UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2016March 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number1-13783
IES Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 76-0542208 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5433 Westheimer Road, Suite 500, Houston, Texas 77056
(Address of principal executive offices and ZIP code)
Registrant’s telephone number, including area code:(713) 860-1500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and, “smaller reporting company” and “emerging growth company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | |||||||
Non-accelerated filer | (Do not check if a smaller reporting company) | Smaller reporting company | ||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
On August 8, 2016,May 4, 2017, there were 21,451,53921,471,428 shares of common stock outstanding.
IES HOLDINGS, INC. AND SUBSIDIARIES
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PART I. FINANCIAL INFORMATION | ||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 36 | |||
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PART I
DEFINITIONS
On May 24, 2016, Integrated Electrical Services, Inc. changed its corporate name to IES Holdings, Inc. In this Quarterly Report onForm 10-Q, the words “IES”, the “Company”, the “Registrant”, “we”, “our”, “ours” and “us” refer to IES Holdings, Inc. and, except as otherwise specified herein, to our subsidiaries.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form10-Q includes certain statements that may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, all of which are based upon various estimates and assumptions that the Company believes to be reasonable as of the date hereof. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “seek,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology. These statements involve risks and uncertainties that could cause the Company’s actual future outcomes to differ materially from those set forth in such statements. Such risks and uncertainties include, but are not limited to:
You should understand that the foregoing, as well as other risk factors discussed in this document and in Part I, Item 1A of our Annual Report on Form10-K for the fiscal year ended September 30, 2015,2016, could cause future outcomes to differ materially from those experienced previously or those expressed in such forward-looking statements. We undertake no obligation to publicly update or revise any information, including information concerning our controlling shareholder, net operating losses, borrowing availability or cash position, or any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Forward-looking statements are provided in this Quarterly Report onForm 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of the estimates, assumptions, uncertainties and risks described herein.
IES HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Information)
June 30, | September 30, | March 31, | September 30, | |||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 22,807 | $ | 49,360 | $ | 20,781 | $ | 32,961 | ||||||||
Restricted cash | 260 | — | 64 | 260 | ||||||||||||
Accounts receivable: | ||||||||||||||||
Trade, net of allowance of $738 and $842, respectively | 109,858 | 92,976 | ||||||||||||||
Trade, net of allowance of $697 and $736, respectively | 129,202 | 124,368 | ||||||||||||||
Retainage | 20,748 | 17,453 | 21,849 | 20,135 | ||||||||||||
Inventories | 17,432 | 13,977 | 18,311 | 13,236 | ||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 9,355 | 12,318 | ||||||||||||||
Costs and estimated earnings in excess of billings | 19,045 | 15,554 | ||||||||||||||
Prepaid expenses and other current assets | 4,305 | 2,956 | 6,059 | 3,214 | ||||||||||||
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Total current assets | 184,765 | 189,040 | 215,311 | 209,728 | ||||||||||||
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Property and equipment, net | 15,253 | 11,683 | 24,425 | 15,694 | ||||||||||||
Goodwill | 39,629 | 17,249 | 43,484 | 39,936 | ||||||||||||
Intangible assets, net | 32,953 | 4,723 | 31,040 | 31,723 | ||||||||||||
Deferred tax assets | 90,347 | 93,549 | ||||||||||||||
Other non-current assets | 4,923 | 4,015 | 3,367 | 3,710 | ||||||||||||
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Total assets | $ | 277,523 | $ | 226,710 | $ | 407,974 | $ | 394,340 | ||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Current maturities of long-term debt | $ | — | $ | 4 | ||||||||||||
Accounts payable and accrued expenses | 90,735 | 82,910 | 114,558 | 108,822 | ||||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 27,647 | 25,165 | ||||||||||||||
Billings in excess of costs and estimated earnings | 25,712 | 24,229 | ||||||||||||||
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Total current liabilities | 118,382 | 108,079 | 140,270 | 133,051 | ||||||||||||
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Long-term debt, net of current maturities | 30,248 | 10,234 | ||||||||||||||
Long-term debt | 29,376 | 29,257 | ||||||||||||||
Other non-current liabilities | 6,767 | 6,983 | 7,414 | 6,832 | ||||||||||||
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Total liabilities | 155,397 | 125,296 | 177,060 | 169,140 | ||||||||||||
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Noncontrolling interest | 1,726 | — | 1,739 | 1,795 | ||||||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued and outstanding | — | — | — | — | ||||||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized; 22,049,529 and 22,049,529 shares issued and 21,440,583 and 21,475,741 outstanding, respectively | 220 | 220 | ||||||||||||||
Treasury stock, at cost, 608,946 and 573,788 shares, respectively | (4,910 | ) | (4,401 | ) | ||||||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized; 22,049,529 issued and 21,471,893 and 21,456,539 outstanding, respectively | 220 | 220 | ||||||||||||||
Treasury stock, at cost, 577,636 and 592,990 shares, respectively | (4,666 | ) | (4,781 | ) | ||||||||||||
Additional paid-in capital | 194,325 | 193,628 | 196,164 | 195,221 | ||||||||||||
Retained deficit | (69,235 | ) | (88,033 | ) | ||||||||||||
Retained earnings | 37,457 | 32,745 | ||||||||||||||
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Total stockholders’ equity | 120,400 | 101,414 | 229,175 | 223,405 | ||||||||||||
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Total liabilities and stockholders’ equity | $ | 277,523 | $ | 226,710 | $ | 407,974 | $ | 394,340 | ||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
IES HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In Thousands, Except Share Information)
(Unaudited)
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Revenues | $ | 179,599 | $ | 144,082 | $ | 203,662 | $ | 159,981 | ||||||||
Cost of services | 145,602 | 119,030 | 171,848 | 132,169 | ||||||||||||
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Gross profit | 33,997 | 25,052 | 31,814 | 27,812 | ||||||||||||
Selling, general and administrative expenses | 25,716 | 20,546 | 30,120 | 24,267 | ||||||||||||
Contingent consideration expense | 66 | — | 83 | 266 | ||||||||||||
Loss (gain) on sale of assets | 34 | (47 | ) | (6 | ) | 775 | ||||||||||
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Income from operations | 8,181 | 4,553 | 1,617 | 2,504 | ||||||||||||
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Interest and other (income) expense: | ||||||||||||||||
Interest expense | 299 | 261 | 428 | 303 | ||||||||||||
Other income, net | (17 | ) | (9 | ) | (44 | ) | (3 | ) | ||||||||
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Income from continuing operations before income taxes | 7,899 | 4,301 | ||||||||||||||
(Benefit) provision for income taxes | (2,937 | ) | 339 | |||||||||||||
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Net income from continuing operations | 10,836 | 3,962 | ||||||||||||||
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Net loss from discontinued operations | — | (5 | ) | |||||||||||||
Income from operations before income taxes | 1,233 | 2,204 | ||||||||||||||
Provision for income taxes | 682 | 10 | ||||||||||||||
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Net income | 10,836 | 3,957 | 551 | 2,194 | ||||||||||||
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Net income attributable to noncontrolling interest | (31 | ) | — | (15 | ) | — | ||||||||||
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Comprehensive income attributable to IES Holdings, Inc. | $ | 10,805 | 3,957 | $ | 536 | $ | 2,194 | |||||||||
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Earnings per share attributable to IES Holdings, Inc.: | ||||||||||||||||
Basic | $ | 0.50 | $ | 0.19 | $ | 0.02 | $ | 0.10 | ||||||||
Diluted | $ | 0.50 | $ | 0.19 | $ | 0.02 | $ | 0.10 | ||||||||
Shares used in the computation of earnings per share: | ||||||||||||||||
Basic | 21,297,898 | 21,319,444 | 21,299,098 | 21,273,814 | ||||||||||||
Diluted | 21,456,634 | 21,370,634 | 21,574,155 | 21,436,012 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
IES HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In Thousands, Except Share Information)
(Unaudited)
Nine Months Ended June 30, | Six Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Revenues | $ | 490,347 | $ | 414,170 | $ | 395,840 | $ | 310,747 | ||||||||
Cost of services | 400,905 | 344,707 | 328,844 | 255,302 | ||||||||||||
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Gross profit | 89,442 | 69,463 | 66,996 | 55,445 | ||||||||||||
Selling, general and administrative expenses | 72,494 | 58,653 | 58,314 | 46,778 | ||||||||||||
Contingent consideration expense | 332 | — | 83 | 266 | ||||||||||||
Loss (gain) on sale of assets | 811 | (40 | ) | (13 | ) | 776 | ||||||||||
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Income from operations | 15,805 | 10,850 | 8,612 | 7,625 | ||||||||||||
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Interest and other (income) expense: | ||||||||||||||||
Interest expense | 895 | 860 | 874 | 596 | ||||||||||||
Other income, net | (49 | ) | (208 | ) | (48 | ) | (32 | ) | ||||||||
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Income from continuing operations before income taxes | 14,959 | 10,198 | 7,786 | 7,061 | ||||||||||||
(Benefit) provision for income taxes | (3,870 | ) | 908 | |||||||||||||
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Net income from continuing operations | 18,829 | 9,290 | ||||||||||||||
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Net loss from discontinued operations | — | (231 | ) | |||||||||||||
Provision (benefit) for income taxes | 3,311 | (932 | ) | |||||||||||||
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Net income | 18,829 | 9,059 | 4,475 | 7,993 | ||||||||||||
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Net income attributable to noncontrolling interest | (31 | ) | — | (67 | ) | — | ||||||||||
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Comprehensive income attributable to IES Holdings, Inc. | $ | 18,798 | $ | 9,059 | $ | 4,408 | $ | 7,993 | ||||||||
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Basic earnings (loss) per share attributable to IES Holdings, Inc.: | ||||||||||||||||
From continuing operations | $ | 0.88 | $ | 0.43 | ||||||||||||
From discontinued operations | — | (0.01 | ) | |||||||||||||
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Basic earnings per share attributable to IES Holdings, Inc. | $ | 0.88 | $ | 0.42 | ||||||||||||
Diluted earnings (loss) per share attributable to IES Holdings, Inc.: | ||||||||||||||||
From continuing operations | $ | 0.87 | $ | 0.43 | ||||||||||||
From discontinued operations | — | (0.01 | ) | |||||||||||||
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Diluted earnings per share attributable to IES Holdings, Inc. | $ | 0.87 | $ | 0.42 | ||||||||||||
Shares used in the computation of earnings (loss) per share: | ||||||||||||||||
Earnings per share attributable to IES Holdings, Inc.: | ||||||||||||||||
Basic | 21,280,469 | 21,542,289 | $ | 0.21 | $ | 0.37 | ||||||||||
Diluted | 21,412,343 | 21,589,437 | $ | 0.20 | $ | 0.37 | ||||||||||
Shares used in the computation of earnings per share: | ||||||||||||||||
Basic | 21,292,523 | 21,271,655 | ||||||||||||||
Diluted | 21,560,678 | 21,389,258 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
IES HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months Ended June 30, | Six Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 18,829 | $ | 9,059 | $ | 4,475 | $ | 7,993 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Bad debt expense | 274 | 10 | (15 | ) | 105 | |||||||||||
Amortization of deferred financing cost | 263 | 230 | 172 | 183 | ||||||||||||
Depreciation and amortization | 3,503 | 1,806 | 4,378 | 1,848 | ||||||||||||
Loss on sale of assets | 832 | 15 | ||||||||||||||
Loss (gain) on sale of assets | (13 | ) | 776 | |||||||||||||
Deferred income taxes | 2,675 | — | ||||||||||||||
Non-cash compensation | 645 | 325 | 926 | 429 | ||||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures: | ||||||||||||||||
Accounts receivable | (8,039 | ) | (4,072 | ) | (435 | ) | 5,361 | |||||||||
Inventories | (208 | ) | 2,751 | (3,252 | ) | 1,703 | ||||||||||
Costs and estimated earnings in excess of billings | 2,964 | (4,173 | ) | (3,491 | ) | 5,587 | ||||||||||
Prepaid expenses and other current assets | (3,098 | ) | (3,047 | ) | (5,642 | ) | (2,257 | ) | ||||||||
Other non-current assets | (1,314 | ) | 109 | 594 | (552 | ) | ||||||||||
Accounts payable and accrued expenses | 1,611 | (1,876 | ) | 213 | (2,575 | ) | ||||||||||
Billings in excess of costs and estimated earnings | 2,482 | 4,880 | 1,483 | 1,170 | ||||||||||||
Other non-current liabilities | (4,840 | ) | 194 | 587 | (1,450 | ) | ||||||||||
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Net cash provided by operating activities | 13,904 | 6,211 | 2,655 | 18,321 | ||||||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Purchases of property and equipment | (2,156 | ) | (2,385 | ) | (2,891 | ) | (1,084 | ) | ||||||||
Proceeds from sale of property and equipment | 2,200 | — | 23 | — | ||||||||||||
Cash paid for acquisitions, net of cash acquired | (59,698 | ) | (3,112 | ) | (11,663 | ) | (8,307 | ) | ||||||||
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Net cash used in investing activities | (59,654 | ) | (5,497 | ) | (14,531 | ) | (9,391 | ) | ||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Borrowings of debt | 20,026 | 6 | 5,050 | 416 | ||||||||||||
Repayments of debt | (112 | ) | — | (5,053 | ) | (426 | ) | |||||||||
Contingent consideration payment | (448 | ) | — | |||||||||||||
Distribution to noncontrolling interest | (122 | ) | — | |||||||||||||
Options exercised | 133 | — | 87 | 61 | ||||||||||||
Purchase of treasury stock | (590 | ) | (3,246 | ) | (14 | ) | (72 | ) | ||||||||
Changes in restricted cash | (260 | ) | — | 196 | — | |||||||||||
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Net cash provided by (used in) financing activities | 19,197 | (3,240 | ) | |||||||||||||
Net cash used in financing activities | (304 | ) | (21 | ) | ||||||||||||
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NET DECREASE IN CASH AND CASH EQUIVALENTS | (26,553 | ) | (2,526 | ) | ||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (12,180 | ) | 8,909 | |||||||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 49,360 | 47,342 | 32,961 | 49,360 | ||||||||||||
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CASH AND CASH EQUIVALENTS, end of period | $ | 22,807 | $ | 44,816 | $ | 20,781 | $ | 58,269 | ||||||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW | ||||||||||||||||
INFORMATION: | ||||||||||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
Cash paid for interest | $ | 651 | $ | 594 | $ | 660 | $ | 426 | ||||||||
Cash paid for income taxes | $ | 1,288 | $ | 517 | $ | 1,685 | $ | 733 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
1. BUSINESS AND ACCOUNTING POLICIES
Description of the Business
On May 24, 2016, Integrated Electrical Services, Inc. changed its corporate name to IES Holdings, Inc. IES Holdings, Inc. is a holding company that owns and manages operating subsidiaries in business activities across a variety of end markets. Our operations are currently organized into four principal business segments, based upon the nature of our current products and services:
• | Communications – Nationwide provider of technology infrastructure products and services to large corporations and independent businesses. |
• | Residential – Regional provider of electrical installation services for single-family housing and multi-family apartment complexes. |
• | Commercial & Industrial – Provider of electrical and mechanical design, construction, and maintenance services to the commercial and industrial markets in various regional markets and nationwide in certain areas of expertise, such as the power infrastructure market. |
• | Infrastructure Solutions |
The words “IES”, the “Company”, “we”, “our”, and “us” refer to IES Holdings, Inc. and, except as otherwise specified herein, to our wholly-owned subsidiaries.
Seasonality and Quarterly Fluctuations
Results of operations from our Residential construction segment are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues generated during fall and winter, with an impact from precipitation in the warmer months. The Communications, Commercial & Industrial, and Infrastructure Solutions segments of our business are less subject to seasonal trends, as work in these segments generally is performed inside structures protected from the weather, although weather can still impact these businesses, especially in the early stages of projects. Our service and maintenance business is generally not affected by seasonality. Our volume of business may be adversely affected by declines in construction projects resulting from adverse regional or national economic conditions. In particular, a prolonged period of low oil prices and subsequent slowdown in the economy could have a negative impact on demand for housing in regions such as Texas, which is a key market for us. Quarterly results may also be materially affected by the timing of new construction projects. Results for our Infrastructure Solutions segment may be affected by the timing of outages at our customers’ facilities. Accordingly, operating results for any fiscal period are not necessarily indicative of results that may be achieved for any subsequent fiscal period.
