IES Holdings, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended June 30, 2022. IES designs and installs electrical and technology systems and provides infrastructure products and services through Communications, Residential, Infrastructure Solutions, and Commercial & Industrial segments. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $567.3 | $405.9 | $1,549.4 | $1,052.7 |
| Gross profit / margin | $82.8 / 14.6% | $72.8 / 17.9% | $221.0 / 14.3% | $196.4 / 18.7% |
| Operating income / margin | $15.6 / 2.8% | $22.5 / 5.5% | $31.0 / 2.0% | $55.5 / 5.3% |
| Net income attributable to IES | $9.5 | $19.3 | $18.5 | $44.2 |
| Diluted EPS | $0.33 | $0.92 | $0.71 | $2.08 |
| Operating cash flow | Not separately presented for quarter | $(17.8) | $35.1 |
Quarterly revenue rose 39.8% year over year; nine-month revenue rose 47.2%, driven by strong demand, residential growth, and contributions from businesses acquired in FY2021. The higher sales did not translate into higher operating profit: gross margin contracted in every segment, while operating income and attributable earnings declined. SG&A increased 33.3% for the quarter and 34.9% year to date, although it fell as a share of revenue.
Segments and material changes
- Communications: Q3 revenue increased 24.5% to $144.7 million, but operating income fell to $4.3 million from $9.9 million. A series of projects in a new adjacent service area incurred $7.8 million of losses in the quarter; related year-to-date losses were $17.1 million. IES said it would no longer pursue work in that service area.
- Residential: Q3 revenue increased 61.8% to $301.8 million, reflecting acquisitions, single-family demand, and pricing. Margin edged down to 17.5% from 18.1%; nine-month margin fell to 17.5% from 19.2%.
- Infrastructure Solutions: Q3 revenue was nearly flat at $39.8 million, while operating results shifted to a $0.4 million loss from $4.8 million of income. Supply constraints, labor inefficiencies, and relocation-related costs weighed on performance.
- Commercial & Industrial: Q3 revenue grew 26.3% to $81.0 million, but operating income decreased to $0.3 million. For nine months, the segment recorded an $11.8 million operating loss; execution and supplier-delay issues on two projects reduced year-to-date gross profit by $13.2 million.
Cash, debt, and liquidity
- Cash was $17.1 million at June 30, 2022, down from $23.1 million at September 30, 2021. Operating activities used $17.8 million in the first nine months, versus $35.1 million provided in the prior-year period, chiefly reflecting lower earnings and higher working capital.
- Investing activities used $26.9 million, including $26.6 million of capital expenditures, primarily for facilities supporting Wedlake and Residential growth. Financing activities provided $38.7 million, including $56.5 million of net credit-facility borrowings.
- Revolver borrowings were $96.9 million; letters of credit were $4.1 million. Revolving facility availability was $49.0 million and reported liquidity was $66.1 million. The facility’s maximum borrowing amount was increased from $125 million to $150 million and matures September 30, 2026.
- IES reported compliance with its credit covenants at quarter-end, a 2.1:1.0 fixed-charge coverage ratio versus a 1.1:1.0 minimum, and stated cash, operating cash flow, and facility availability should cover requirements for at least the next 12 months.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance was provided. Remaining performance obligations were $893.9 million, of which approximately $852.2 million was expected to be recognized within 12 months. Backlog was $1.208 billion, including $314 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 cited ongoing material shortages and delays, higher commodity and labor costs, COVID-related workforce disruptions, and project execution inefficiencies. The company noted that it cannot pass through all cost increases and that fixed-price contracts heighten margin exposure.
- Trade receivables included $10.9 million delayed by contractual disputes, with a $3.1 million reserve. A Department of Labor inquiry into piece-rate wage and recordkeeping practices at an Arizona subsidiary remained ongoing; IES had reserved $0.5 million and could not estimate a range of additional costs.
- Self-insurance liabilities were $6.7 million. The company also had $12.1 million of material purchase commitments for the next 12 months and $115.8 million of estimated costs to complete bonded projects.
- Tontine Associates and affiliates held approximately 57% of outstanding shares, giving them significant control; a change in ownership could affect tax attributes and trigger provisions in financing, surety, or other agreements.
Important facts for investors to verify
- Whether the margin deterioration and project losses in Communications, Infrastructure Solutions, and Commercial & Industrial persist or are contained.
- Receivable collection trends, including the disputed balances, and the effect of inventory and contract-asset growth on operating cash flow.
- Progress in resolving supply-chain, labor, and project execution issues, and the extent to which cost increases can be passed to customers.
- Ongoing covenant headroom and borrowing availability, particularly if working-capital needs or floating interest rates rise.
- Developments in the Department of Labor matter, contractual disputes, and other self-insurance or legal exposures.
- Realization and profitability of reported backlog and remaining performance obligations, including agreements not yet legally enforceable.