IES Holdings, Inc.: Form 10-Q for the period ended Dec 31, 2024

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, set forth in Part II, Item 8. “Financial Statements and Supplementary Data” as set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024, and the Condensed Consolidated Financial Statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following discussion may contain forward looking statements. For additional information, see “Disclosure Regarding Forward Looking Statements” in Part I of this Quarterly Report on Form 10-Q.

OVERVIEW

Executive Overview

Please refer to Part I, Item 1. “Business” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2024, for a discussion of the Company’s services and corporate strategy. IES Holdings, Inc., a Delaware corporation, designs and installs integrated electrical and technology systems and provides infrastructure products and services to a variety of end markets, including data centers, residential housing, and commercial and industrial facilities. Our operations are organized into four business segments: Communications, Residential, Infrastructure Solutions and Commercial & Industrial.

Current Market and Operating Conditions

Entering fiscal 2025, we see strong demand across many of our key end markets. However, our business segments each have their own unique set of factors influencing demand for our services. We are cautious about near-term demand for single-family housing as elevated mortgage rates and the impacts of inflation on materials and labor costs have resulted in a decline in housing affordability. In addition, consumer expectations about future interest rate reductions may cause some home buyers to delay purchases in anticipation of lower mortgage costs. In the multi-family residential business, higher borrowing costs for project owners during fiscal 2024 resulted in a reduction in backlog entering fiscal 2025, which may result in lower multi-family residential revenues compared with fiscal 2024. However, backlog across our business segments as a whole remains high, reflecting strong demand in key end markets. Demand with respect to data centers, a key end market served by our Communications, Infrastructure Solutions, and Commercial & Industrial segments, remains particularly strong. However, availability of labor and capacity could constrain the rate at which we are able to grow this business.

While the COVID-19 pandemic's impact on markets, the supply chain and the labor force had minimal impact on our business thus far in fiscal 2025 compared with prior fiscal years, COVID-19 and any future pandemic or other public health emergency could impact our workforce, customers and suppliers in the future. An inability to procure materials in a timely manner, to complete work on schedule, and to reflect higher materials or labor costs in our pricing to customers has had, and could have in the future, a significant impact on our operating results.

Please refer to Part I. Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 for further information.

RESULTS OF OPERATIONS

We report our operating results across our four operating segments: Communications, Residential, Infrastructure Solutions, and Commercial & Industrial. Expenses associated with our corporate office are classified separately. The following table presents selected historical results of operations of IES Holdings, Inc., including the results of acquired businesses from the dates acquired.

(Dollars in thousands, Percentage of revenues)

Consolidated revenues for the three months ended December 31, 2024, were $115.1 million higher than for the three months ended December 31, 2023, an increase of 18.1%, with increases at all four of our operating segments. See further discussion below of changes in revenues for our individual segments.

Consolidated gross profit for the three months ended December 31, 2024 increased $34.2 million compared to the three months ended December 31, 2023. Our overall gross profit percentage was 23.8% during the three months ended December 31, 2024, as compared to 22.7% during the three months ended December 31, 2023. Gross profit as a percentage of revenue increased at our Residential, Infrastructure Solutions and Commercial & Industrial segments and decreased slightly at our Communications segment. See further discussion below of changes in gross margin for our individual segments.

Selling, general and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and benefits related to corporate, segment and branch management (including incentive-based compensation), occupancy and utilities, training, professional services, information technology costs, consulting fees, travel and certain types of depreciation and amortization. We allocate certain corporate selling, general and administrative costs across our segments as we believe this more accurately reflects the costs associated with operating each segment.

During the three months ended December 31, 2024, our selling, general and administrative expenses were $103.0 million, an increase of $17.2 million, or 20.0%, over the three months ended December 31, 2023. As a percentage of revenue, selling, general and administrative expenses increased from 13.5% for the three months ended December 31, 2023 to 13.7% for the three months ended December 31, 2024. The increase in selling, general and administrative expenses was generally consistent with revenue growth.

Communications

(Dollars in thousands, Percentage of revenues)

23

Revenues. Our Communications segment’s revenues increased by $62.2 million during the three months ended December 31, 2024, or 36.4%, compared to the three months ended December 31, 2023. The increase primarily resulted from an increase in demand from data center customers.