Basis of Financial Statement Preparation
The accompanying unaudited condensed consolidated financial statements include the accounts of IES and its wholly-owned subsidiaries, and have been prepared in accordance with the instructions to interim financial reporting as prescribed by the Securities and Exchange Commission (the “SEC”). The results for the interim periods are not necessarily indicative of results for the entire year. These interim financial statements do not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”), and should be read in conjunction with the consolidated financial statements and notes thereto filed with the SEC in our Annual Report on Form10-K for the fiscal year ended September 30, 2015.2016. In the opinion of management, the unaudited condensed consolidated financial statements contained in this report include all known accruals and adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods reported herein. Any such adjustments are of a normal recurring nature.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Noncontrolling Interest
In conjunction with our purchase of STR Mechanical, LLC (“STR”) during the third quarter of fiscal 2016, we acquired a controlling interest of 80 percent of the membership interests of STR. The remaining 20 percent interest, which was retained by the third party sellers, is identified in our financials as noncontrolling interest and is classified outside of permanent equity on our consolidated balance sheet. See Note 13 – Acquisitions and DivestituresBusiness Combinations for further discussion.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are primarily used in our revenue recognition of construction in progress, fair value assumptions in accounting for business combinations and analyzing goodwill, investments, intangible assets and long-lived asset impairments and adjustments, allowance for doubtful accounts receivable, stock-based compensation, reserves for legal matters, assumptions regarding estimated costs to exit certain segments, realizability of deferred tax assets, unrecognized tax benefits and self-insured claims liabilities and related reserves.
Recent Accounting PronouncementsStandards Not Yet Adopted
In May 2014, the FASBFinancial Accounting Standards Board (“FASB”), issued ASUNo. 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”), a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The standard also requires expanded disclosures surrounding revenue recognition. The effective date will be the first quarter of our fiscal year ended September 30, 2019. The standard allows for either full retrospective or modified retrospective adoption.adoption, and we currently plan to use the modified retrospective basis on the adoption date. We are currently evaluatingcontinuing to evaluate the impact of the adoption of this standard on our consolidated financial statements. In particular, we continue to analyze areas including contract termination provisions and accounting for change orders. However, we expect that we will continue to recognize revenues for most of our fixed-price contracts over time, as services are performed. We have not yet selected a transition method or determinedare also continuing to assess the effect ASU 2014-09 will have on our ongoing financial reporting.
In April 2015,necessary changes in processes and controls to meet the FASB issued ASU No. 2015-03, Interest-Imputation Of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires that debt issuance costs be presented as a direct deduction from the carrying amountdisclosure requirements of the related debt liability, consistent with the presentation of debt discounts. In August 2015, the FASB issued an update (ASU 2015-15) which allows an entity to present the cost of securing a revolving line of credit as an asset, regardless of whether a balance is outstanding. The standard is effective for fiscal years beginning after December 15, 2015 on a retrospective basis. The adoption of this update is not expected to have a material impact on our results of operations, financial position or cash flows.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The update is effective for fiscal years beginning after December 15, 2015 on a retrospective basis. The adoption of this update is not expected to have a material impact on our results of operations, financial position or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which clarifies that in a classified statement of financial position, an entity shall classify deferred tax liabilities and assets as noncurrent amounts. The new standard will become effective for our fiscal year beginning October 1, 2017. The company adopted this presentation during the period ended December 31, 2015. Prior periods have not been retrospectively adjusted.standard.
In February 2016, the FASB issued ASUNo. 2016-02, Leases (“ASU2016-02”). Under ASU2016-02, lessees will need to recognize aright-of-use asset and a lease liability for all of their leases, other than those that meet the definition of a short-term lease. For income statement purposes, leases must be classified as either operating or finance. Operating leases will result in straight-line expense, similar to current operating leases, while finance leases will result in a front-loaded expense pattern, similar to current capital leases. ASU2016-02 becomes effective for the fiscal year ended September 30, 2020. We are currently evaluating whether to early adopt the standard and what impact it will have on our consolidated financial statements.
In November 2016, the FASB issued ASU2016-18, Statement of Cash Flows, to standardize the classification of restricted cash and cash equivalents transactions on the statement of cash flows. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The retrospective transition method will be required for this new guidance. We expect we will adopt this guidance by September 30, 2017, and that it will not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU2017-01, Business Combinations. This standard clarifies the definition of a business to assist entities with evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted for certain transactions. The prospective transition method will be required for this new guidance. We do not expect this guidance to have a material impact on our consolidated financial statements.
Also in January 2017, the FASB issued ASU2017-04, Intangibles – Goodwill and Other. This update is intended to simplify the subsequent measurement of goodwill by eliminating the second step in thecurrent two-step goodwill impairment test. This update is effective for public entities for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The prospective transition method will be required for this new guidance. We do not expect this guidance to have a material impact on our consolidated financial statements.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Adoption of New Accounting Pronouncements
In March 2016, the FASB issued ASUNo. 2016-09, Compensation - Compensation—Stock Compensation (“ASU2016-09”). ASU2016-09 eliminates additional paid in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and the accounting for forfeitures is also changing. ASU2016-09 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.
We expectelected to early adopt ASU2016-09 in the quarter ended December 31, 2016, which required us to reflect any adjustments as of October 1, 2016. We elected to account for forfeitures as they occur to determine the amount of compensation cost to be recognized, resulting in a cumulative effect adjustment of $58 to reduce retained earnings for the increase to stock compensation expense. We recorded an offsetting cumulative effect adjustment of $362 to increase retained earnings to recognize a deferred tax asset related to tax benefits which were not previously recognized, as the tax deduction related to stock compensation expense resulted in an increase to a net operating loss rather than a reduction to income tax payable. Amendments to the accounting for minimum statutory withholding tax requirements had no impact to retained earnings as of October 1, 2016.
In August 2016, the FASB issued ASU2016-15, Statement of Cash Flows, to standardize the classification of certain transactions on the statement of cash flows. These transactions include contingent consideration payments made after a business combination. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted, and requires application using a retrospective transition method. We implemented the standard for the quarter ended March 31, 2017. The adoption of this update is not expected to have a materialhad no impact on our resultsstatement of operations, financial position or cash flows.
2. CONTROLLING SHAREHOLDER
At June 30, 2016,March 31, 2017, Tontine Capital Partners, L.P. together with its affiliates (collectively, “Tontine”) was the Company’s controlling shareholder, owning approximately 62.4%58% of the Company’s outstanding common stock according to a Schedule 13D/A filed with the SEC by Tontine on March 25,October 5, 2016. Accordingly, Tontine has the ability to exercise significant control over our affairs, including the election of directors and most actions requiring the approval of shareholders.
While Tontine is subject to restrictions under federal securities laws on sales of its shares as an affiliate, in 2013, pursuant to the terms of a registration rights agreement between the Company and Tontine, the Companyhas filed a shelf registration statement to register all of the shares of IES common stock then owned by Tontine (the “Registered Shares”).at the time of registration. As long as the shelf registration statement remains effective, Tontine has the ability to resell any or all of its Registered Sharesregistered shares from time to time in one or more offerings, as described in the shelf registration statement and in any prospectus supplement filed in connection with an offering pursuant to the shelf registration statement.
Should Tontine sell or otherwise dispose of all or a portion of its position in IES, a change in ownership of IES could occur. A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability of the Company’s net operating losses (“NOLs”) for federal and state income tax purposes. On January 28, 2013,November 8, 2016, the Company implemented a new tax benefit protection plan (the “NOL Rights Plan”) that is. The NOL Rights Plan was designed to deter an acquisition of the Company’s stock in excess of a threshold amount that could trigger a change of ownershipcontrol within the meaning of Internal Revenue Code Section 382. There can be no assurance that the NOL Rights Plan will be effective in deterring a change of ownership or protecting the NOLs. Furthermore, a change in ownershipcontrol would trigger the change of control provisions in a number of our material agreements, including our credit facility, bonding agreements with our sureties and our severance arrangements.
David B.Jeffrey L. Gendell the brother of Jeffrey Gendell, the founder and managing member of Tontine, has beenwas appointed as a member of the Company’sBoard of Directors and asnon-executive Chairman of the Board in November 2016. He is the managing member and founder of Tontine, and the brother of David B. Gendell, who has served as a member of the Board of Directors since February 2012, and has served as the Company’s non-executive Vice Chairman of the Board since November 2016 and asnon-executive Chairman of the Board from January 2015. Mr.2015 to November 2016. David B. Gendell is also an employee of Tontine.
On March 29, 2012, theThe Company entered intois party to a two-year sublease agreement with Tontine Associates, LLC, an affiliate of Tontine, for corporate office space in Greenwich, Connecticut, with monthly payments due in the amount of $6.Connecticut. The lease was renewed for a two-year term in March 2014 at approximately the same payment level, and for a three-year term in April 2016 with an increase in the monthly rent to $8, reflecting the increase paid by Tontine Associates, LLC to its landlord and the Company’s increased use of the corporate office space. The lease has terms at market rates and payments by the Company are at a rate consistent with that paid by Tontine Associates, LLC to its landlord.
3. DEBT
At June 30, 2016 and September 30, 2015, our long-term debt of $30,248 and $10,234, respectively, relates to amounts drawn on our revolving credit facility. The increase in debt relates to $20,000 drawn during the three months ended June 30, 2016, in connection with our acquisition of Technibus, Inc. on June 15, 2016. See Note 13 – Business Combinations and Divestitures for further discussion.
Amendment to 2012 Credit Facility
On May 3, 2016, we amended our revolving credit facility (as amended, the “2012 Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). This amendment increased the maximum revolver amount under the 2012 Credit Facility from $60,000 to $70,000, and extended the maturity date by one year to August 9, 2019. In addition, as further described below, the amendment reduced the interest rate charged under the 2012 Credit Facility, modified the calculation of amounts available under the 2012 Credit Facility, resulting in an increase in available borrowing capacity, created new minimum thresholds for liquidity and Excess
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Availability (as defined in our amended3. DEBT
At March 31, 2017 and restated credit and security agreement under the 2012 Credit Facility (the “Amended Credit Agreement”)), and modified the thresholds of liquidity and Excess Availability below which the Company must maintain a specified Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement).
Terms of 2012 Credit Facility
The 2012 Credit Facility contains customary affirmative, negative and financial covenants, which were adjusted in the May 3, 2016 amendment. At June 30, 2016, we were subject to the financial covenant requiring, at any time that our Liquidity (the aggregate amount of unrestricted cash and cash equivalents on hand plus Excess Availability) is less than $14,000 or our Excess Availability is less than $7,000, that we maintain a Fixed Charge Coverage Ratio of not less than 1.0:1.0. Additionally, pursuant to the amendment, we are required to maintain minimum Liquidity of $8,750 and Excess Availability of $4,380 at all times. At JuneSeptember 30, 2016, our Liquidity was $53,203long-term debt of $29,376 and our Excess Availability was $30,396, and as such, we were not required$29,257, respectively, relates to maintain a Fixed Charge Coverage Ratio of 1.0:1.0 as of such date. Nonetheless, at June 30, 2016, our Fixed Charge Coverage Ratio was 14.2:1.0. Compliance with our Fixed Charge Coverage Ratio, while not required at June 30, 2016, provides us with the ability to use cash on hand or to drawamounts drawn on our 2012 Credit Facility such thatrevolving credit facility. Our weighted-average interest rate on these borrowings was 2.99% at March 31, 2017, and 2.76% at September 30, 2016. At March 31, 2017, we can fall below the $7,000 Excess Availabilityalso had $6,634 in outstanding letters of credit and $14,000 Liquidity thresholds described abovetotal availability of $40,686 under this facility without violating our financial covenant.covenants.
If inOn April 14, 2017, we entered into an amendment and restatement of our revolving credit facility which increased the future our Liquidity or Excess Availability fall below $14,000 or $7,000, respectively,size of the facility and at that time our Fixed Charge Coverage Ratio is less than 1.0:1.0, or if we otherwise fail to perform or otherwise comply withmodified certain of ourits terms, including the financial covenants or other agreements under our 2012 Credit Facility, it would resultdisclosed in an event of default under our 2012 Credit Facility, which could result in some or allItem 7 of our indebtedness becoming immediately dueAnnual Report on10-K for the year ended September 30, 2016. See Note 14 – Subsequent Events for further discussion of this amendment and payable.
Borrowings under the 2012 Credit Facility may not exceed a “borrowing base” that is determined monthly by our lenders based on available collateral, primarily certain accounts receivables, inventories and personal property and equipment.restatement. The amendment modified the calculation of amounts available under the 2012 Credit Facility, by increasing our advance rates and expanding the types of assets to be includedCompany was in our borrowing base, resulting in an increase in available borrowing capacity.
Under the terms of the 2012 Credit Facility, amounts outstanding bear interestcompliance with all covenants at a per annum rate equal to a Daily Three Month LIBOR (as defined in the Credit Agreement), plus an interest rate margin, which is determined quarterly, based on the thresholds below. The amendment reduced the interest rate margin from between 2.00 and 3.00 percent to a range from 1.75 to 2.25 percent.
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Certain amounts up to $3,000, as set forth in the Amended Credit Agreement, accrue interest based on an Interest Rate Margin of 3.25%. In addition, we are charged monthly in arrears for (1) an unused commitment fee of 0.375% per annum, (2) a collateral monitoring fee ranging from $1 to $2, based on the then-applicable interest rate margin, (3) a letter of credit fee based on the then-applicable interest rate margin and (4) certain other fees and charges as specified in the Amended Credit Agreement.March 31, 2017.
At June 30, 2016,March 31, 2017, the carrying value of amounts outstanding on our Revolving Loan (as defined under the Amended Credit Agreement)revolving credit facility approximated fair value, as debt incurs interest at a variable rate. The fair value of the debt is classified as a level 2 measurement.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
4. PER SHARE INFORMATION
The following table reconcilestables reconcile the components of the basic and diluted earnings (loss) per share for the three and ninesix months ended June 30, 2016March 31, 2017 and 2015:2016:
Three Months Ended June 30, | ||||||||
2016 | 2015 | |||||||
Numerator: | ||||||||
Net income from continuing operations attributable to common shareholders of IES Holdings, Inc. | $ | 10,747 | $ | 3,927 | ||||
Net income from continuing operations attributable to restricted shareholders of IES Holdings, Inc. | 58 | 35 | ||||||
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Net income from continuing operations attributable to IES Holdings, Inc. | 10,805 | 3,962 | ||||||
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Net loss from discontinued operations attributable to common shareholders of IES Holdings, Inc. | — | (5 | ) | |||||
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Net loss from discontinued operations attributable to IES Holdings, Inc. | — | (5 | ) | |||||
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Net income attributable to common shareholders | 10,747 | 3,922 | ||||||
Net income attributable to restricted shareholders | 58 | 35 | ||||||
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Net income attributable to IES Holdings, Inc. | $ | 10,805 | $ | 3,957 | ||||
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Denominator: | ||||||||
Weighted average common shares outstanding — basic | 21,297,898 | 21,319,444 | ||||||
Effect of dilutive stock options and non-vested restricted stock | 158,736 | 51,190 | ||||||
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Weighted average common and common equivalent shares outstanding — diluted | 21,456,634 | 21,370,634 | ||||||
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Earnings per share attributable to IES Holdings, Inc.: | ||||||||
Basic | $ | 0.50 | $ | 0.19 | ||||
Diluted | $ | 0.50 | $ | 0.19 | ||||
Nine Months Ended June 30, | ||||||||
2016 | 2015 | |||||||
Numerator: | ||||||||
Net income from continuing operations attributable to common shareholders of IES Holdings, Inc. | $ | 18,641 | $ | 9,258 | ||||
Net income from continuing operations attributable to restricted shareholders of IES Holdings, Inc. | 157 | 32 | ||||||
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Net income from continuing operations attributable to IES Holdings, Inc. | 18,798 | 9,290 | ||||||
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Net loss from discontinued operations attributable to common shareholders of IES Holdings, Inc. | — | (231 | ) | |||||
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Net loss from discontinued operations attributable to IES Holdings, Inc. | — | (231 | ) | |||||
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Net income attributable to common shareholders | 18,641 | 9,027 | ||||||
Net income attributable to restricted shareholders | 157 | 32 | ||||||
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Net income attributable to IES Holdings, Inc. | $ | 18,798 | $ | 9,059 | ||||
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Denominator: | ||||||||
Weighted average common shares outstanding — basic | 21,280,469 | 21,542,289 | ||||||
Effect of dilutive stock options and non-vested restricted stock | 131,874 | 47,148 | ||||||
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Weighted average common and common equivalent shares outstanding — diluted | 21,412,343 | 21,589,437 | ||||||
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Basic earnings (loss) per share attributable to IES Holdings, Inc.: | ||||||||
From continuing operations | $ | 0.88 | $ | 0.43 | ||||
From discontinued operations | — | (0.01 | ) | |||||
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Basic earnings per share attributable to IES Holdings, Inc. | $ | 0.88 | $ | 0.42 | ||||
Diluted earnings (loss) per share attributable to IES Holdings, Inc.: | ||||||||
From continuing operations | $ | 0.87 | $ | 0.43 | ||||
From discontinued operations | — | (0.01 | ) | |||||
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Diluted earnings per share attributable to IES Holdings, Inc. | $ | 0.87 | $ | 0.42 | ||||
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Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Net income attributable to common shareholders of IES Holdings, Inc. | $ | 532 | $ | 2,174 | ||||
Net income attributable to restricted shareholders of IES Holdings, Inc. | 4 | 20 | ||||||
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Net income attributable to IES Holdings, Inc. | $ | 536 | $ | 2,194 | ||||
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Denominator: | ||||||||
Weighted average common shares outstanding — basic | 21,299,098 | 21,273,814 | ||||||
Effect of dilutive stock options andnon-vested restricted stock | 275,057 | 162,198 | ||||||
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Weighted average common and common equivalent shares outstanding — diluted | 21,574,155 | 21,436,012 | ||||||
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Earnings per share attributable to IES Holdings, Inc.: | ||||||||
Basic | $ | 0.02 | $ | 0.10 | ||||
Diluted | $ | 0.02 | $ | 0.10 |
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Six Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Net income attributable to common shareholders of IES Holdings, Inc. | $ | 4,373 | $ | 7,919 | ||||
Net income attributable to restricted shareholders of IES Holdings, Inc. | 35 | 74 | ||||||
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Net income attributable to IES Holdings, Inc. | $ | 4,408 | $ | 7,993 | ||||
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Denominator: | ||||||||
Weighted average common shares outstanding — basic | 21,292,523 | 21,271,655 | ||||||
Effect of dilutive stock options andnon-vested restricted stock | 268,155 | 117,603 | ||||||
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Weighted average common and common equivalent shares outstanding — diluted | 21,560,678 | 21,389,258 | ||||||
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Earnings per share attributable to IES Holdings, Inc.: | ||||||||
Basic | $ | 0.21 | $ | 0.37 | ||||
Diluted | $ | 0.20 | $ | 0.37 |
For the three and ninesix months ended June 30,March 31, 2017 and 2016, and 2015, the average price of our common shares exceeded the exercise price of all of our outstanding options; therefore, all of our outstanding stock options were included in the computation of fully diluted earnings per share.
