IES Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. This annual report includes fourth-quarter results but is not a standalone quarterly filing. Amounts are in U.S. dollars.
Business context and reporting period
IES provides electrical, mechanical, communications infrastructure and industrial services through four segments: Commercial & Industrial, Communications, Infrastructure Solutions and Residential. Its strategy emphasizes improving margins and free cash flow, investing in existing businesses and pursuing acquisitions.
In FY2017, IES acquired Freeman Enclosure Systems, Technical Services and an 80% interest in NEXT Electric for aggregate consideration of approximately $21.0 million. Tontine Associates and affiliates owned approximately 58% of the common stock, giving them control over most shareholder matters.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $810.7 million | $696.0 million |
| Gross profit / margin | $140.5 million / 17.3% | $127.0 million / 18.2% |
| Operating income / margin | $20.3 million / 2.5% | $25.0 million / 3.6% |
| Net income attributable to IES | $13.4 million | $120.8 million |
| Diluted EPS | $0.62 | $5.62 |
| Cash from operating activities | $22.3 million | $25.0 million |
| Cash and cash equivalents at year-end | $28.3 million | $33.0 million |
| Total debt at year-end | $29.4 million | $29.3 million |
| Working capital | $52.8 million | $43.7 million |
Investing activities used $24.5 million, including $20.2 million for acquisitions and $4.6 million for capital expenditures. Financing activities used $2.7 million, including share repurchases. Days sales outstanding rose to 66 from 60.
The revolving credit facility was expanded to $100 million and extended to August 2021. At year-end, IES reported $48.3 million of excess availability, $76.5 million of covenant-defined liquidity, an 8.0:1.0 fixed-charge coverage ratio and $38.2 million of covenant-defined EBITDA; it was in compliance with covenants. FY2018 property and equipment requirements were estimated at $4.5–$6.5 million.
Material changes versus FY2016
- Revenue increased 16.5%, reflecting growth in Communications, Infrastructure Solutions and Residential, and acquired-business contributions. Segment revenue was $274.0 million Residential, $227.6 million Commercial & Industrial, $225.3 million Communications and $83.8 million Infrastructure Solutions.
- Gross margin fell 0.9 percentage points to 17.3%; operating income declined $4.6 million. Management cited weaker margins across all segments, higher SG&A and project execution difficulties at two Commercial & Industrial branches.
- Net income fell sharply from FY2016, chiefly because FY2016 included a $109.0 million benefit from releasing deferred-tax valuation allowances. FY2017 included $5.2 million of income tax expense.
- Commercial & Industrial recorded an operating loss of $1.2 million, versus income of $7.6 million. The Denver and Roanoke branches recorded an $8.4 million operating loss in FY2017 and were being wound down.
- Backlog decreased to $331 million from $341 million. IES expected $278 million to convert to revenue in FY2018; backlog is not a guarantee of revenue or profit.
Outlook, risks and unusual items
Management expected revenue from existing businesses to increase year over year in FY2018, assuming no significant deterioration in economic conditions, while forecasting slower growth in Residential and Communications. It expected lower multifamily demand, partly offset by single-family growth; Communications growth was expected to depend on customer investment timing. Management also cited continued competitive margin pressure and emphasized controlled growth.
- Project and margin risks: Fixed-price work, cost estimation, labor and commodity-price increases, project delays, customer cancellations, collections and percentage-of-completion estimates may affect earnings and cash flow. FY2017 included $3.9 million of expense from estimate changes on two Commercial & Industrial jobs.
- Tax assets: The balance sheet included $86.2 million of net deferred tax assets. Federal NOLs were estimated at $378.3 million, including amounts management did not consider more likely than not to be realized. A change in ownership could limit NOL use; a lower federal tax rate could reduce deferred-tax-asset value.
- Control and financing: Tontine share sales could affect control, trigger contractual change-of-control provisions and limit NOL benefits. Credit-facility covenant breaches could cause default and acceleration; surety availability is also at providers’ discretion.
- Legal matters: In the Capstone matter, IES had not recorded a reserve, stating loss was not probable and exposure could not be reasonably estimated. In the USAMRIID project litigation, IES claimed approximately $21 million through August 2017 and expected a further $4.5 million in claims, but recorded no recovery.
- Reporting and controls: The auditor gave an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded Freeman and NEXT Electric from the internal-control assessment because they were acquired during the year; the companies represented 5.7% of assets excluding goodwill and intangibles and 2.3% of revenue.
Important facts for investors to verify
- Whether FY2018 revenue growth and the expected moderation in Residential and Communications were achieved, including the impact of multifamily demand.
- Progress in winding down Denver and Roanoke, remaining project exposures and any effect on segment margins or credit covenants.
- Cash conversion, receivable collections and backlog realization, given higher days sales outstanding and the decline in backlog.
- Acquisition performance, final purchase accounting and obligations relating to contingent consideration and noncontrolling interests.
- Use and realizability of deferred tax assets and NOLs, including potential ownership-change or tax-rate impacts.
- Developments in the Capstone and USAMRIID matters, surety capacity and compliance with amended credit-facility covenants.