Gross Profit. Our Communications segment’s gross profit during the three months ended December 31, 2024 increased by $12.5 million compared to the three months ended December 31, 2023, primarily driven by increased revenues as discussed above. Gross profit as a percentage of revenue was 21.0% in the three months ended December 31, 2024 compared to 21.2% in the three months ended December 31, 2023.

Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased by $5.3 million, or 35.8%, during the three months ended December 31, 2024 compared to the three months ended December 31, 2023. The increase was consistent with the Communications segment's revenue growth during the period, resulting in selling, general and administrative expenses as a percentage of revenue of 8.7% in both periods.

Residential

(Dollars in thousands, Percentage of revenues)

Revenues. Our Residential segment’s revenues increased by $4.1 million, or 1.3%, during the three months ended December 31, 2024 compared to the three months ended December 31, 2023. Our multi-family business revenues increased by $7.3 million, or 10.5%, driven by successful execution of its backlog. A reduction in new single-family construction demand largely driven by the impacts of hurricanes in the Florida market, continued low housing affordability and consumer expectations about future interest rate reductions caused a decrease of $4.8 million, or 2.7%, in our single-family electrical revenues, while this decrease was offset by the continued expansion of our plumbing and HVAC business, where revenues increased by $1.6 million, or 2.2%.

Gross Profit. During the three months ended December 31, 2024, our Residential segment's gross profit increased by $3.7 million, or 4.9%, compared to the three months ended December 31, 2023. Gross profit as a percentage of revenue increased slightly to 24.7% during the three months ended December 31, 2024, compared to 23.9% for the three months ended December 31, 2023. The increase in profitability was driven primarily by improved project execution and reduced material costs.

Selling, General and Administrative Expenses. Our Residential segment's selling, general and administrative expenses increased by $3.9 million, or 7.7%, during the three months ended December 31, 2024, compared to the three months ended December 31, 2023. The increase was driven by higher personnel and other administrative costs to support the continued growth of our business. Selling, general and administrative expenses as a percentage of revenue in the Residential segment increased to 17.3% during the three months ended December 31, 2024, compared to 16.3% in the three months ended December 31, 2023.

Infrastructure Solutions

(Dollars in thousands, Percentage of revenues)

Revenues. Revenues in our Infrastructure Solutions segment increased by $45.2 million during the three months ended December 31, 2024, an increase of 71.9% compared to the three months ended December 31, 2023, driven primarily by continued strong demand in our custom engineered solutions manufacturing businesses, including generator enclosures for data center customers. Greiner Industries, Inc. (“Greiner”), which was acquired on April 1, 2024, contributed $12.2 million in revenues in the three months ended December 31, 2024.

Gross Profit. Our Infrastructure Solutions segment’s gross profit during the three months ended December 31, 2024 increased $16.8 million, compared to the three months ended December 31, 2023, and gross profit as a percentage of revenue increased from 28.9% to 32.3%. The improvement in gross profit and gross margin was primarily driven by higher volumes, improved pricing, operating efficiencies at our facilities, and the impact of investments to increase capacity we have made over the last several years.

Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the three months ended December 31, 2024 increased by $4.0 million, compared to the three months ended December 31, 2023, primarily as a result of increased employee compensation cost to support growth in the business and higher incentive compensation as a result of higher earnings and administrative expenses incurred at Greiner. Selling, general and administrative expenses as a percentage of revenue decreased from 11.6% for the three months ended December 31, 2023 to 10.4% for the three months ended December 31, 2024 as we benefited from the scale of our operations.

Commercial & Industrial

(Dollars in thousands, Percentage of revenues)

Revenues. Revenues in our Commercial & Industrial segment increased by $3.5 million, or 4.2%, during the three months ended December 31, 2024, compared to the three months ended December 31, 2023. The increase primarily relates to continued strong demand and successful execution of backlog across the business.

Gross Profit. Our Commercial & Industrial segment’s gross profit during the three months ended December 31, 2024 increased by $1.2 million, compared to the three months ended December 31, 2023. Gross profit as a percentage of revenue increased from 16.4% for the quarter ended December 31, 2023 to 17.1% for the quarter ended December 31, 2024 as we benefited from improved project execution and bid margins across the business.

Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the three months ended December 31, 2024 increased by $1.2 million, or 17.8%, compared to the three months ended December 31, 2023 primarily as a result of increased employee compensation cost, including higher incentive compensation as a result of successful project execution. Selling, general and administrative expenses as a percentage of revenue increased from 8.1% for the three months ended December 31, 2023 to 9.1% for the three months ended December 31, 2024.

INTEREST AND OTHER EXPENSE, NET

(In thousands)

During the three months ended December 31, 2024, we incurred interest expense of $0.5 million primarily comprised of interest on our finance lease agreements and fees on an average letter of credit balance of $5.5 million under our revolving credit facility and an average unused line of credit balance of $144.4 million. This compares to interest expense of $0.4 million for the three months ended December 31, 2023, primarily comprised of interest on our finance lease agreements and fees on an average letter of credit balance of $5.6 million under our revolving credit facility and an average unused line of credit balance of $142.4 million.

The increase in total other income, net for the three months ended December 31, 2024, compared to the three months ended December 31, 2023 is primarily the result of unrealized gains on investments in trading securities of $2.3 million in the three months ended December 31, 2024 compared to unrealized gains of $0.1 million on investments in trading securities in the three months ended December 31, 2023.

PROVISION FOR INCOME TAXES

We recorded income tax expense of $20.0 million for the three months ended December 31, 2024, compared to $15.4 million for the three months ended December 31, 2023, driven by increased pretax income.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based on our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our Condensed Consolidated Financial Statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from those estimates. For a discussion of our significant accounting policies, please see our Annual Report on Form 10-K for the fiscal year ended September 30, 2024. Some of the more significant estimates include revenue recognition, business combinations, and income taxes.

There have been no significant changes to our accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

REMAINING PERFORMANCE OBLIGATIONS AND BACKLOG

Remaining performance obligations represent the unrecognized revenue value of our contractual commitments. While backlog is not a defined term under GAAP, it is a common measurement used in our industry, and we believe it improves our ability to forecast future results and identify operating trends that may not otherwise be apparent. Backlog is a measure of revenue that we expect to recognize from work that has yet to be performed on uncompleted contracts and from work that has been contracted but has not started, exclusive of short-term projects. While all of our backlog is supported by documentation from customers, backlog is not a guarantee of future revenues, as contractual commitments may change and our performance may vary. Not all of our work is performed under contracts included in backlog; for example, most of the apparatus repair work that is completed by our Infrastructure Solutions segment is performed under master service agreements on an as-needed basis. Additionally, electrical, plumbing and HVAC installation services for single-family housing at our Residential segment are completed on a short-term basis and are therefore excluded from backlog. The table below summarizes our remaining performance obligations and backlog (in thousands):

WORKING CAPITAL

During the three months ended December 31, 2024, working capital exclusive of cash increased by $33.5 million from September 30, 2024, reflecting a $13.9 million increase in current assets excluding cash and a $19.6 million decrease in current liabilities during the period.

During the three months ended December 31, 2024, our current assets exclusive of cash increased to $784.8 million, as compared to $770.9 million as of September 30, 2024. The increase was primarily driven by an $18.0 million increase in marketable securities as a portion of our excess cash was invested in trading securities and a $5.5 million increase in prepaid expenses and other current assets as we made advance payments on our annual business insurance policies during the first quarter of fiscal 2025. These increases were partially offset by a $10.8 million decrease in trade accounts receivable due to the timing of cash collections.

During the three months ended December 31, 2024, our total current liabilities decreased by $19.6 million to $503.0 million, compared to $522.6 million as of September 30, 2024, driven by a $31.0 million decrease in accounts payable and accrued expenses primarily as a result of the timing of vendor payments and incentive compensation payments at the end of the calendar year across all of our operating segments. This decrease was partially offset by a $11.4 million increase in billings in excess of costs and estimated earnings driven by the timing of contract billings on projects on which revenue is recognized using the percentage of completion method.

Surety

We believe the bonding capacity provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of December 31, 2024, the estimated cost to complete our bonded projects was approximately $138.9 million.

LIQUIDITY AND CAPITAL RESOURCES

The Revolving Credit Facility

On January 21, 2025 we entered into the Fourth Amended and Restated Credit Agreement (the “Amended Credit Agreement”). Pursuant to the Amended Credit Agreement, our maximum revolver amount increased from $150 million to $300 million, and the maturity date was extended from September 30, 2026 to January 21, 2030.