5. OPERATING SEGMENTS
We manage and measure performance of our business in four distinct operating segments: Communications, Residential, Commercial & Industrial and Infrastructure Solutions.
Transactions between segments, if any, are eliminated in consolidation. Our corporate office provides general and administrative as well as support services to our four operating segments. Management allocates certain shared costs between segments for selling, general and administrative expenses and depreciation expense.
Segment information for the three and ninesix months ended June 30,March 31, 2017 and 2016 and 2015 is as follows:
Three Months Ended June 30, 2016 | Three Months Ended March 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial & | Infrastructure | Commercial & | Infrastructure | |||||||||||||||||||||||||||||||||||||||||||||
Communications | Residential | Industrial | Solutions | Corporate | Total | Communications | Residential | Industrial | Solutions | Corporate | Total | |||||||||||||||||||||||||||||||||||||
Revenues | $ | 48,702 | $ | 56,867 | $ | 59,512 | $ | 14,518 | $ | — | $ | 179,599 | $ | 61,674 | $ | 67,923 | $ | 55,272 | $ | 18,793 | $ | — | $ | 203,662 | ||||||||||||||||||||||||
Cost of services | 40,487 | 43,388 | 51,882 | 9,845 | — | 145,602 | 52,378 | 52,351 | 52,604 | 14,515 | — | 171,848 | ||||||||||||||||||||||||||||||||||||
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Gross profit | 8,215 | 13,479 | 7,630 | 4,673 | — | 33,997 | 9,296 | 15,572 | 2,668 | 4,278 | — | 31,814 | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 5,185 | 9,237 | 4,771 | 3,248 | 3,275 | 25,716 | 6,120 | 10,932 | 5,261 | 4,222 | 3,585 | 30,120 | ||||||||||||||||||||||||||||||||||||
Contingent consideration | — | — | — | 66 | — | 66 | — | — | — | 83 | — | 83 | ||||||||||||||||||||||||||||||||||||
(Gain) loss on sale of assets | — | — | (17 | ) | 51 | — | 34 | (1 | ) | (3 | ) | (8 | ) | 6 | — | (6 | ) | |||||||||||||||||||||||||||||||
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Income (loss) from operations | $ | 3,030 | $ | 4,242 | $ | 2,876 | $ | 1,308 | $ | (3,275 | ) | $ | 8,181 | $ | 3,177 | $ | 4,643 | $ | (2,585 | ) | $ | (33 | ) | $ | (3,585 | ) | $ | 1,617 | ||||||||||||||||||||
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Other data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense | $ | 153 | $ | 122 | $ | 410 | $ | 897 | $ | 74 | $ | 1,656 | $ | 171 | $ | 151 | $ | 306 | $ | 1,622 | $ | 69 | $ | 2,319 | ||||||||||||||||||||||||
Capital expenditures | $ | 122 | $ | 393 | $ | 377 | $ | 109 | $ | 71 | $ | 1,072 | $ | 481 | $ | 108 | $ | 435 | $ | 56 | $ | 15 | $ | 1,095 | ||||||||||||||||||||||||
Total assets | $ | 53,711 | $ | 40,008 | $ | 58,559 | $ | 92,559 | $ | 32,686 | $ | 277,523 | $ | 68,475 | $ | 50,743 | $ | 54,485 | $ | 107,535 | $ | 126,736 | $ | 407,974 |
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Three Months Ended June 30, 2015 | Three Months Ended March 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial & | Infrastructure | Commercial & | Infrastructure | |||||||||||||||||||||||||||||||||||||||||||||
Communications | Residential | Industrial | Solutions | Corporate | Total | Communications | Residential | Industrial | Solutions | Corporate | Total | |||||||||||||||||||||||||||||||||||||
Revenues | $ | 35,516 | $ | 52,991 | $ | 44,406 | $ | 11,169 | $ | — | $ | 144,082 | $ | 39,351 | $ | 53,387 | $ | 54,146 | $ | 13,097 | $ | — | $ | 159,981 | ||||||||||||||||||||||||
Cost of services | 28,451 | 42,615 | 39,161 | 8,803 | — | 119,030 | 32,767 | 40,616 | 48,946 | 9,840 | — | 132,169 | ||||||||||||||||||||||||||||||||||||
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Gross profit | 7,065 | 10,376 | 5,245 | 2,366 | — | 25,052 | 6,584 | 12,771 | 5,200 | 3,257 | — | 27,812 | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 4,275 | 7,709 | 3,776 | 2,463 | 2,323 | 20,546 | 4,979 | 8,906 | 4,603 | 3,115 | 2,664 | 24,267 | ||||||||||||||||||||||||||||||||||||
Gain on sale of assets | (31 | ) | — | (16 | ) | — | — | (47 | ) | |||||||||||||||||||||||||||||||||||||||
Contingent Consideration | — | — | — | 266 | — | 266 | ||||||||||||||||||||||||||||||||||||||||||
Loss on sale of assets | — | — | — | 775 | — | 775 | ||||||||||||||||||||||||||||||||||||||||||
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Income (loss) from operations | $ | 2,821 | $ | 2,667 | $ | 1,485 | $ | (97 | ) | $ | (2,323 | ) | $ | 4,553 | $ | 1,605 | $ | 3,865 | $ | 597 | $ | (899 | ) | $ | (2,664 | ) | $ | 2,504 | ||||||||||||||||||||
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Other data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense | $ | 141 | $ | 120 | $ | 71 | $ | 236 | $ | 68 | $ | 636 | $ | 135 | $ | 121 | $ | 252 | $ | 455 | $ | 68 | $ | 1,031 | ||||||||||||||||||||||||
Capital expenditures | $ | 174 | $ | 64 | $ | 130 | $ | 366 | $ | — | $ | 734 | $ | 479 | $ | 102 | $ | 37 | $ | 114 | $ | — | $ | 732 | ||||||||||||||||||||||||
Total assets | $ | 39,096 | $ | 37,690 | $ | 45,776 | $ | 28,266 | $ | 61,678 | $ | 212,506 | $ | 41,753 | $ | 38,088 | $ | 48,139 | $ | 33,610 | $ | 74,189 | $ | 235,779 | ||||||||||||||||||||||||
Nine Months Ended June 30, 2016 | Six Months Ended March 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial & | Infrastructure | Commercial & | Infrastructure | |||||||||||||||||||||||||||||||||||||||||||||
Communications | Residential | Industrial | Solutions | Corporate | Total | Communications | Residential | Industrial | Solutions | Corporate | Total | |||||||||||||||||||||||||||||||||||||
Revenues | $ | 128,813 | $ | 162,381 | $ | 158,923 | $ | 40,230 | $ | — | $ | 490,347 | $ | 114,977 | $ | 134,365 | $ | 109,228 | $ | 37,270 | $ | — | $ | 395,840 | ||||||||||||||||||||||||
Cost of services | 105,855 | 124,459 | 141,237 | 29,354 | — | 400,905 | 97,710 | 103,063 | 100,454 | 27,617 | — | 328,844 | ||||||||||||||||||||||||||||||||||||
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Gross profit | 22,958 | 37,922 | 17,686 | 10,876 | — | 89,442 | 17,267 | 31,302 | 8,774 | 9,653 | — | 66,996 | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 14,877 | 26,856 | 13,014 | 9,062 | 8,685 | 72,494 | 11,834 | 21,485 | 9,585 | 8,322 | 7,088 | 58,314 | ||||||||||||||||||||||||||||||||||||
Contingent consideration | — | — | — | 332 | — | 332 | — | — | — | 83 | — | 83 | ||||||||||||||||||||||||||||||||||||
(Gain) loss on sale of assets | — | — | (17 | ) | 828 | — | 811 | |||||||||||||||||||||||||||||||||||||||||
Gain on sale of assets | (1 | ) | (3 | ) | (7 | ) | (2 | ) | — | (13 | ) | |||||||||||||||||||||||||||||||||||||
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Income (loss) from operations | $ | 8,081 | $ | 11,066 | $ | 4,689 | $ | 654 | $ | (8,685 | ) | $ | 15,805 | $ | 5,434 | $ | 9,820 | $ | (804 | ) | $ | 1,250 | $ | (7,088 | ) | $ | 8,612 | |||||||||||||||||||||
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Other data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense | $ | 410 | $ | 364 | $ | 845 | $ | 1,674 | $ | 210 | $ | 3,503 | $ | 345 | $ | 301 | $ | 654 | $ | 2,945 | $ | 133 | $ | 4,378 | ||||||||||||||||||||||||
Capital expenditures | $ | 685 | $ | 537 | $ | 563 | $ | 300 | $ | 71 | $ | 2,156 | $ | 1,560 | $ | 347 | $ | 644 | $ | 137 | $ | 203 | $ | 2,891 | ||||||||||||||||||||||||
Total assets | $ | 53,711 | $ | 40,008 | $ | 58,559 | $ | 92,559 | $ | 32,686 | $ | 277,523 | $ | 68,475 | $ | 50,743 | $ | 54,485 | $ | 107,535 | $ | 126,736 | $ | 407,974 | ||||||||||||||||||||||||
Nine Months Ended June 30, 2015 | Six Months Ended March 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial & | Infrastructure | Commercial & | Infrastructure | |||||||||||||||||||||||||||||||||||||||||||||
Communications | Residential | Industrial | Solutions | Corporate | Total | Communications | Residential | Industrial | Solutions | Corporate | Total | |||||||||||||||||||||||||||||||||||||
Revenues | $ | 95,269 | $ | 151,753 | $ | 132,677 | $ | 34,471 | $ | — | $ | 414,170 | $ | 80,111 | $ | 105,514 | $ | 99,410 | $ | 25,712 | $ | — | $ | 310,747 | ||||||||||||||||||||||||
Cost of services | 78,132 | 122,523 | 117,331 | 26,721 | — | 344,707 | 65,369 | 81,071 | 89,354 | 19,508 | — | 255,302 | ||||||||||||||||||||||||||||||||||||
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Gross profit | 17,137 | 29,230 | 15,346 | 7,750 | — | 69,463 | 14,742 | 24,443 | 10,056 | 6,204 | — | 55,445 | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 11,377 | 22,741 | 11,155 | 6,795 | 6,585 | 58,653 | 9,692 | 17,620 | 8,242 | 5,814 | 5,410 | 46,778 | ||||||||||||||||||||||||||||||||||||
(Gain) loss on sale of assets | (24 | ) | 4 | (18 | ) | (2 | ) | — | (40 | ) | ||||||||||||||||||||||||||||||||||||||
Contingent Consideration | — | — | — | 266 | — | 266 | ||||||||||||||||||||||||||||||||||||||||||
Loss on sale of assets | — | — | — | 776 | — | 776 | ||||||||||||||||||||||||||||||||||||||||||
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Income (loss) from operations | $ | 5,784 | $ | 6,485 | $ | 4,209 | $ | 957 | $ | (6,585 | ) | $ | 10,850 | $ | 5,050 | $ | 6,823 | $ | 1,814 | $ | (652 | ) | $ | (5,410 | ) | $ | 7,625 | |||||||||||||||||||||
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Other data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense | $ | 388 | $ | 362 | $ | 207 | $ | 640 | $ | 209 | $ | 1,806 | $ | 257 | $ | 242 | $ | 434 | $ | 779 | $ | 136 | $ | 1,848 | ||||||||||||||||||||||||
Capital expenditures | $ | 644 | $ | 257 | $ | 297 | $ | 1,023 | $ | 164 | $ | 2,385 | $ | 564 | $ | 144 | $ | 185 | $ | 191 | $ | — | $ | 1,084 | ||||||||||||||||||||||||
Total assets | $ | 39,096 | $ | 37,690 | $ | 45,776 | $ | 28,266 | $ | 61,678 | $ | 212,506 | $ | 41,753 | $ | 38,088 | $ | 48,139 | $ | 33,610 | $ | 74,189 | $ | 235,779 |
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
6. STOCKHOLDERS’ EQUITY
Equity Incentive Plan
The Company’s 2006 Equity Incentive Plan, aswhich was amended and restated effective February 9, 2016, following approval by shareholders at the Company’s 2016 Annual Shareholders’ Meeting (as so amended and restated, the “Amended Plan), provides for grants of stock options as well as grants of stock, including restricted stock. Approximately 3.0 million shares of common stock are authorized for issuance under the Amendedamended and restated 2006 Equity Incentive Plan, of which approximately 1,031,7711,051,757 shares arewere available for issuance at June 30, 2016. The terms of the Amended Plan are described further in the Company’s definitive Proxy Statement for its 2016 Annual Meeting of Stockholders, which was filed with the SEC on December 28, 2015.March 31, 2017.
Stock Repurchase Program
Our Board of Directors has authorized a stock repurchase program for the purchase from time to time of up to 1.5 million shares of the Company’s common stock. 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 Rule10b5-1 trading plan, which allows repurchases underpre-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 or reinstated at any time at the Company’s discretion and without notice. The Company initiated the program in February 2015 andWe made no purchases of stock pursuant to this plan during the year ended September 30, 2015, pursuant to the program, we repurchased 482,156 shares of common stock at an average price of $7.22 per share for a total aggregate purchase price of $3.5 million. We repurchased 39,237 shares of our common stock during the threesix months ended June 30, 2016, in open market transactions at an average price of $11.82 per share. We repurchased 46,929 shares of our common stock during the nine months ended June 30, 2016, in open market transactions at an average price of $11.07 per share.March 31, 2017 and 2016.
Treasury Stock
During the ninesix months ended June 30, 2016,March 31, 2017, we repurchased 6,084683 shares of common stock from our employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock issued under the Amended2006 Equity Incentive Plan, 46,929as amended and restated. During the six months ended March 31, 2017, we issued 1,287 unrestricted shares of common stock werefrom treasury stock to members of our Board of Directors as part of their overall compensation, and 14,750 unrestricted shares of common stock to satisfy the exercise of outstanding options.
