IES Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018; comparisons are to the three months ended December 31, 2017 unless otherwise noted. IES provides commercial and industrial contracting, communications infrastructure, industrial solutions, and residential electrical services. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $243.8 | $198.3 |
| Gross profit / margin | $41.6 / 17.1% | $33.1 / 16.7% |
| Operating income / margin | $9.5 / 3.9% | $3.0 / 1.5% |
| Net income (loss) | $7.0 | $(29.5) |
| IES-attributable earnings (loss) per diluted share | $0.32 | $(1.39) |
| Operating cash flow | $(1.4) | $5.0 |
- Revenue rose 23.0%; gross profit increased $8.5 million. SG&A grew 6.6% to $32.1 million but declined as a share of revenue, from 15.2% to 13.2%.
- Revenue increased in all four segments: Commercial & Industrial $72.6 million (+36.9%); Communications $69.3 million (+27.3%); Infrastructure Solutions $29.5 million (+35.9%); Residential $72.5 million (+4.8%).
- Segment operating income was $2.0 million in Commercial & Industrial, $5.0 million in Communications, $1.4 million in Infrastructure Solutions, and $3.9 million in Residential. Infrastructure Solutions’ gross margin declined to 20.1% from 21.6%, mainly due to work mix; Residential operating income fell to $3.9 million from $4.1 million.
- Cash and cash equivalents were $20.6 million at December 31, down $5.7 million from September 30. Investing cash use was $2.1 million, primarily capital expenditures; financing cash use was $2.2 million, including share repurchases and employee tax-withholding share purchases.
- Reported long-term debt was $29.6 million, primarily revolving-credit borrowings; the MD&A separately cites $30.2 million of outstanding borrowings. The filing text does not clearly reconcile these figures. The weighted-average borrowing rate was 4.52%.
- The $100 million revolving facility had $57.9 million of excess availability and $78.5 million of covenant-defined liquidity, including $6.8 million of outstanding letters of credit. IES reported covenant compliance, a 7.4:1 fixed-charge coverage ratio, and trailing-four-quarter covenant EBITDA of $42.5 million.
- Current assets were $265.8 million and current liabilities $161.2 million. Working capital excluding cash increased $12.0 million during the quarter; days sales outstanding improved to 61 from 62.
Changes, outlook, risks, and unusual items
- Drivers and management commentary: Management attributed broad-based revenue growth to stronger demand and improving conditions in some markets. Commercial & Industrial cited higher bid volume, improved project efficiencies, and volume leverage. Communications growth was driven in part by data-center customers’ spending. Management said market conditions remain competitive in parts of Commercial & Industrial and Communications revenue can vary with customers’ capital-spending cycles.
- Backlog and contracted work: Backlog rose to $538 million from $482 million at September 30, 2018. Remaining performance obligations were $406.9 million, of which approximately $387.0 million was expected to be recognized over the next 12 months. The filing cautions that backlog is not a guarantee of revenue or profit and differs from remaining performance obligations.
- Guidance: The filing provides no specific financial guidance or quantified full-year outlook. Management notes seasonality in Residential, with typically lower activity in fall and winter, and says quarterly results are not necessarily indicative of full-year results.
- Tax comparison: Prior-year results included a $31.3 million charge to remeasure deferred tax balances after the Tax Cuts and Jobs Act. The company completed its accounting for that change in fiscal 2018; the sharp year-over-year improvement in net income therefore reflects this unusual prior-period tax charge as well as improved operating results.
- Accounting change: IES adopted the new revenue-recognition standard on October 1, 2018, recording a $0.1 million cumulative adjustment to opening retained earnings. Management said the quarter’s impact was not material; some Infrastructure Solutions contracts may now be recognized at completion rather than over time.
- USAMRIID claim: The company settled the long-running project dispute for $2.5 million in cash payments, subject to completion of limited remaining work and a $0.15 million change-order credit. IES received the initial $1.0 million in January 2019; $1.5 million remained contingent on completing the work. The company said it made no material change to the charge recorded in the prior fiscal year.
- Key risks and contingencies: Project-estimate and fixed-price contract risk; labor, commodity, and interest-rate exposure; customer funding and collection risk; dependence on surety and credit availability; self-insured claims and construction-defect liabilities; and possible changes in Tontine Associates’ controlling-shareholder position. A one-percentage-point rise in rates on the facility borrowings outstanding at quarter-end would increase annual pretax interest expense by approximately $0.3 million. Management reported no material change to previously disclosed risk factors.
- Ownership and capital allocation: Tontine owned approximately 57.5% of outstanding common shares, according to its January 11, 2019 filing. A change in ownership could affect tax-loss availability and trigger provisions in financing, bonding, or severance arrangements. IES repurchased 46,133 shares under its repurchase program during the quarter at an average $16.08 per share; additional employee shares were acquired for tax withholding.
- Legal and insurance exposure: Accrued self-insurance liabilities were $5.9 million; residential construction-defect reserves were $0.2 million. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect, while noting estimates and outcomes remain uncertain.
Important facts for investors to verify
- Reconcile the $29.6 million balance-sheet debt amount with the $30.2 million borrowing figure in MD&A, and confirm current revolver availability after letters of credit.
- Track operating cash conversion and working-capital needs as the business grows, particularly receivables, inventory, and contract assets and liabilities.
- Monitor realization and profitability of the $538 million backlog and timing of the $406.9 million remaining performance obligations; these measures are not interchangeable or guaranteed revenue.
- Confirm completion of the remaining USAMRIID work and collection of the contingent settlement payment.
- Assess whether revenue and margin gains persist, especially in Infrastructure Solutions, Residential, and data-center-related Communications work, while accounting for seasonality and customer spending cycles.
- Evaluate the effect of Tontine ownership changes on governance, tax attributes, credit and surety arrangements, and share supply.