Under the Amended Credit Agreement, the Company is subject to certain financial covenants including a maximum Consolidated Total Leverage Ratio (as defined in the Amended Credit Agreement) of 3.00 to 1.00 and a minimum Consolidated Interest Coverage Ratio (as defined in the Amended Credit Agreement) of 3.00 to 1.00.

Amounts outstanding bear interest at a rate equal to either (1) the Base Rate (which is the greater of the Federal Funds Rate (as defined in the Amended Credit Agreement) and the Prime Rate (as defined in the Amended Credit Agreement)), (2) the Daily Simple SOFR (as defined in the Amended Credit Agreement) or (3) Term SOFR (as defined in the Amended Credit Agreement), plus, in each case, an interest rate margin, which is determined quarterly based on our Consolidated Total Leverage Ratio, in accordance with the following thresholds:

In addition, we are charged monthly in arrears for an unused commitment fee of 0.25% to 0.35% per annum on any unused portion of the revolving credit facility based on the Company's Consolidated Total Leverage Ratio.

The Amended Credit Agreement restricts certain types of transactions when the Company’s Consolidated Total Leverage Ratio, after giving pro forma effect thereto, exceeds 2.75 to 1.00. The Amended Credit Agreement continues to contain other customary affirmative and negative covenants as well as events of default.

Under the Amended Credit Agreement, if in the future our Consolidated Total Leverage Ratio is greater than 3.00:1.00, or our Consolidated Interest Coverage Ratio is less than 3.00:1.00, or if we otherwise fail to perform or otherwise comply with certain of our covenants or other agreements under the Amended Credit Agreement, it would result in an event of default under the Amended Credit Agreement, which could result in some or all of our then-outstanding indebtedness becoming immediately due and payable.

At December 31, 2024, we had $5.5 million in outstanding letters of credit and no outstanding borrowings under our revolving credit facility. As of December 31, 2024, the Company was in compliance with the financial covenants under the credit agreement that was in place at December 31, 2024.

Operating Activities

Our cash flow from operations is not only influenced by cyclicality, demand for our services, operating margins and the type of services we provide, but can also be influenced by working capital needs such as the timing of our receivable collections. Working capital needs are generally lower during our fiscal first and second quarters due to the seasonality that we experience in many regions of the country; however, a seasonal decline in working capital may be offset by needs associated with higher growth or acquisitions. Currently, our working capital needs are higher than they have been historically, as a result of growth of our business and elevated commodity prices.

Net cash provided by operating activities was $37.3 million during the three months ended December 31, 2024, as compared to $25.0 million in the three months ended December 31, 2023. The increase in operating cash flow resulted from increased earnings in the three months ended December 31, 2024 and a decrease in cash used in working capital during the three months ended December 31, 2024 as compared with the three months ended December 31, 2023.

Investing Activities

Net cash used in investing activities was $58.4 million for the three months ended December 31, 2024, compared to $6.0 million used in investing activities in the three months ended December 31, 2023. During the three months ended December 31, 2024, we paid $44.9 million to acquire a membership interest in Jett Texas Company LLC (“Jett”), an investment company, as part of the financing of Jett's investment in the CB&I storage solutions business formerly owned by McDermott International, Ltd. We also made capital expenditures of $13.2 million as we continued to purchase new assets instead of entering into new lease agreements at our Communications segment and made other capital expenditures to support the growth of our business. During the three months ended December 31, 2023, we used $6.5 million for capital expenditures to support the growth of our business.

Financing Activities

Net cash used in financing activities for the three months ended December 31, 2024 was $20.6 million, compared to $7.3 million for the three months ended December 31, 2023. Net cash used in financing activities for the three months ended December 31, 2024 included $15.7 million used to repurchase our common stock, including repurchases to satisfy statutory withholding requirements upon the vesting of employee stock compensation, and $4.0 million in distributions to noncontrolling interests under operating agreements in connection with certain acquisitions. Net cash used in financing activities for the three months ended December 31, 2023 included $4.1 million to settle our contingent consideration liability related to prior year acquisitions and $1.3 million in distributions to noncontrolling interests under operating agreements in connection with certain acquisitions.