During the six months ended March 31, 2016, we repurchased on2,140 shares of common stock from our employees to satisfy minimum tax withholding requirements upon the open market pursuant to our share repurchase program,vesting of restricted stock issued under the 2006 Equity Incentive Plan and 7,500 shares of common stock were forfeited by former employees and returned to treasury stock. The Company had 6,859 shares returned to treasury stock during the same period related to the satisfaction of an obligation in connection with a reconciliation of ourWe issued 3,905 unrestricted shares of common stock offered in exchange for shares of MISCOR Group, Ltd during our 2013 acquisition of that company. During the nine months ended June 30, 2016, from treasury stock we issued 4,714 unrestricted shares to members of our Board of Directors as part of their overall compensation, and 27,50015,000 unrestricted shares to satisfy the exercise of outstanding options.
Restricted Stock
During the three months ended June 30,March 31, 2017 and 2016, and 2015, we recognized $130$136 and $127,$130, respectively, in compensation expense related to our restricted stock awards. During the ninesix months ended June 30,March 31, 2017 and 2016, and 2015, we recognized $392$273 and $153,$262, respectively, in compensation expense related to our restricted stock awards. At June 30, 2016,March 31, 2017, the unamortized compensation cost related to outstanding unvested restricted stock was $893.$541.
Phantom StockPerformance Cash Units
Phantom stockPerformance based phantom cash units (“PSUs”PPCUs”) are primarily granteda contractual right to cash payment of $20 dollars per PPCU. At March 31, 2017, the non-employee membersCompany had outstanding an aggregate of 30,000 PPCUs, which will generally become vested, if at all, upon achievement of certain specified performance objectives and continued performance of services throughmid-December 2018, each of which as of March 31, 2017 are deemed probable. During the Boardthree months ended March 31, 2017, and 2016, we recognized compensation expense of Directors as part$58 and zero, respectively, related to these units. During the six months ended March 31, 2017, and 2016, we recognized compensation expense of their overall compensation. These PSUs are paid via unrestricted stock grants$193 and zero, respectively, related to each non-employee director upon their departure from the Boardthese units.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Phantom Stock Units
Phantom stock units (“PSUs”) are primarily granted to the members of the Board of Directors as part of their overall compensation. These PSUs are paid via unrestricted stock grants to each director upon their departure from the Board of Directors. We record compensation expense for the full value of the grant on the date of grant. For the three months ended June 30,March 31, 2017 and 2016, and 2015, we recognized $34$40 and $140,$34, respectively, in compensation expense related to these grants. During the ninesix months ended June 30,March 31, 2017 and 2016, and 2015, we recognized $102$84 and $200,$68, respectively, in compensation expense related to these grants.
Performance Based Phantom Stock Units
PerformanceA performance based phantom stock units (“PPSUs”unit (a “PPSU”) areis a contractual right in respect ofto receive one share of the Company’s common stock. The PPSUs will generally become vested, if at all, upon the achievement of certain specified performance objectives and continued performance of services throughmid-December 2018. During the nine months ended June 30, 2016, 2018, each of which as of March 31, 2017 are deemed probable. At March 31, 2017, the Company grantedhas outstanding an aggregate of 420,000408,000 three-year performance-based PPSUs. The vesting of these awards is subject to the achievement of specified levels of cumulative net income before taxes or specified stock price levels. ForDuring the three and nine months ended June 30,March 31, 2017 and 2016, we recognized compensation expense of $22$225 and $66,$21, respectively, related to these grants.
Performance Cash Units
Performance based phantom cash units (“PPCUs”) are a contractual right to cash payment of $20 dollars per PPCU. The PPCUs will generally become vested, if at all, upon achievement of certain specified performance objectives and continued performance of services through mid-December 2018. During For the ninesix months ended June 30,March 31, 2017 and 2016, the Company granted an aggregatewe recognized compensation expense of 30,000 three-year performance-based PPCUs. The PPCUs are payable in cash$528 and payment is not deemed probable as of June 30, 2016. Therefore, we have recognized no expense$43, respectively, related to these grants.
Stock Options
During the three months ended June 30,March 31, 2017 and 2016, and 2015, we recognized compensation expense of $17$2 and $19,$16, respectively, related to our stock option awards. During the ninesix months ended June 30,March 31, 2017 and 2016, and 2015, we recognized $50compensation expense of $23 and $(61),$32, respectively, in compensation expense related to our stock option awards. The net benefit in 2015 relates to a revision in forfeiture assumptions upon the departure of the Company’s Chairman and CEO in January 2015, at which time he forfeited unvested stock options. At June 30, 2016,March 31, 2017, the unamortized compensation cost related to outstanding unvested stock options was $42.
Exercise of Options
During the three and nine months ended June 30, 2016, in connection with the exercise of 12,500 and 27,500 outstanding stock options, we received $72 and $133, respectively. The aggregate intrinsic value of these shares exercised was $247.zero.
7. SECURITIES AND EQUITY INVESTMENTS
Our financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, investments, accounts payable and a loan agreement. We believe that the carrying value of these financial instruments in the accompanying Condensed Consolidated Balance Sheets approximates their fair value due to their short-term nature. Additionally, we have a cost method investment in EnerTech Capital Partners II L.P. (“EnerTech”). We estimate the fair value of our investment in EnerTech (Level 3) using quoted market prices for underlying publicly traded securities, and estimated enterprise values are determined using cash flow projections and market multiples of the underlyingnon-public companies.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Investment in EnerTech
During the three months ended March 31, 2017, we collected a distribution of $361, reducing our carrying value. The following table presents the reconciliation of the carrying value and unrealized gains to the fair value of the investment in EnerTech as of June 30, 2016March 31, 2017 and September 30, 2015:2016:
March 31, | September 30, | |||||||||||||||
June 30, 2016 | September 30, 2015 | 2017 | 2016 | |||||||||||||
Carrying value | $ | 919 | $ | 919 | $ | 558 | $ | 919 | ||||||||
Unrealized gains | 80 | 66 | 183 | 159 | ||||||||||||
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Fair value | $ | 999 | $ | 985 | $ | 741 | $ | 1,078 | ||||||||
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At each reporting date, the Company performs evaluations of impairment for this investment to determine if any unrealized losses are other-than-temporary. There was no impairment for the nine months ended June 30, 2016 or 2015.
EnerTech’s general partner, with the consentas of the fund’s investors, has extended the fund through December 31, 2016. The fund will terminate on this date unless extended by the fund’s valuation committee. The fund may be extended for another one-year period through DecemberMarch 31, 2017 withor September 30, 2016.
IES HOLDINGS, INC.
Notes to the consent of the fund’s valuation committee.Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
8. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company offers employees the opportunity to participate in its 401(k) savings plans. During the three months ended June 30,March 31, 2017 and 2016, and 2015, we recognized $247$315 and $100,$199, respectively, in matching expense. During the ninesix months ended June 30,March 31, 2017 and 2016, and 2015, we recognized $525$459 and $283,$278, respectively, in matching expense.
Post Retirement Benefit Plans
Certain individuals at one of the Company’s locations are entitled to receive fixed annual payments pursuant to post retirement benefit plans. We had an unfunded benefit liability of $858 and $871$835 recorded as of JuneMarch 31, 2017, and $875 as of September 30, 2016, and September 30, 2015, respectively, related to such plans.
9. FAIR VALUE MEASUREMENTS
Fair Value Measurement Accounting
Fair value is considered the price to sell an asset, or transfer a liability, between market participants on the measurement date. Fair value measurements assume that the asset or liability is (1) exchanged in an orderly manner, (2) the exchange is in the principal market for that asset or liability, and (3) the market participants are independent, knowledgeable, able and willing to transact an exchange. Fair value accounting and reporting establishes a framework for measuring fair value by creating a hierarchy for observable independent market inputs and unobservable market assumptions and expands disclosures about fair value measurements. Considerable judgment is required to interpret the market data used to develop fair value estimates. As such, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current exchange. The use of different market assumptions and/or estimation methods could have a material effect on the estimated fair value.
At June 30, 2016,March 31, 2017, financial assets and liabilities measured at fair value on a recurring basis were limited to our Executive Deferred Compensation Plan, under which certain employees are permitted to defer a portion of their base salary and/or bonus for a Plan Year (as defined in the plan), and a contingent consideration liabilityliabilities related to our acquisitionacquisitions of Calumet Armature & Electric, LLC (“Calumet”) in October 2015.2015 and Freeman Enclosure Systems, LLC and its affiliate Strategic Edge LLC (together, “Freeman”) in March 2017.
Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017, are summarized in the following table by the type of inputs applicable to the fair value measurements:
March 31, 2017 | ||||||||||||
Total Fair Value | Quoted Prices (Level 1) | Significant Unobservable Inputs (Level 3) | ||||||||||
Executive savings plan assets | $ | 630 | $ | 630 | $ | — | ||||||
Executive savings plan liabilities | (514 | ) | (514 | ) | — | |||||||
Contingent consideration | (1,112 | ) | — | (1,112 | ) | |||||||
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Total | $ | (996 | ) | $ | 116 | $ | (1,112 | ) | ||||
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IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Financial assets and liabilities measured at fair value on a recurring basis as of JuneSeptember 30, 2016, are summarized in the following table by the type of inputs applicable to the fair value measurements:
June 30, 2016 | September 30, 2016 | |||||||||||||||||||||||
Total Fair Value | Quoted Prices (Level 1) | Significant Unobservable (Level 3) | Total Fair Value | Quoted Prices (Level 1) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
Executive savings plan assets | $ | 575 | $ | 575 | $ | — | $ | 599 | $ | 599 | $ | — | ||||||||||||
Executive savings plan liabilities | (462 | ) | (462 | ) | — | (486 | ) | (486 | ) | — | ||||||||||||||
Contingent consideration | 780 | — | 780 | (1,100 | ) | — | (1,100 | ) | ||||||||||||||||
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Total | $ | 893 | $ | 113 | $ | 780 | $ | (987 | ) | $ | 113 | $ | (1,100 | ) | ||||||||||
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Financial assetsIn fiscal years 2016 and liabilities measured at fair value on a recurring basis as of September 30, 2015, are summarized in the following table by the type of inputs applicable to the fair value measurements:
September 30, 2015 | ||||||||||||
Total Fair Value | Quoted Prices (Level 1) | Significant Unobservable (Level 3) | ||||||||||
Executive savings plan assets | $ | 617 | $ | 617 | $ | — | ||||||
Executive savings plan liabilities | (504 | ) | (504 | ) | — | |||||||
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Total | $ | 113 | $ | 113 | $ | — | ||||||
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In the first quarter of 2016,2017, we entered into a contingent consideration arrangementarrangements related to a business combination.certain acquisitions. Please see Note 13 – Business Combinations and Divestitures for further discussion. At June 30, 2016,March 31, 2017, we estimated the fair value of thethese contingent consideration liabilityliabilities at $780 .$1,112. The table below presents a reconciliation of the fair value of this obligation,these obligations, which used significant unobservable inputs (Level 3).
Contingent Consideration Agreement | Contingent Consideration Agreement | |||||||
Fair Value at September 30, 2015 | $ | — | ||||||
Fair Value at September 30, 2016 | $ | 1,100 | ||||||
Issuances | 448 | 464 | ||||||
Settlements | (535 | ) | ||||||
Adjustments to Fair Value | 332 | 83 | ||||||
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Fair Value at June 30, 2016 | $ | 780 | ||||||
Fair Value at March 31, 2017 | $ | 1,112 | ||||||
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10. INVENTORY
Inventories consist of the following components:
March 31, | September 30, | |||||||
2017 | 2016 | |||||||
Raw materials | $ | 3,099 | $ | 2,538 | ||||
Work in process | 5,517 | 4,158 | ||||||
Finished goods | 1,565 | 1,558 | ||||||
Parts and supplies | 8,130 | 4,982 | ||||||
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Total inventories | $ | 18,311 | $ | 13,236 | ||||
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IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
10. INVENTORY
Inventories consist of the following components:
June 30, 2016 | September 30, 2015 | |||||||
Raw materials | $ | 3,223 | $ | 1,641 | ||||
Work in process | 3,943 | 2,641 | ||||||
Finished goods | 1,071 | 1,199 | ||||||
Parts and supplies | 9,195 | 8,496 | ||||||
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Total inventories | $ | 17,432 | $ | 13,977 | ||||
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11. GOODWILL AND INTANGIBLE ASSETS
The following is a progression of goodwill by segment for the ninesix months ended June 30, 2016:March 31, 2017:
Residential | Commercial & Industrial | Infrastructure Solutions | Total | |||||||||||||
Goodwill at September 30, 2015 | $ | 8,631 | $ | — | $ | 8,618 | $ | 17,249 | ||||||||
Acquisitions “Note 13” | — | 3,676 | 19,281 | 22,957 | ||||||||||||
Divestitures “Note 13” | — | — | (577 | ) | (577 | ) | ||||||||||
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Goodwill at June 30, 2016 | $ | 8,631 | $ | 3,676 | $ | 27,322 | $ | 39,629 | ||||||||
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Commercial & | Infrastructure | |||||||||||||||
Residential | Industrial | Solutions | Total | |||||||||||||
Goodwill at September 30, 2016 | $ | 8,631 | $ | 3,806 | $ | 27,499 | $ | 39,936 | ||||||||
Acquisitions (See Note 13) | — | — | 3,820 | 3,820 | ||||||||||||
Purchase Accounting Adjustments | — | — | (272 | ) | (272 | ) | ||||||||||
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Goodwill at March 31, 2017 | $ | 8,631 | $ | 3,806 | $ | 31,047 | $ | 43,484 | ||||||||
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Goodwill
We evaluateThe adjustment to goodwill in the quarter ended March 31, 2017 relates to finalizing the deferred tax balances acquired in connection with our acquisition of Technibus, Inc.in June 2016. Please see Note 13 – Business Combinations for potential impairment at least annually at year end, however, if impairment indicators exist, we will evaluate as needed. Events affecting the composition of a reporting unit, such as a sale or disposal, can be an indication of a potential impairment. As such, after allocating $577 of goodwill to a disposal group within our Infrastructure Solutions reporting unit, we considered whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount. Based on the results of this analysis, no impairment was indicated.further discussion.
Intangible assets consist of the following:
Estimated Useful Lives (in Years) | June 30, 2016 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||
Trademarks/trade names | 8 - Indefinite | $ | 3,845 | $ | 80 | $ | 3,765 | |||||||||
Technical library | 20 | 400 | 56 | 344 | ||||||||||||
Customer relationships | 8 - 15 | 27,314 | 1,487 | 25,827 | ||||||||||||
Covenants not to compete | 3 | 140 | 140 | — | ||||||||||||
Developed technology | 4 | 400 | 333 | 67 | ||||||||||||
Backlog | 1 | 1,571 | 257 | 1,314 | ||||||||||||
Construction contracts | 1 | 2,191 | 555 | 1,636 | ||||||||||||
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Total | $ | 35,861 | $ | 2,908 | $ | 32,953 | ||||||||||
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Estimated Useful Lives (in Years) | September 30, 2015 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||
Trademarks/trade names | 8 - Indefinite | $ | 1,400 | $ | 9 | $ | 1,391 | |||||||||
Technical library | 20 | 400 | 41 | 359 | ||||||||||||
Customer relationships | 8 - 12 | 3,600 | 788 | 2,812 | ||||||||||||
Covenants not to compete | 3 | 140 | 121 | 19 | ||||||||||||
Developed technology | 4 | 400 | 258 | 142 | ||||||||||||
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Total | $ | 5,940 | $ | 1,217 | $ | 4,723 | ||||||||||
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IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
March 31, 2017 | ||||||||||||||||
Estimated | ||||||||||||||||
Useful Lives | Gross Carrying | Accumulated | ||||||||||||||
(in Years) | Amount | Amortization | Net | |||||||||||||
Trademarks/trade names | 5 - 20 | $ | 4,104 | $ | 271 | $ | 3,833 | |||||||||
Technical library | 20 | 400 | 71 | 329 | ||||||||||||
Customer relationships | 6 - 15 | 28,614 | 3,325 | 25,289 | ||||||||||||
Developed technology | 4 | 400 | 400 | — | ||||||||||||
Backlog | 1 | 2,151 | 1,133 | 1,018 | ||||||||||||
Construction contracts | 1 | 2,191 | 1,620 | 571 | ||||||||||||
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Total | $ | 37,860 | $ | 6,820 | $ | 31,040 | ||||||||||
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September 30, 2016 | ||||||||||||||||
Estimated | ||||||||||||||||
Useful Lives | Gross Carrying | Accumulated | ||||||||||||||
(in Years) | Amount | Amortization | Net | |||||||||||||
Trademarks/trade names | 5 - 20 | $ | 3,845 | $ | 139 | $ | 3,706 | |||||||||
Technical library | 20 | 400 | 61 | 339 | ||||||||||||
Customer relationships | 6 - 15 | 27,414 | 2,003 | 25,411 | ||||||||||||
Developed technology | 4 | 400 | 358 | 42 | ||||||||||||
Backlog | 1 | 1,621 | 545 | 1,076 | ||||||||||||
Construction contracts | 1 | 2,191 | 1,042 | 1,149 | ||||||||||||
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Total | $ | 35,871 | $ | 4,148 | $ | 31,723 | ||||||||||
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12. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time we are a party to various claims, lawsuits and other legal proceedings that arise in the ordinary course of business. We maintain various insurance coverages to minimize financial risk associated with these proceedings. None of these proceedings, separately or in the aggregate, are expected to have a material adverse effect on our financial position, results of operations or cash flows. With respect to all such proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We expense routine legal costs related to these proceedings as they are incurred.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
The following is a discussion of our significant legal matters:
Capstone Construction Claims
From 2003 to 2005, two of our former subsidiaries performed HVAC and electrical work under contract with Capstone Building Corporation (“Capstone”) on a university student housing project in Texas. In 2005, our subsidiaries filed for arbitration against Capstone, seeking payment for work performed, change orders and other impacts. The parties settled those claims, and the release included a waiver of warranties associated with any of the HVAC work. Several years later, the subsidiaries discontinued operations, and the Company sold their assets.
