% | $196.4m / 17.2% | $138.2m / 14.1% |
| Operating income | $31.6m | Loss of $4.9m | $72.3m | $15.3m |
| Net income | $24.2m | Loss of $4.1m | $52.9m | $11.0m |
| IES-attributable earnings per share | $0.93 basic; $0.92 diluted | Loss of $0.30 basic and diluted | $2.08 basic; $2.06 diluted | $0.39 basic; $0.38 diluted |
Quarterly revenue increased 13.4% year over year; six-month revenue increased 16.5%. Gross margin improved across all four segments in both comparisons. Quarterly SG&A rose 9.3% to $69.3m, but declined as a share of revenue to 12.2% from 12.6%. For the six months, SG&A increased 11.6% to $137.1m and fell to 12.0% of revenue from 12.5%.
Segments and material changes
- Residential: Q2 revenue rose 17.6% to $306.1m; six-month revenue rose 24.3% to $624.2m. Management cited price increases and strong demand, particularly in multi-family and Florida single-family markets. Margins also improved.
- Communications: Q2 revenue increased 8.0% to $141.1m, supported by data-center and high-tech manufacturing demand. Q2 gross margin rose to 17.8% from 8.5%; the prior-year quarter included $9.3m of losses on projects in an adjacent service area, which the company has since exited.
- Infrastructure Solutions: Q2 revenue increased 26.1% to $52.6m, primarily from generator-enclosure demand. Gross margin improved to 27.0% from 16.9%, with prior-year results affected by supply-chain, labor, and relocation inefficiencies.
- Commercial & Industrial: Q2 revenue was essentially flat at $69.0m, while operating income recovered to $0.4m from a $13.6m loss. The prior-year quarter included significant project losses. Six-month revenue declined 6.3%, partly because STR Mechanical was sold in October 2022.
The six-month results include a $13.0m pretax gain on the STR sale. The gain materially contributed to reported operating income; it is not recurring operating performance.
Cash flow, balance sheet, and liquidity
- Cash flow, six months: Operating activities provided $60.1m, compared with $2.9m used in the prior-year period. Investing activities provided $12.3m, including $19.1m of asset-sale proceeds, partly offset by $6.7m of capital expenditures. Financing activities used $82.1m, including $67.5m of net credit-facility repayments, $7.6m of share repurchases, and $5.3m distributed to noncontrolling interests. Cash decreased $9.7m to $15.1m.
- Debt and availability: Revolver borrowings were $15.1m at March 31, versus $82.7m at September 30, 2022; the balance sheet reports $14.2m of long-term debt. The $150m facility matures September 30, 2026. The company reported $127.8m of excess availability and $143.0m of total liquidity, and was in compliance with its covenants. Its fixed-charge coverage ratio was 3.0:1.0.
- Working capital: Current assets were $591.9m and current liabilities $373.0m, compared with $624.4m and $401.9m, respectively, at September 30, 2022. Trade receivables fell $40.1m, and days sales outstanding improved to 55 from 58.
- Contract visibility: Remaining performance obligations were $1.012bn; the company expected to recognize approximately $833.2m over the next 12 months. Backlog, including agreements without an enforceable obligation, was $1.389bn. Management cautions backlog may change and is not a guarantee of revenue or profit.
Outlook, risks, and other items
No quantified earnings or revenue guidance is provided. Management expects decreased housing affordability to reduce near-term demand in single-family residential as 2023 progresses, citing higher mortgage rates and elevated labor and material costs. It also noted that customer capital budgets for other markets may be affected by broader economic, technological, or other factors. Management expects cash, operating cash flow, and revolver availability to meet requirements for at least the next 12 months.
Key risks include project execution and fixed-price estimating, labor availability and cost, commodity prices and supply-chain delays, customer financing and collections, construction-market cyclicality, and floating-rate debt. The company has no interest-rate hedges; a 1 percentage-point rate increase on March 31 borrowings would raise annual pretax interest expense by an estimated $0.2m. It reported $6.0m of material purchase commitments over the next 12 months, $7.6m of self-insurance liabilities, and $129.5m estimated cost to complete bonded projects. Routine legal proceedings were not expected to have a material adverse effect; a previously disclosed Department of Labor matter was settled in November 2022.
Tontine Associates and affiliates owned approximately 58% of the outstanding common stock, giving them significant influence. A change in ownership could affect tax-loss carryforwards and trigger provisions in financing, surety, and severance arrangements. The company reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the sharp earnings and margin improvement is sustainable, given prior-year project losses and the $13.0m STR-sale gain in six-month results.
- Whether management’s expectation of softer near-term single-family demand emerges, and how it affects Residential revenue and margins.
- Whether the $1.012bn of remaining performance obligations converts to revenue on schedule and at profitable margins; separately assess backlog agreements without enforceable obligations.
- Cash conversion and working-capital needs, including receivable collections, inventory levels, and the company’s ability to maintain covenant headroom as rates and activity change.
- Potential effects of Tontine share sales or a change of control, including consequences for tax attributes and material agreements.