Stock Repurchase Program

On July 31, 2024, our Board authorized a stock repurchase program for the purchase from time to time of up to $200.0 million of the Company’s common stock after the previous stock repurchase program was fully utilized. Share purchases are made for cash in open market transactions at prevailing market prices or in privately negotiated transactions or otherwise. The timing and amount of purchases under the program are determined based upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. All or part of the repurchases may be implemented under a Rule 10b5-1 trading plan, which allows repurchases under pre-set terms at times when the Company might otherwise be prevented from purchasing under insider trading laws or because of self-imposed blackout periods. The program does not require the Company to purchase any specific number of shares and may be modified, suspended, reinstated, or terminated at any time at the Company’s discretion and without notice. We repurchased 21,048 shares pursuant to our repurchase programs during the three months ended December 31, 2024.

MATERIAL CASH REQUIREMENTS

From time to time, we may enter into firm purchase commitments for materials, such as copper or aluminum wire, which we expect to use in the ordinary course of business. These commitments are typically for terms of less than one year and require us to buy minimum quantities of materials at specific intervals at a fixed price over the term. As of December 31, 2024, we did not have any such firm commitments to purchase materials outstanding and there were no material changes in our material cash requirements from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024. We expect that cash and cash equivalents, cash flow from operations and availability under our revolving credit facility will be sufficient to satisfy cash requirements during at least the next 12 months.

Management is actively involved in monitoring exposure to market risk and continues to develop and utilize appropriate risk management techniques. Our exposure to significant market risks includes fluctuations in labor costs and commodity prices. We are also exposed to interest rate risk with respect to any debt obligations we may incur our revolving credit facility. For additional information see “Disclosure Regarding Forward-Looking Statements” in Part I of this Quarterly Report on Form 10-Q and our risk factors in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Commodity Risk

Our exposure to significant market risks includes fluctuations in commodity prices for, among other things, copper, aluminum, steel, electrical components, certain plastics, and fuel. Commodity price risks may have an impact on our results of operations due to the fixed-price nature of many of our contracts. Over the long term, we expect to be able to pass along a portion of these costs to our customers, as market conditions in the industries we serve will allow.

Investment Risk

We are exposed to market price volatility for our investments in marketable securities which are carried at fair value measured using market prices, with gains and losses included in “Other income, net” on our Condensed Consolidated Statements of Comprehensive Income. Changes in the market value of these investments could create volatility in our reported earnings from period to period, and a decline in value of our investments could have an adverse impact on our reported earnings. Changes in market value of these investments measured at fair value resulted in an unrealized gain of $2.3 million in the three months ended December 31, 2024. As of December 31, 2024, we had investments in marketable securities with a fair value of $53.0 million, and a 10% change in the market value of these investments would cause a $5.3 million impact to our pre-tax income.

Interest Rate Risk

Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Any long-term debt that may be outstanding from time to time under our revolving credit facility is structured on floating rate terms. We currently do not maintain any hedging contracts that would limit our exposure to variable rates of interest when we have outstanding borrowings under our revolving credit facility. Under the Amended Credit Agreement, we have the option to use SOFR as the benchmark for establishing the interest rate charged on our borrowings. If we choose to use SOFR to establish the interest rate on our borrowings and SOFR were to increase, our interest payment obligations on any then-outstanding borrowings would increase, having a negative effect on our cash flow and financial condition. We had no borrowings outstanding under our revolving credit facility as of December 31, 2024.

Changes in Internal Control Over Financial Reporting

In the fiscal year ended September 30, 2024, we began planning and preparing for our phased implementation of a new enterprise resource planning (“ERP”) system, which will replace and upgrade many of our existing financial systems and processes. The ERP system is designed to accurately maintain our financial records and provide timely information to management to be used in operating the business. The first phase was implemented in the quarter ended December 31, 2024. The Company has updated the internal controls as appropriate and will continue to monitor the impact of the implementation on our financial reporting business processes. Other than executing the first phase of the ERP implementation, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As the implementation activities take place, we will continue to evaluate each quarter whether there are changes that affect our internal control over financial reporting.

Disclosure Controls and Procedures

In accordance with Rules 13a-15 and 15d-15 of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2024, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no material changes to the risk factors disclosed under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024.