On October 24, 2013, Capstone filed a petition in the 12th Judicial District Court of Walker County, Texas against these subsidiaries, among other subcontractors, seeking contribution, defense, indemnity and damages for breach of contract in connection with alleged construction defect claims brought against Capstone by the owner of the student housing project. The owner claims $9,600$10,406 in damages, plus attorneys’ fees and costs against Capstone, which Capstone is seeking to recover from the subcontractors. The claims against the Company are based on alleged defects in the mechanical design, construction and installation of the HVAC and electrical systems performed by our former subsidiaries.
Based on the settlement reached in the 2005 arbitration, we moved for, and the District Court granted us, summary judgment, dismissing all of Capstone’s claims in the 2013 lawsuit. Capstone appealed, and onin April, 28, 2016, the 10th Court of Appeals, Waco, Texas Division, reversed the ruling with respect to the indemnity claims and remanded the case back to the District Court. We intend to file a petition for review to the Texas Supreme Court. Should theThe Texas Supreme Court agree that the claims should be remandedsubsequently denied our petition to review this decision and our motion for rehearing. As a result, we filed a new motion for summary judgment at the District Court thelevel in April 2017. The Company will defend the claims and expects ultimately to prevail on the merits, but there can be no assurance that the Company will prevail or that it will not incur costs and liability for indemnity in connection with resolution of the claims. To date, the Company has not established a reserve with respect to this matter, as we believe the likelihood of our responsibility for damages is not probable and a potential range of exposure is not reasonably estimable.
Ward Transformer Site
Private Action
In April 2009, Carolina Power and Light Company and Consolidation Coal Company filed suit in the U.S. District Court for the Eastern District of North Carolina (Western Division) against a number of entities, including one of our subsidiaries, to recover costs to remove Polychlorinated Byphenyls (“PCB”) contamination at Ward Transformer, an electric transformer resale and reconditioning facility located in Raleigh, North Carolina (the “Private Action”). Plaintiffs had been ordered under a settlement agreement with the U.S. Environmental Protection Agency (the “EPA”) to clean up the onsite contamination, including the groundwater underneath the facility, and were seeking to recover costs associated with the clean-up from other potentially responsible parties (“PRPs”). During the first quarter of fiscal year 2016, the parties to this matter reached an agreement in principle to settle the Company’s exposure, and following the first quarter, the parties settled this matter. The agreed upon settlement was fully accrued at September 30, 2015 and paid during the nine months ended June 30, 2016.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
EPA Action
Contamination outside of and downstream from the Ward Transformer site is not subject to the Private Action. The EPA has not yet assessed costs for that portion of the remediation, and has not entered into any settlement agreement with any party to begin clean-up. While the costs to remediate the offsite conditions remain unknown, certain of the parties with larger exposure have agreed to undertake the clean-up. During the first quarter of fiscal year 2016, these parties agreed in principle to release several types of PRPs from liability for a nominal amount based on their limited involvement in the site, and following the third quarter, we settled this matter for $15, which we expect to pay in the fourth quarter.
Risk-Management
We retain the risk for workers’ compensation, employer’s liability, automobile liability, construction defects, general liability and employee group health claims, as well as pollution coverage, resulting from uninsured deductibles per accident or occurrence which are generally subject to annual aggregate limits. Our general liability program provides coverage for bodily injury and property damage. In many cases, we insure third parties, including general contractors, as additional insureds under our insurance policies. Losses up to the deductible amounts, or losses that are not covered under our policies, are accrued based upon our known claims incurred and an estimate of claims incurred but not reported. As a result, many of our claims are effectively self-insured. Many claims against our insurance are in the form of litigation. At June 30, 2016March 31, 2017 and September 30, 2015,2016, we had $4,765$6,198 and $4,518,$5,464, respectively, accrued for insurance liabilities. We are also subject to construction defect liabilities, primarily within our Residential segment. As of June 30, 2016March 31, 2017 and September 30, 2015,2016, we had $285$219 and $464,$235, respectively, reserved for these claims. Because the reserves are based on judgment and estimates, and involve variables that are inherently uncertain, such as the outcome of litigation and an assessment of insurance coverage, there can be no assurance that the ultimate liability will not be higher or lower than such estimates or that the timing of payments will not create liquidity issues for the Company.
Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral. This is common in the insurance industry. To date, we have not had a situation where an underwriter has had reasonable cause to effect payment under a letter of credit. At both June 30, 2016March 31, 2017 and September 30, 2015, $6,3472016, $6,176 and $6,126, respectively, of our outstanding letters of credit was utilized to collateralize our insurance program.
Surety
As of June 30, 2016,March 31, 2017, the estimated cost to complete our bonded projects was approximately $55,706.$38,949. We evaluate our bonding requirements on a regular basis, including the terms offered by our sureties. We believe the bonding capacity presently provided by our current sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. Posting letters of credit in favor of our sureties reduces the borrowing availability under our credit facility.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Other Commitments and Contingencies
Some of our customers and vendors require us to post letters of credit, or provide intercompany guarantees, as a means of guaranteeing performance under our contracts and ensuring payment by us to subcontractors and vendors. If our customer has reasonable cause to effect payment under a letter of credit, we would be required to reimburse our creditor for the letter of credit. At JuneMarch 31, 2017 and September 30, 2016, $571$458 and $818, respectively, of our outstanding letters of credit were to collateralize our vendors.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
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 June 30, 2016,March 31, 2017, we had no such purchase orders totaling $804. We expect to use all of the materials purchased pursuant to these orders within the next 12 months.orders.
13. BUSINESS COMBINATIONS AND DIVESTITURES
Business Combinations2017
The Company completed four acquisitionsthe acquisition of 100% of the membership interests and associated real estate of Freeman Enclosure Systems, LLC and its affiliate Strategic Edge LLC (together, “Freeman”), on March 16, 2017, for a total maximum consideration of $12,127, including cash consideration of $11,663 paid at close and $464 of contingent consideration to be paid in April 2020. The total purchase consideration for the Freeman acquisition included contingent consideration payments based on the acquired company’s earnings, as defined in the nine months ended June 30, 2016:
The total aggregate consideration of $59,583 for these four acquisitions includes cash consideration of $59,298 and contingent consideration with an acquisition date fair value estimated at $448. Of the cash consideration, $58,448 was paid at closing, and the remaining $850 was paid within 90 days subsequent to the transaction dates, in accordance with working capital settlement provisions pursuant to the agreements with the sellers. The contingent consideration arrangement relates to the purchase of Calumet, and provides that a maximum of $2,250 may be earned over the three year period ended December 31, 2018. As of June 30, 2016 the fair value of the contingent consideration arrangement was $780 . Based on an increase in the fair value of the liability driven by improved actual and expected financial performance of Calumet, we have recorded additional contingent consideration expense as a component of income from continuing operations.
The Company accounted for the transactionstransaction under the acquisition method of accounting, which requires recording assets and liabilities at fair value (Level 3). The valuations derived from estimated fair value assessments and assumptions used by management are preliminary, pending finalization of certain tangible and intangible assetthe valuations assessment of deferred taxes, fixed assets, contingent consideration liability, and final agreement on the settlement of acquisition date working capital.certain intangible assets. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different values being assigned to individual assets acquired and liabilities assumed. This may result in adjustments to the preliminary amounts recorded. The preliminary valuation of the assets acquired and liabilities assumed as of the variousdate of the acquisition dates is as follows:
Current assets | $ | 14,717 | $ | 5,406 | ||||
Property and equipment | 4,572 | 7,581 | ||||||
Intangible assets (primarily customer relationships) | 29,921 | 1,989 | ||||||
Goodwill | 22,957 | 3,820 | ||||||
Current liabilities | (5,887 | ) | (5,508 | ) | ||||
Deferred tax liability | (5,002 | ) | (1,161 | ) | ||||
Noncontrolling interest | (1,695 | ) | ||||||
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Net assets acquired | $ | 59,583 | $ | 12,127 | ||||
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With regard to goodwill, which is not tax deductible, the $5,002 deferred tax liability recorded in connection withbalance is attributable to the acquisitions, we reduced a portionworkforce of our valuation allowance equal to this deferred tax liability, resulting in a corresponding income tax benefitthe acquired business and other intangibles that do not qualify for separate recognition.
2016
The Company completed four acquisitions in the nine monthsfiscal year ended September 30, 2016 for total aggregate consideration of $59,592. See Note18-Business Combinations and Divestitures in our Form10-K for the year ended September 30, 2016 for further information:
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
With regard to
The total purchase consideration for the balance is attributable toCalumet acquisition included contingent consideration payments based on the workforceacquired company’s earnings, as defined in the purchase and sale agreement, through October 31, 2018. The fair value of the acquired businesscontingent consideration liability was estimated at $648, and other intangibles that do not qualify for separate recognition. In connection with$1,100 at March 31, 2017 and September 30, 2016, respectively. We made the Technibus transaction, we acquired tax basisfirst payment of $15,218 with respect to goodwill.
These four acquisitions contributed $10,649 in additional revenue and $1,193 in additional operating income$535 during the three months ended June 30,March 31, 2017. The remaining contingent consideration will be paid out during fiscal years 2018 and 2019, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.
The Company accounted for these four transactions under the acquisition method of accounting, which requires recording assets and liabilities at fair value (Level 3). The valuations related to Calumet and Shanahan were finalized as of December 31, 2016. The valuations related to STR and Technibus are pending finalization of certain tangible and intangible asset valuations and assessments of deferred taxes.
These four acquisitions contributed $19,613 in additional revenue and $1,841 in additional operating income during the nine months ended June 30, 2016.
Unaudited Pro Forma Information
The following unaudited supplemental pro forma results of operations include the results of the four acquisitions during three and nine months ended June 30, 2016, described above as if each had been consolidated as of October 1, 2014, and have been provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following pro forma financial information because of future events and transactions, finalization of the valuations of deferred taxes, fixed assets, and certain intangible assets, as well as other factors, many of which are beyond IES’s control. Cost savings and other synergy benefits resulting from the business combination have not been included in pro forma results.
The unaudited pro forma financial information reflects certain adjustments related to the acquisition, such as the recording of depreciation expense in connection with fair value adjustments to property and equipment, amortization expense in connection with recording acquired identifiable intangible assets at fair value, and interest expense calculated on the $20,000 drawn on the Company’s available line of credit at a rate of 2.5%. The unaudited pro forma financial information also includes the effect of certain non-recurring items as of October 1, 2014 such as the $5,002 of tax benefits and acquisition related costs of $681 incurred during the three and nine months ended June 30, 2016, which are shown as if they had been incurred on October 1, 2014.
The supplemental pro forma results of operations, calculated as if each acquisition occurred as of October 1 of the fiscal year prior to consummation, for the three and ninesix months ended June 30,March 31, 2017 and 2016, and 2015, as if the acquisitions had been completed on October 1, 2014, are as follows:
Unaudited | ||||||||||||||||
Unaudited | Three Months Ended | Three Months Ended | ||||||||||||||
Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | March 31, 2017 | March 31, 2016 | |||||||||||||
Revenues | $ | 183,162 | $ | 161,283 | $ | 212,630 | $ | 174,167 | ||||||||
Net Income | $ | 6,972 | $ | 6,079 | $ | 599 | $ | 2,921 | ||||||||
Unaudited | Unaudited | |||||||||||||||
Nine Months Ended June 30, 2016 | Nine Months Ended June 30, 2015 | Six Months Ended | Six Months Ended | |||||||||||||
March 31, 2017 | March 31, 2016 | |||||||||||||||
Revenues | $ | 515,608 | $ | 458,446 | $ | 415,310 | $ | 342,562 | ||||||||
Net Income | $ | 15,828 | $ | 16,288 | $ | 4,888 | $ | 9,287 |
14. SUBSEQUENT EVENTS
Southern RewindingCredit facility amendment
On May 21, 2015,April 10, 2017, we entered into an amendment and restatement to our wholly-owned subsidiary Magnetech Industrial Services, Inc.revolving credit facility (“Magnetech”the Amended Credit Agreement”) acquired all. Pursuant to the Amended Credit Agreement, our maximum revolver amount increased from $70 million to $100 million, and the maturity date of the common stock and certain related real estate of Southern Industrial Sales and Services, Inc. (“Southern Rewinding”),revolving credit facility was extended from August 9, 2019 to August 9, 2021. The Amended Credit Agreement also modified our financial covenants by, among other items, implementing a Columbus, Georgia-based motor repair and related field services company, for total consideration of $3,937. Ofnew covenant that amount, $3,137 was paid at closing, with additional consideration of $800 scheduledrequires the Company to maintain a minimum EBITDA (as defined in the Amended Credit Agreement) that will be paid throughtested quarterly on a trailing twelve month basis; increasing the period ending November 2016. Of that additional amount, $400 was paid duringminimum liquidity requirement applicable to the nine months ended June 30, 2016. PaymentCompany from 12.5% to 30% of the remaining $400 is subjectmaximum revolver amount; raising the Company’s required fixed charge coverage ratio (the “FCCR”) to Magnetech’s right to hold back certain amounts in respect1.1:1.0 from 1.0:1.0; and requiring that the FCCR be tested quarterly regardless of seller obligations. After closing, we provided the newly-acquired entity with $1,065 of working capital. Southern Rewinding is included in our Infrastructure Solutions segment.
IES HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
(All Amounts in Thousands Except Share Amounts)
(Unaudited)
Company’s liquidity levels.
The Company accounted for the transaction under the acquisition methodamendment and restatement did not include any changes to interest rates and continues to contain other customary affirmative, negative and financial covenants as well as events of accounting, which requires recording assets and liabilities at fair value (Level 3). The valuation of the assets acquired and liabilities assumed as of May 21, 2015 is as follows:
Current assets | $ | 1,225 | ||
Property and equipment | 911 | |||
Intangible assets (primarily customer relationships) | 1,700 | |||
Non-tax-deductible goodwill | 1,532 | |||
Current liabilities | (1,431 | ) | ||
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Net assets acquired | $ | 3,937 | ||
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Pro forma revenues and results of operations for the acquisition have not been presented because the effects were not material to the consolidated financial statements.
Divestitures
In February 2016, our Board of Directors approved a plan for the sale of substantially all of the operating assets of HK Engine Components, LLC (“HK”), a wholly-owned subsidiary operating in the Infrastructure Solutions segment. In connection with the sale, we allocated $577 of goodwill to the disposal group. In conjunction with the write down of these assets to their net realizable value of $2,200, we then recognized a loss of $828, recorded within “Loss on sale of assets” within our Condensed Consolidated Statement of Comprehensive Income for the nine months ended June 30, 2016. The sale of these assets to a third party was completed on April 15, 2016.default.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, set forth in Item 8,“Financial Statements and Supplementary Data” and Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each as set forth in our Annual Report on Form10-K for the year ended September 30, 20152016 and the condensed consolidated financial statementsCondensed Consolidated Financial Statements and notes thereto included elsewhere in Part I of this Quarterly Report on Form10-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 Form10-Q.
OVERVIEW
Executive Overview
Please refer to Item 1,“Business” “Business”of our Annual Report on Form10-K for the year ended September 30, 2015,2016, for a discussion of the Company’s services and corporate strategy. IES Holdings, Inc., a Delaware corporation, is a holding company that owns and manages diverse operating subsidiaries, comprised of providers of industrial products and infrastructure services to a variety of end markets. Our operations are currently organized into four principal business segments: Communications, Residential, Commercial & Industrial and Infrastructure Solutions.
Business Combinations
During the nine months ended June 30, 2016, and in furtherance of our strategy of acquiring or investing in complementary or stand-alone platform businesses, we acquired four businesses to be operated within our existing Infrastructure Solutions and Commercial & Industrial business segments, respectively.
RESULTS OF OPERATIONS
We report our operating results across our four operating segments: Communications, Residential, Commercial & Industrial and Infrastructure Solutions. Expenses associated with our corporate office are classified separately. The following table presents selected historical results of operations of IES, as well as the results of acquired businesses from the dates acquired.
Three Months Ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
$ | % | $ | % | |||||||||||||
(Dollars in thousands, Percentage of revenues) | ||||||||||||||||
Revenues | $ | 179,599 | 100.0 | % | $ | 144,082 | 100.0 | % | ||||||||
Cost of services | 145,602 | 81.1 | % | 119,030 | 82.6 | % | ||||||||||
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Gross profit | 33,997 | 18.9 | % | 25,052 | 17.4 | % | ||||||||||
Selling, general and administrative expenses | 25,716 | 14.3 | % | 20,546 | 14.3 | % | ||||||||||
Contingent consideration | 66 | 0.0 | % | — | 0.0 | % | ||||||||||
Loss (gain) on sale of assets | 34 | 0.0 | % | (47 | ) | 0.0 | % | |||||||||
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Net income from operations | 8,181 | 4.6 | % | 4,553 | 3.1 | % | ||||||||||
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Interest and other (income) expense, net | 282 | 0.2 | % | 252 | 0.2 | % | ||||||||||
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Income from operations before income taxes | 7,899 | 4.4 | % | 4,301 | 2.9 | % | ||||||||||
Provision for income taxes | (2,937 | ) | (1.6 | )% | 339 | 0.2 | % | |||||||||
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Net income from continuing operations | 10,836 | 6.0 | % | 3,962 | 2.7 | % | ||||||||||
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Net loss from discontinued operations | — | 0.0 | % | (5 | ) | 0.0 | % | |||||||||
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Net income | 10,836 | 6.0 | % | 3,957 | 2.7 | % | ||||||||||
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Net income attributable to noncontrolling interest | (31 | ) | 0.0 | % | — | 0.0 | % | |||||||||
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Comprehensive income attributable to IES Holdings, Inc. | $ | 10,805 | 6.0 | % | $ | 3,957 | 2.7 | % | ||||||||
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Revenues Cost of services Gross profit Selling, general and administrative expenses Contingent consideration Loss (gain) on sale of assets Net income from operations Interest and other (income) expense, net Income from operations before income taxes Provision for income taxes Net income Net income attributable to noncontrolling interest Comprehensive income attributable to IES Holdings, Inc. Three Months Ended March 31, 2017 2016 $ % $ % (Dollars in thousands, Percentage of revenues) $ 203,662 100.0 % $ 159,981 100.0 % 171,848 84.4 % 132,169 82.6 % 31,814 15.6 % 27,812 17.4 % 30,120 14.8 % 24,267 15.2 % 83 0.0 % 266 0.2 % (6 ) 0.0 % 775 0.5 % 1,617 0.8 % 2,504 1.5 % 384 0.2 % 300 0.2 % 1,233 0.6 % 2,204 1.3 % 682 0.3 % 10 0.0 % 551 0.3 % 2,194 1.3 % (15 ) 0.0 % — 0.0 % $ 536 0.3 % $ 2,194 1.3 %
Consolidated revenues for the three months ended June 30, 2016March 31, 2017, were $35.5$43.7 million higher than for the three months ended June 30, 2015,March 31, 2016, an increase of 24.7%27.3%, with increases at each of our operating segments. Our four newlyfive businesses acquired businessesin fiscal 2016 and 2017 contributed $10.6$9.3 million of the increase for the three months ended June 30,March 31, 2017.
Consolidated gross profit for the three months ended March 31, 2017, increased $4.0 million compared with the three months ended March 31, 2016.
Our overall gross profit percentage increaseddecreased to 18.9%15.6% during the three months ended June 30, 2016March 31, 2017, as compared to 17.4% during the three months ended June 30, 2015.March 31, 2016. Gross profit as a percentage of revenue increaseddecreased at each of our Residential, Commercial & Industrialsegments. Our five businesses acquired in fiscal 2016 and Infrastructure Solutions segments, partly offset by a decrease at our Communication segment.2017 contributed $1.7 million of the increase in consolidated gross profit.
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, costs associated with acquisitions, 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 June 30, 2016,March 31, 2017, our selling, general and administrative expenses were $25.7$30.1 million, or 14.3% of revenue, an increase of $5.2$5.9 million, or 25.2%24.1%, over the three months ended June 30, 2015.March 31, 2016. This increase was primarily attributable to increased activity levels across our business, as increased volume levels required additional personnel to support our growth,growth. However, general and higher profitability led to an increase in variable incentive compensationadministrative expense as a percent of $0.9 million for segment and branch management. Professional services expense, incurred at the holding company level, including expense related to our acquisitions, increased by $0.7revenue decreased from 15.2% for the three months ended June 30,March 31, 2016, compared withto 14.8% for the three months ended June 30, 2015.March 31, 2017, as we benefitted from the increased scale of our operations. Selling, general and administrative expense incurred at newlybusinesses acquired businessesduring fiscal 2016 and 2017 contributed $1.7$2.0 million of the increase for the three months ended June 30, 2016. See Note 13 – Business Combinations and Divestitures for further information.March 31, 2017.
Nine Months Ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
$ | % | $ | % | |||||||||||||
(Dollars in thousands, Percentage of revenues) | ||||||||||||||||
Revenues | $ | 490,347 | 100.0 | % | $ | 414,170 | 100.0 | % | ||||||||
Cost of services | 400,905 | 81.8 | % | 344,707 | 83.2 | % | ||||||||||
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Gross profit | 89,442 | 18.2 | % | 69,463 | 16.8 | % | ||||||||||
Selling, general and administrative expenses | 72,494 | 14.8 | % | 58,653 | 14.2 | % | ||||||||||
Contingent consideration | 332 | 0.1 | % | — | 0.0 | % | ||||||||||
Loss (gain) on sale of assets | 811 | 0.2 | % | (40 | ) | 0.0 | % | |||||||||
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Net income from operations | 15,805 | 3.1 | % | 10,850 | 2.6 | % | ||||||||||
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Interest and other (income) expense, net | 846 | 0.2 | % | 652 | 0.2 | % | ||||||||||
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Income from operations before income taxes | 14,959 | 2.9 | % | 10,198 | 2.4 | % | ||||||||||
(Benefit) provision for income taxes | (3,870 | ) | (0.8 | )% | 908 | 0.2 | % | |||||||||
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Net income from continuing operations | 18,829 | 3.7 | % | 9,290 | 2.2 | % | ||||||||||
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Net loss from discontinued operations | — | 0.0 | % | (231 | ) | (0.1 | )% | |||||||||
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Net income | 18,829 | 3.8 | % | 9,059 | 2.2 | % | ||||||||||
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Net income attributable to noncontrolling interest | (31 | ) | 0.0 | % | — | 0.0 | % | |||||||||
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Comprehensive income attributable to IES Holdings, Inc. | $ | 18,798 | 3.7 | % | $ | 9,059 | 2.1 | % | ||||||||
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Revenues Cost of services Gross profit Selling, general and administrative expenses Contingent consideration Loss (gain) on sale of assets Net income from operations Interest and other (income) expense, net Income from operations before income taxes Provision (benefit) for income taxes Net income Net income attributable to noncontrolling interest Comprehensive income attributable to IES Holdings, Inc. Six Months Ended March 31, 2017 2016 $ % $ % (Dollars in thousands, Percentage of revenues) $ 395,840 100.0 % $ 310,747 100.0 % 328,844 83.1 % 255,302 82.2 % 66,996 16.9 % 55,445 17.8 % 58,314 14.7 % 46,778 15.1 % 83 0.0 % 266 0.1 % (13 ) 0.0 % 776 0.2 % 8,612 2.2 % 7,625 2.4 % 826 0.2 % 564 0.2 % 7,786 2.0 % 7,061 2.2 % 3,311 0.8 % (932 ) (0.3 )% 4,475 1.2 % 7,993 2.5 % (67 ) 0.0 % — 0.0 % $ 4,408 1.2 % $ 7,993 2.5 %
Consolidated revenues for the ninesix months ended June 30, 2016March 31, 2017, were $76.2$85.1 million higher than for the ninesix months ended June 30, 2015,March 31, 2016, an increase of 18.4%27.4%, with increases at each of our operating segments. Our four newly acquiredfive businesses and Southern Rewinding, which was acquired in May 2015,fiscal 2016 and 2017 contributed $24.5$21.8 million of the revenue increase for the ninesix months ended June 30, 2016.March 31, 2017.
Our overall gross profit percentage increaseddecreased to 18.2%16.9% during the ninesix months ended June 30, 2016March 31, 2017, as compared to 16.8%17.8% during the ninesix months ended June 30, 2015.March 31, 2016. Total gross profit increased at all four of our segments.segments with the exception of Commercial & Industrial. Gross profit as a percentage of revenue improvedremained flat at Residential and increased at Infrastructure Solutions, slightly offset by decreases at our Communications and Commercial & Industrial segments.
During the ninesix months ended June 30, 2016,March 31, 2017, our selling, general and administrative expenses were $72.5$58.3 million, an increase of $13.8$11.5 million, or 23.6%24.7%, over the ninesix months ended June 30, 2015.March 31, 2016. This increase was primarily attributable to increased activity levels across our business, as increased volume levels required additional personnel to support our growth, and higher profitability led to an increase in variable incentive compensation expense of $2.3 million for segment and branch management. Professional services expense, incurred at the holding company level, including expense related to our acquisitions, increased by $1.0 million for the nine months ended June 30, 2016, compared with the nine months ended June 30, 2015.growth. Selling, general and administrative expense incurred at newly acquiredour five businesses and Southern Rewinding, which was acquired in May 2015,fiscal 2016 and 2017 contributed $3.7$3.8 million of the increase for the ninesix months ended June 30, 2016. See Note 13 – Business Combinations and Divestitures for further information.March 31, 2017.
Communications
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
(Dollars in thousands, Percentage of revenues) | (Dollars in thousands, Percentage of revenues) | |||||||||||||||||||||||||||||||
Revenue | $ | 48,702 | 100.0 | % | $ | 35,516 | 100.0 | % | $ | 61,674 | 100.0 | % | $ | 39,351 | 100.0 | % | ||||||||||||||||
Gross profit | 8,215 | 16.9 | % | 7,065 | 19.9 | % | 9,296 | 15.1 | % | 6,584 | 16.7 | % | ||||||||||||||||||||
Selling, general and administrative expenses | 5,185 | 10.6 | % | 4,275 | 12.0 | % | 6,120 | 9.9 | % | 4,979 | 12.7 | % |
Revenue.Our Communications segmentsegment’s revenues increased by $13.2$22.3 million during the three months ended June 30, 2016,March 31, 2017, a 37.1%56.7% increase compared to the three months ended June 30, 2015.The increase is the result of both the expansion of our customer base and additional work with existing customers. Revenues from data center work increased by $7.7 million for the three months ended June 30,March 31, 2016 as compared with the same period in 2015. Additionally, we continue to expand our business in areas such as wireless access, audio visual, and structured cabling.
Gross Profit.Our Communications segment’s gross profit during the three months ended June 30, 2016 increased $1.2 million, or 16.3%, as compared to the three months ended June 30, 2015. Gross profit as a percentage of revenue decreased 3.0% to 16.9% for the three months ended June 30, 2016, as we have taken on several projects where we are paid based on our cost incurred plus an agreed upon margin. This work is generally lower risk, and is typically performed at lower margins than the fixed price arrangements which comprise the majority of the work we perform. Additionally, for the quarter ended June 30, 2015, we benefitted from certain project efficiency gains which did not recur in the quarter ended June 30, 2016.
Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased by $0.9 million, or 21.3%, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015 as a result of higher personnel cost, particularly related to adding personnel in sales and estimating in support of our growing business. Selling, general and administrative expenses as a percentage of revenues in the Communications segment decreased 1.4% to 10.6% of segment revenue during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, largely as a result of lower incentive compensation expense as a percent of revenue during the quarter ended June 30, 2016. Incentive compensation for division management is based on both earnings and cash flow, and decreased during the quarter ended June 30, 2016 as a result of an increase in working capital needs during the quarter.
Revenue Gross profit Selling, general and administrative expenses Nine Months Ended June 30, 2016 2015 $ % $ % (Dollars in thousands, Percentage of revenues) $ 128,813 100.0 % $ 95,269 100.0 % 22,958 17.8 % 17,137 18.0 % 14,877 11.5 % 11,377 11.9 %
Revenue.Our Communications segment revenues increased by $33.5 million during the nine months ended June 30, 2016, a 35.2% increase, compared to the nine months ended June 30, 2015.The increase is the result of both the expansion of our customer base and additional work with existing customers. We continue to expand our business in areas such as high-techretail distribution centers, audio visual and security, and wireless access. Revenues from data center work increased by $25.0$10.4 million, and revenues from manufacturing and retail distribution centers increased by $3.2 million for the ninethree months ended June 30, 2016March 31, 2017, as compared with the ninesame period in 2016. We also experienced strong growth in our core structured cabling business, with revenues increasing $4.5 million for the three months ended June 30, 2015.March 31, 2017, compared with the three months ended March 31, 2016.
Gross Profit.Our Communications segment’s gross profit during the ninethree months ended June 30, 2016March 31, 2017 increased $5.8by $2.7 million or 34.0%, as compared to the ninethree months ended June 30, 2015.March 31, 2016. Gross profit as a percentage of revenue decreased 0.2%1.6% to 17.8%15.1% for the ninethree months ended June 30, 2016, as we experienced some inefficiencyMarch 31, 2017. The decline is driven, in part, by inefficiencies on a project which was completedcertain projects during the quarter ended March 31, 2016.2017. Additionally, margins have been affected by an increase in the volume of cost-plus work performed in the quarter ended March 31, 2017. This work is generally lower risk and is typically performed at lower margins than the fixed price arrangements which comprise the majority of the work we perform.
Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased $3.5by $1.1 million, or 30.8%22.9%, during the ninethree months ended June 30, 2016March 31, 2017, compared to the ninethree months ended June 30, 2015March 31, 2016, as a result of higher personnel cost, particularly related to additional personnel in sales and estimating in support of our growing business. Selling, general and administrative expenses as a percentage of revenues in the Communications segment decreased 2.8% to 9.9% of segment revenue during the three months ended March 31, 2017, compared to the three months ended March 31, 2016, largely as we benefitted from the increased scale of our operations.
Six Months Ended March 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
$ | % | $ | % | |||||||||||||
(Dollars in thousands, Percentage of revenues) | ||||||||||||||||
Revenue | $ | 114,977 | 100.0 | % | $ | 80,111 | 100.0 | % | ||||||||
Gross profit | 17,267 | 15.0 | % | 14,742 | 18.4 | % | ||||||||||
Selling, general and administrative expenses | 11,834 | 10.3 | % | 9,692 | 12.1 | % |
Revenue.Our Communications segment revenues increased by $34.9 million during the six months ended March 31, 2017, a 43.5% increase compared to the six months ended March 31, 2016.The increase is the result of both the expansion of our customer base and additional work with existing customers. Revenues from data center work increased by $15.5 million for the six months ended March 31, 2017, compared with the six months ended March 31, 2016, and revenues from manufacturing and retail distribution centers
increased by $5.4 million for the six months ended March 31, 2017, as compared with the same period in 2016. Additionally, we continue to expand our business in areas such as retail distribution centers, audio visual and security, and wireless access. We also experienced strong growth in our core structured cabling business, with revenues increasing $7.4 million for the six months ended March 31, 2017, compared with the six months ended March 31, 2016.
Gross Profit.Our Communications segment’s gross profit during the six months ended March 31, 2017, increased $2.5 million, or 17.1%, as compared to the six months ended March 31, 2016. Gross profit as a percentage of revenue decreased 3.4% to 15.0% for the six months ended March 31, 2017. The decline is driven, in part, by inefficiencies on certain projects during the six months ended March 31, 2017. Additionally, margins have been affected by an increase in the volume of cost-plus work performed in the six months ended March 31, 2017. This work is generally lower risk, and is typically performed at lower margins than the fixed price arrangements which comprise the majority of the work we perform.
Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased $2.1 million, or 22.1%, during the six months ended March 31, 2017, compared to the six months ended March 31, 2016, as a result of higher personnel cost, including increased incentive compensation associated with higher profitability.earnings. Additionally, we have continued to invest in the necessary infrastructure to support the growing volume of business. Selling, general and administrative expenses as a percentage of revenues in the Communications segment decreased 0.4%1.8% to 11.5%10.3% of segment revenue during the ninesix months ended June 30, 2016March 31, 2017, compared to the ninesix months ended June 30, 2015.March 31, 2016, as we benefitted from the increased scale of our operations.
Residential
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
(Dollars in thousands, Percentage of revenues) | (Dollars in thousands, Percentage of revenues) | |||||||||||||||||||||||||||||||
Revenue | $ | 56,867 | 100.0 | % | $ | 52,991 | 100.0 | % | $ | 67,923 | 100.0 | % | $ | 53,387 | 100.0 | % | ||||||||||||||||
Gross profit | 13,479 | 23.7 | % | 10,376 | 19.6 | % | 15,572 | 22.9 | % | 12,771 | 23.9 | % | ||||||||||||||||||||
Selling, general and administrative expenses | 9,237 | 16.2 | % | 7,709 | 14.5 | % | 10,932 | 16.1 | % | 8,906 | 16.7 | % |
Revenue.Our Residential segmentsegment’s revenues increased by $3.9$14.5 million during the three months ended June 30, 2016,March 31, 2017, an increase of 7.3%27.2% as compared to the three months ended June 30, 2015.March 31, 2016. The increase is driven by our multi-family business, where revenues increased by $10.7 million for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The increased activity in the second quarter of fiscal 2017 is driven in large part by work performed on projects which were delayed in fiscal 2016. Single-family construction revenues increased by $5.6$5.3 million, primarily driven by our Texas operations, where the economy has experienced continued growth and population expansion. Although demand for housing in the greater Houston area has been affectedRevenues from cable installations and solar decreased by a downturn in the oil and gas market, we have been successful in growing our market share despite this slowing demand. Revenue from solar installations increased by $0.2$0.8 million and cable and service revenues increased by $1.1$0.7 million, forrespectively, during the three months ended June 30, 2016March 31, 2017, as compared with the same period in 2015, primarily as a result of an expansion of our service area. However, these increases were partly offset by a decrease in multi-family revenues, which declined by $3.0 million year over year. Demand for multi-family housing has been increasing in the Southeastern region, leading to an increase in our backlog. However, as a result of labor constraints experienced by framing contractors and other trades, many of these projects have been delayed.2016.
Gross Profit.During the three months ended June 30, 2016,March 31, 2017, our Residential segment experienced a $3.1$2.8 million, or 29.9%21.9%, increase in gross profit as compared to the three months ended June 30, 2015.March 31, 2016. The increase in gross profit was driven primarily by single-family projects. As demand has increased within the single-family business, a higher volume of activity contributed to our ability to improve operating efficiency, and we have also reduced costs on materials such as fixtures. In addition, although our multi-family business experienced a decreaseincrease in revenues, gross margins increased,revenue. Gross margin as a resultpercentage of improved project efficiencyrevenue for our single family business remained flat during the quarter ended March 31, 2017, as compared with the quarter ended March 31, 2016.
Selling, General and Administrative Expenses. Our Residential segment experienced a $1.5$2.0 million, or 19.8%22.7%, increase in selling, general and administrative expenses during the three months ended June 30, 2016March 31, 2017, compared to the three months ended June 30, 2015March 31, 2016, primarily as a result of higher variable compensation and a $0.7$1.4 million increase in incentive costs associated with increased profitability. Selling, general and administrative expenses as a percentage of revenues in the Residential segment increaseddecreased to 16.2%16.1% of segment revenue during the three months ended June 30, 2016March 31, 2017, compared to 14.5%16.7% in the three months ended June 30, 2015.March 31, 2016, as we benefitted from the increased scale of our operations.
Nine Months Ended June 30, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
(Dollars in thousands, Percentage of revenues) | (Dollars in thousands, Percentage of revenues) | |||||||||||||||||||||||||||||||
Revenue | $ | 162,381 | 100.0 | % | $ | 151,753 | 100.0 | % | $ | 134,365 | 100.0 | % | $ | 105,514 | 100.0 | % | ||||||||||||||||
Gross profit | 37,922 | 23.4 | % | �� | 29,230 | 19.3 | % | 31,302 | 23.3 | % | 24,443 | 23.2 | % | |||||||||||||||||||
Selling, general and administrative expenses | 26,856 | 16.5 | % | 22,741 | 15.0 | % | 21,485 | 16.0 | % | 17,620 | 16.7 | % |
Revenue.Our Residential segment revenues increased by $10.6$28.9 million during the ninesix months ended June 30, 2016,March 31, 2017, an increase of 7.0%27.3% as compared to the ninesix months ended June 30, 2015.March 31, 2016. The increase is driven by our multi-family business, where revenues increased by $21.1 million for the six months ended March 31, 2017, compared with the six months ended March 31, 2016. For the six months ended March 31, 2017, we continued to benefit from work on multi-family projects which were delayed at the end of fiscal 2016. Single-family construction revenues increased by $17.5$9.7 million, primarily driven by our Texas operations, where the economy has experienced continued growth and population expansion. Although demand for housing in the greater Houston area has been affected by a downturn in the oil and gas market, we have been successful in growing our market share despite this slowing demand. Revenue from solar installations increaseddecreased by $2.0$1.7 million, and cable and service revenues increaseddecreased by $3.5$0.3 million for ninesix months ended June 30, 2016March 31, 2017, as compared with the same period in 2015, primarily as a result of an expansion of our service area. However, these increases were partly offset by a decrease in multi-family revenues, which declined by $12.1 million year over year. Demand for multi-family housing has been increasing in the Southeastern region, leading to an increase in our backlog. However, as a result of labor constraints experienced by framing contractors and other trades, many of these projects have been delayed.2016.
Gross Profit.During the ninesix months ended June 30, 2016,March 31, 2017, our Residential segment experienced an $8.7a $6.9 million, or 29.7%28.1%, increase in gross profit as compared to the ninesix months ended June 30, 2015.March 31, 2016. Gross profit increased primarily due to a higher volume of single-family projects.work. Gross margin percentage increased within single-family, as demand for single-family housing has increased and efficiency has improved, and we have reduced costs on materials such as fixtures. The multi-family business also reported an increase in gross margin, driven by improved project efficiency within our multi-family business during 2016.remained flat.
Selling, General and Administrative Expenses. Our Residential segment experienced a $4.1$3.9 million, or 18.1%21.9%, increase in selling, general and administrative expenses during the ninesix months ended June 30, 2016March 31, 2017, compared to the ninesix months ended June 30, 2015,March 31, 2016, driven by increased compensation expense, primarily as a result of an increase of $0.9$2.8 million in variable compensation and incentive costs associated with increased profitability. Selling, general and administrative expenses as a percentage of revenues in the Residential segment increased 1.5%decreased 0.7% to 16.5%16.0% of segment revenue during the ninesix months ended June 30, 2016.March 31, 2017, as we benefitted from the increased scale of our operations.
Commercial & Industrial
Three Months Ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
$ | % | $ | % | |||||||||||||
(Dollars in thousands, Percentage of revenues) | ||||||||||||||||
Revenue | $ | 59,512 | 100.0 | % | $ | 44,406 | 100.0 | % | ||||||||
Gross profit | 7,630 | 12.8 | % | 5,245 | 11.8 | % | ||||||||||
Selling, general and administrative expenses | 4,771 | 8.0 | % | 3,776 | 8.5 | % |
Revenue Gross profit Selling, general and administrative expenses Three Months Ended March 31, 2017 2016 $ % $ % (Dollars in thousands, Percentage of revenues) $ 55,272 100.0 % $ 54,146 100.0 % 2,668 4.8 % 5,200 9.6 % 5,261 9.5 % 4,603 8.5 %
Revenue.Revenues in our Commercial & Industrial segment increased $15.1$1.1 million during the three months ended June 30, 2016,March 31, 2017, an increase of 34.0%2.1% compared to the three months ended June 30, 2015.March 31, 2016. The increase in revenue was driven by an increase in large project work in our Eastrevenue from the Shanahan and Southeast locations, more specifically projects within the office/retail, warehouse/distribution and industrial sectors, for three months ended June 30, 2016 as compared with the three months ended June 30, 2015. Additionally, revenue for the quarter ended June 30, 2016, included $4.7 million from Shanahan, which was acquired in November 2015, and $1.8 million from STR which we acquired in April 2016.acquisitions. The market for this segment’s services remains highly competitive.
Gross Profit. Our Commercial & Industrial segment’s gross profit during the three months ended June 30, 2016 increasedMarch 31, 2017, decreased by $2.4$2.5 million, or 45.5%48.7%, as compared to the three months ended June 30, 2015, which was driven by the increased volume in revenue combined with improved project executionMarch 31, 2016. Gross margin decreased from 9.6% for the three months ended June 30,March 31, 2016, to 4.8% for the three months ended March 31, 2017, driven by project inefficiencies for the three months ended March 31, 2017, as compared with the same period in 2015. Gross profit for2016. These inefficiencies were caused by labor cost overruns on four of our projects at two of our commercial branches in connection with the acceleration of schedules by our customers, as well as high rates of employee turnover. We expect these jobs to be largely completed in the third quarter ended June 30, 2016 included $1.1 million from the acquiredof fiscal 2017, but they will continue to impact our margins through project completion. The Shanahan and STR businesses.acquisitions contributed $0.4 million of the increase in gross margin. These newly acquired businesses continue to perform well, and have generally performed at higher gross margins than our existing business.
Selling, General and Administrative Expenses.Our Commercial & Industrial segment’s selling, general and administrative expenses during the three months ended June 30, 2016March 31, 2017, increased $1.0$0.7 million, or 26.4%14.3%, compared to the three months ended June 30, 2015, but decreasedMarch 31, 2016. Selling, general and administrative expenses as a percentage of revenue, as we benefitted from improved efficiency in connection with a higher volume of activity. Expense forrevenues increased 1.0% to 9.5% during the three months ended June 30, 2016 included $0.6 million incurred byMarch 31, 2017, compared to the three months ended March 31, 2016. The Shanahan and STR businesses.acquisitions contributed $0.5 million of the increase. Additionally, we incurred additional compensation costs to transition employees of an acquired business to our policy for paid time off.
Nine Months Ended June 30, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
(Dollars in thousands, Percentage of revenues) | (Dollars in thousands, Percentage of revenues) | |||||||||||||||||||||||||||||||
Revenue | $ | 158,923 | 100.0 | % | $ | 132,677 | 100.0 | % | $ | 109,228 | 100.0 | % | $ | 99,410 | 100.0 | % | ||||||||||||||||
Gross profit | 17,686 | 11.1 | % | 15,346 | 11.6 | % | 8,774 | 8.0 | % | 10,056 | 10.1 | % | ||||||||||||||||||||
Selling, general and administrative expenses | 13,014 | 8.2 | % | 11,155 | 8.4 | % | 9,585 | 8.8 | % | 8,242 | 8.3 | % |
Revenue.Revenues in our Commercial & Industrial segment increased $26.2$9.8 million during the ninesix months ended June 30, 2016,March 31, 2017, an increase of 19.8%9.9% compared to the ninesix months ended June 30, 2016.March 31, 2017. The increase in revenue was driven by an increase in large project work in our EastDenver and SoutheastNebraska locations more specifically projects within the office/retail, warehouse/distribution and industrial sectors for the ninesix months ended June 30, 2016March 31, 2017, as compared with the ninesix months ended June 30, 2015. The increase in demand in the East and Southeast was partly offset by decreased demand in the Northwest for the nine months ended June 30,March 31, 2016. Revenue for the ninesix months ended June 30, 2016March 31, 2017, also included $11.7increased by $7.8 million from the Shanahan and STR acquisitions. The market for this segment’s services remains highly competitive.
Gross Profit. Our Commercial & Industrial segment’s gross profit during the ninesix months ended June 30, 2016 increased 15.3%March 31, 2017, decreased 12.8%, as compared to the ninesix months ended June 30, 2015. However, gross profit asMarch 31, 2016. As a percentage of revenue, gross profit decreased from 11.6%10.1% for the ninesix months ended June 30, 2015March 31, 2016, to 11.1%8.0% for the ninesix months ended June 30, 2016, as we experiencedMarch 31, 2017. This decrease was due to the effects of project delays and resulting inefficiencies. These inefficiencies were caused by labor cost overruns on four of our projects at two of our commercial branches in connection with the acceleration of schedules by our customers and high rates of employee turnover. We believe certain locations combinedof the additional costs we incurred were caused by the actions of others, and as such, we are evaluating any potential recoveries and claims associated with a more favorable mixthese costs. As of projectsMarch 31, 2017, we have not recorded any benefit related to any such recoveries or claims. We believe certain of the additional costs we incurred were caused by the actions of others, and as such, we are evaluating any potential recoveries and claims associated with these costs. As of March 31, 2017, we have not recorded any benefit related to any such recoveries or claims. We expect these jobs to be largely completed in progress duringthe third quarter of fiscal 2017, but they will continue to impact our margins through project completion. Our Shanahan and STR acquisitions contributed $1.3 million of additional margin for the six months ended March 31, 2017, compared with the same period prior year. Additionally, we incurredThese newly acquired businesses continue to perform well, and have generally performed at higher costs related togross margins than our insurance programs, and a charge of $0.5 million upon the settlement of a dispute related to a project completed in a prior year. Gross profit for the nine months ended June 30, 2016 also included $1.8 related to the acquired Shanahan and STR businessesexisting business.
Selling, General and Administrative Expenses.Our Commercial & Industrial segment’s selling, general and administrative expenses during the ninesix months ended June 30, 2016March 31, 2017, increased $1.9$1.3 million, or 16.7%16.3%, compared to the ninesix months ended June 30, 2015, but decreasedMarch 31, 2016, and increased slightly as a percentage of revenue. The year over year increase is primarily due to increased employment expenseswas driven by the acquisition of $1.3 million related to expanded service activities within the segment. Additionally, expense for the nine months ended June 30, 2016 included $1.2 million incurred by the Shanahan and STR businesses.businesses, where selling, general and administrative expense for the six months ended March 31, 2017, increased by $0.9 million.
Infrastructure Solutions
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
(Dollars in thousands, Percentage of revenues) | (Dollars in thousands, Percentage of revenues) | |||||||||||||||||||||||||||||||
Revenue | $ | 14,518 | 100.0 | % | $ | 11,169 | 100.0 | % | $ | 18,793 | 100.0 | % | $ | 13,097 | 100.0 | % | ||||||||||||||||
Gross profit | 4,673 | 32.2 | % | 2,366 | 21.2 | % | 4,278 | 22.8 | % | 3,257 | 24.9 | % | ||||||||||||||||||||
Selling, general and administrative expenses | 3,248 | 22.4 | % | 2,463 | 22.1 | % | 4,222 | 22.5 | % | 3,115 | 23.8 | % | ||||||||||||||||||||
Contingent consideration | 66 | 0.5 | % | 0 | 0.0 | % | 83 | 0.4 | % | 266 | 2.0 | % | ||||||||||||||||||||
Loss on sale of assets | 51 | 0.4 | % | 0 | 0.0 | % | 6 | 0.0 | % | 775 | 5.9 | % |
Revenue.Revenues in our Infrastructure Solutions segment increased $3.3$5.7 million during the three months ended June 30, 2016,March 31, 2017, an increase of 30.0%43.5% compared to the three months ended June 30, 2015.March 31, 2016. The increase in revenue was driven primarily by $5.1 million of additional revenue of $6.7 million contributed by Southern Rewinding, Calumetour fiscal 2016 and Technibus, which were acquired in May 2015, October 2015, and June 2016, respectively.2017 acquisitions. This increase was partly offset by the disposal in April 2016 of substantially all of the operating assets of our HK Engine Componentsengine components business, which we determined was no longer a core asset for our Infrastructure Solutions business. This business contributed $2.2$0.6 million ofin revenue induring the quarterthree months ended June 30, 2015. See Note 13 – Business Combinations and Divestitures for further information.March 31, 2016, which was not repeated during the three months ended March 31, 2017.
Gross Profit. Our Infrastructure Solutions segment’s gross profit during the three months ended June 30, 2016March 31, 2017 increased $2.3$1.0 million as compared to the three months ended June 30, 2015.March 31, 2016. The increase is primarily driven by $1.4$1.3 million of additional margin contributed by Southern Rewinding, Calumetour fiscal 2016 and Technibus. The decrease in2017 acquisitions. During the quarter ended March 31, 2017, our gross margin from our engine components business, whichas a percentage of revenue was affected negatively by the mix of work we soldperformed at the Technibus business. In particular, experienced production inefficiencies as we performed a higher than typical proportion of isolated-phase bus projects as compared withnon-segregated bus duct projects. This increase in April 2016,margin provided by acquired businesses was more thanslightly offset by improved profitabilitya decline in margin in our motor repair business, where we have benefitted from a focus on controlling cost and improving workflow efficiency. Additionally, the Southern Rewinding and Calumet businesses have performed at higher profit margins than our other motor repair businesses as a result of their product offerings and the markets they serve.business.
Selling, General and Administrative Expenses.Our Infrastructure Solutions segment’s selling, general and administrative expenses during the three months ended June 30, 2016March 31, 2017 increased $0.9$1.1 million compared to the three months ended June 30, 2015.March 31, 2016. The increase was primarily the result of generalthe fiscal 2016 and administrative costs at Southern Rewinding, Calumet and Technibus,2017 acquisitions, which contributed $1.3 million to the increase in expense forby $1.5 million during the three months ended June 30, 2016. This additional expense was partly offset by reductions in expense for our motor repair business. The reduction in general and administrative expense as a percent of revenue reflects our ability to grow our business efficiently, and benefit from the increased scale of our operations.March 31, 2017.
Nine Months Ended June 30, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
(Dollars in thousands, Percentage of revenues) | (Dollars in thousands, Percentage of revenues) | |||||||||||||||||||||||||||||||
Revenue | $ | 40,230 | 100.0 | % | $ | 34,471 | 100.0 | % | $ | 37,270 | 100.0 | % | $ | 25,712 | 100.0 | % | ||||||||||||||||
Gross profit | 10,876 | 27.0 | % | 7,750 | 22.5 | % | 9,653 | 25.9 | % | 6,204 | 24.1 | % | ||||||||||||||||||||
Selling, general and administrative expenses | 9,062 | 22.5 | % | 6,795 | 19.7 | % | 8,322 | 22.3 | % | 5,814 | 22.6 | % | ||||||||||||||||||||
Contingent consideration | 332 | 0.8 | % | 0 | 0.0 | % | 83 | 0.2 | % | 266 | 1.0 | % | ||||||||||||||||||||
Loss on sale of assets | 828 | 2.1 | % | (2 | ) | 0.0 | % | |||||||||||||||||||||||||
Loss (gain) on sale of assets | (2 | ) | 0.0 | % | 776 | 3.0 | % |
Revenue.Revenues in our Infrastructure Solutions segment increased $5.8$11.6 million during the ninesix months ended June 30, 2016,March 31, 2017, an increase of 16.7%45.0% compared to the ninesix months ended June 30, 2015.March 31, 2016. The increase was primarily driven by $12.8$14.0 million of additional revenue contributed by Southern Rewinding, Calumetour fiscal 2016 and Technibus.2017 acquisitions. These increases were partly offset by a $5.0$1.8 million decrease in revenue from our HK Engine Components business, which experienced a reduction in demand for our engine components services by certain of our large rail customers.business. Substantially all of the operating assets of our engine components business were sold in April 2016 to a third party. See Note 13 – Business Combinations and Divestitures for further information.
Gross Profit. Our Infrastructure Solutions segment’s gross profit during the ninesix months ended June 30, 2016March 31, 2017, increased $3.1$3.4 million as compared to the ninesix months ended June 30, 2015.March 31, 2016. The increase is primarily driven by $4.6$3.7 million of additional gross profit contributed by Southern Rewinding, Calumetour fiscal 2016 and Technibus, and improved2017 acquisitions, slightly offset by a decrease in gross margins inat our motor repair business, where we have benefitted from a focus on controlling costs and improving workflow efficiency. These benefits were partly offset by a $1.7 million decrease in gross profit from our engine components business, which we sold in April 2016.business.
Selling, General and Administrative Expenses.Our Infrastructure Solutions segment’s selling, general and administrative expenses during the ninesix months ended June 30, 2016March 31, 2017, increased $2.4$2.5 million compared to the ninesix months ended June 30, 2015.March 31, 2016. The increase was primarily the result of general and administrative costs incurred at Southern Rewinding, Calumetby our fiscal 2016 and Technibus,2017 acquisitions, which increased $2.5$2.9 million for the ninesix months ended June 30, 2016,March 31, 2017, including intangible amortization for these acquisitions. These additional costs were slightly offset by reduced expense for our motor repair business and the elimination of $0.3 million of general and administrative costs associated with our engine components business.
Contingent Consideration.Results of operations from Calumet Armature & Electric, LLC (“Calumet”), which we acquired in October 2015, have outperformed forecast measures used in our original valuation of the contingent consideration agreement, which we performed following the acquisition of Calumet. As we now expect to pay higher contingent consideration because of increased profitability, weacquisition. We recorded additional contingent consideration expense of $83 thousand and $0.3 million during the ninesix months ended June 30, 2016.March 31, 2017 and 2016, respectively.
Loss on Sale of Asset.We recognized $0.8 million in conjunction with the write down to net realizable value of certain assets related to our engine component business.business during the six months ended March 31, 2016. The sale of these assets to a third party pursuant to an asset purchase agreement was finalized onin April 15, 2016.
Interest and Other Expense, net
Three Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Interest expense | $ | 219 | $ | 182 | $ | 341 | $ | 210 | ||||||||
Deferred financing charges | 80 | 79 | 87 | 93 | ||||||||||||
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Total interest expense | 299 | 261 | 428 | 303 | ||||||||||||
Other (income) expense, net | (17 | ) | (9 | ) | (44 | ) | (3 | ) | ||||||||
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Total interest and other expense, net | $ | 282 | $ | 252 | $ | 384 | $ | 300 | ||||||||
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Interest Expense for the three months ended June 30,March 31, 2017 and 2016 and 2015
During the three months ended June 30, 2016,March 31, 2017, we incurred interest expense of $0.3$0.4 million primarily comprised of interest expense from our revolving credit facility, an average letter of credit balance of $6.9$6.6 million under the 2012 Credit Facility (as defined under “Liquidity and Capital Resources” below) and an average unused line of credit balance of $44.0$33.2 million. This compares to interest expense of $0.3 million for the three months ended June 30, 2015,March 31, 2016, primarily comprised of interest expense from our revolving credit facility and average letter of credit and unused line of credit balances under the 2012 Credit Facility of $6.9 million and $42.9 million, respectively.
Nine Months Ended June 30, | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Interest expense | $ | 632 | $ | 630 | ||||
Deferred financing charges | 263 | 230 | ||||||
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Total interest expense | 895 | 860 | ||||||
Other (income) expense, net | (49 | ) | (208 | ) | ||||
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Total interest and other expense, net | $ | 846 | $ | 652 | ||||
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Interest expense Deferred financing charges Total interest expense Other (income) expense, net Total interest and other expense, net Six Months Ended March 31, 2017 2016 (In thousands) $ 702 $ 413 172 183 874 596 (48 ) (32 ) $ 826 $ 564
Interest Expense for the ninesix months ended June 30,March 31, 2017 and 2016 and 2015
During the ninesix months ended June 30, 2016,March 31, 2017, we incurred interest expense of $0.9 million primarily comprised of interest expense from our revolving credit facility, an average letter of credit balance of $6.9$6.7 million under the 2012 Credit Facility and an average unused line of credit balance of $43.2$33.1 million. This compares to interest expense of $0.9$0.6 million for the ninesix months ended June 30, 2015,March 31, 2016, primarily comprised of interest expense from our revolving credit facility, an average letter of credit balance of $6.8$6.9 million and an average unused line of credit balance of $46.4$42.9 million.
PROVISION FOR INCOME TAXES
We reported a benefit fromprovision for income taxes of $2.9$0.7 million for the three months ended June 30, 2016March 31, 2017, compared to expensea provision of $0.3$.01 million for the three months ended June 30, 2015. ResultsMarch 31, 2016.
We reported a provision for income taxes of $3.3 million for the threesix months ended JuneMarch 31, 2017, compared to a benefit of $0.9 million for the six months ended March 31, 2016.
The increase in tax expense for both the three and six months ended March 31, 2017, as compared to the three and six months ended March 31, 2016, is due to the release of a valuation allowance during the quarter ended September 30, 2016. As a result of the valuation allowance release during the quarter ended September 30, 2016, includedtax expense is no longer reduced by a corresponding valuation allowance release. See Note9-Income Taxes in our Form10-K for the year ended September 30, 2016, for further discussion of the release of this valuation allowance. Additionally, for the six months ended March 31, 2016, we recognized a benefit of $1.4 million related to the release of $3.6 million of valuation allowance in connection with the acquisition of deferred tax liabilities related to Technibus.
We reported a benefit from income taxes of $3.9 million for nine months ended June 30, 2016 compared to expense of $0.9 million for the nine months ended June 30, 2015. Results for the nine months ended June 30, 2016 included benefits related to the release of $5.0 million of valuation allowance in connection with the acquisition of deferred tax liabilities related to Technibus, Shanahan and Calumet.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations is based upon our Condensed Consolidated Financial Statements included in this report on Form10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes, impairments of long-lived assets, and contingencies and litigation.
We establish valuation allowances for deferred tax assets based on a standard of whether it is more likely than not that the assets will fail to result in a future reduction of taxes paid. Our ability to realize deferred tax assets depends on our ability to generate sufficient taxable income of the appropriate character within the periods provided by tax regulations for the applicable tax jurisdiction. In assessing the realization of deferred tax assets, we consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and tax planning strategies. When assessing the need for a valuation allowance, we consider all available evidence, including the nature and magnitude of our cumulative losses in recent years, duration of carryforward periods, and our financial outlook.
After a prolonged period of operating losses spanning many years, the Company reported income for the fiscal years ended September 30, 2014 and 2015, and for the nine months ended June 30, 2016.
Over the ten-year period from 2004 through 2013, the Company reported net losses each year, finally returning to profitability in the year ended September 30, 2014. Although we have recently returned to profitability, GAAP guidelines place considerably more weight on historical results and less weight on future projections, and as such, the cumulative pretax losses provide sufficient negative evidence to support the appropriateness of a full valuation allowance. We will evaluate the appropriateness of our remaining deferred tax assets and valuation allowances on a quarterly basis. This evaluation will include new information as it becomes available, including our most recent financial results and expectations about the financial performance of recent acquisitions. To the extent that profitability continues, or other sources of future taxable income become more likely, our conclusion regarding the amount of valuation allowances required could change, resulting in the reversal of a portion of our valuation allowances. Such a reversal, if one were to occur, would result in a benefit to earnings. At September 30, 2015, federal and state deferred tax asset valuation allowances were $106.5 million and $4.7 million, respectively.
In conjunction with our purchase of STR Mechanical, LLC (“STR”) during the third quarter of fiscal 2016, we acquired a controlling interest of 80 percent of the membership interests of STR. The remaining 20 percent interest, which was retained by the third party sellers, is identified in our financials as noncontrolling interest and is classified outside of permanent equity on our consolidated balance sheet. See Note 13 – Acquisitions and Divestitures for further discussion.
BACKLOG
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 authorizing the performance of future work, backlog is not a guarantee of future revenues, as contractual commitments may change.change and our performance may vary. Not all of our work is performed under contracts included in backlog; for example, most motor repaircertain service work performed by our Infrastructure Solutions segment is performed under master service agreements on anas-needed basis. Our backlog has increaseddecreased from $270$341 million at September 30, 20152016, to $361$335 million at JuneMarch 31, 2017. The decrease relates to an increase in work performed on certain Residential multi-family projects which were delayed at September 30, 2016.2016, and the completion of certain large projects at our Communications segment.
WORKING CAPITAL
During the ninesix months ended June 30, 2016,March 31, 2017, working capital exclusive of cash increased by $11.7$10.6 million from September 30, 2015,2016, reflecting a $22.0$17.8 million increase in current assets excluding cash and a $10.3$7.2 million increase in current liabilities during the period. Working capital associated with the Technibus, STR, Shanahan and Calumet businesses, which were acquired during the nine months ended June 30, 2016, was $12.0 million.
During the ninesix months ended June 30, 2016,March 31, 2017, our current assets exclusive of cash increased to $162.0$194.5 million, as compared to $139.7$176.8 million as of September 30, 2015.2016. The increase included $5.4 million of current trade accounts receivables, net, increased by $16.9 million at June 30, 2016, as compared to September 30, 2015,assets associated with the Freeman acquisition in March 2017. The remaining increase was driven by higher revenues,a $2.8 million increase in prepaid expenses and other current assets, as well as $14.0a $3.5 million increase in costs and estimated earnings in excess of accounts receivablebillings and a $3.3 million increase in inventory excluding the inventory acquired in the Freeman transaction. The increase in prepaid expenses and other current assets is driven by the timing of businesses acquiredcertain prepaid insurance policies during the period.year. The increase in costs and estimated earnings in excess of billings is the result of an increase in the amount of work performed at our Communications segment under cost plus arrangements. These cost plus arrangements typically take longer to bill than the fixed price arrangements that are more common for the business. Inventory increased primarily at our Residential segment due to the timing of a large wire purchase. Days sales outstanding (“DSOs”) increased to 5764 at June 30, 2016March 31, 2017 from 5660 at September 30, 2015.2016. While the rate of collections may vary, our typically secured position, resulting from our ability in general to secure liens against our customers’ overdue receivables, reasonably assures that collection will occur eventually to the extent that our security retains value.
During the ninesix months ended June 30, 2016,March 31, 2017, our total current liabilities increased by $10.3$7.2 million to $118.4$140.3 million, compared to $108.1$133.1 million as of September 30, 2015.2016. The increase was primarily the result of increased$5.5 million of accounts payable and accrued liabilities of $7.8 million, driven primarily byadded with the business acquisitions during the period, and an increase to overbillings of $2.5 million.Freeman acquisition in March 2017.
Surety
We believe the bonding capacity presently provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of June 30, 2016,March 31, 2017, the estimated cost to complete our bonded projects was approximately $55.7$38.9 million.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2016, we had cash and cash equivalents of $22.8 million, working capital exclusive of cash of $43.6 million, and $6.9 million of letters of credit outstanding under our 2012 Credit Facility. We anticipate that the combination of cash on hand, cash flows, and available capacity under our 2012 Credit Facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. Our ability to generate cash flow is dependent on many factors, including demand for our services, the availability of projects at margins acceptable to us, the ultimate collectability of our receivables, and our ability to borrow on our 2012 Credit Facility, if needed.
We continue to closely monitor the financial markets and general national and global economic conditions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted in the future by adverse conditions in the financial markets.
The 2012 Revolving Credit Facility
We maintain aOn April 10, 2017, we entered into an amendment and restatement to our revolving credit facility (the “Second Amended and Restated Credit and Security Agreement”, or the “Amended Credit Agreement”) with Wells Fargo Bank, N.A. whichPursuant to the Amended Credit Agreement, our maximum revolver amount increased from $70 million to $100 million, and the maturity date of the revolving credit
facility was most recently amendedextended from August 9, 2019 to August 9, 2021. The Amended Credit Agreement also modified our financial covenants by, among other items, implementing a new covenant that requires the Company to maintain a minimum EBITDA (as defined in May 2016. This amendment increasedthe Amended Credit Agreement) that will be tested quarterly on a trailing twelve month basis; increasing the minimum Liquidity (as defined in the Amended Credit Agreement) requirement applicable to the Company from 12.5% to 30% of the maximum revolver amount underamount; raising the 2012 Credit Facility from $60 million to $70 million and extended the maturity date by one year to August 9, 2019. In addition, as further described below, the amendment reduced the interest rate charged under the 2012 Credit Facility, modified the calculation of amounts available under the 2012 Credit Facility, resulting in an increase in available borrowing capacity, created new minimum thresholds for liquidity and Excess Availability (as defined in our amended and restated credit and security agreement under the 2012 Credit Facility (as amended, the “Amended Credit Agreement”)), and modified the thresholds of liquidity and Excess Availability below which the Company must maintain a specifiedCompany’s required Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement).
Terms (the “FCCR”) to 1.1:1.0 from 1.0:1.0; and requiring that the FCCR be tested quarterly regardless of 2012 Credit Facilitythe Company’s Liquidity levels.
The 2012Amended Credit Facility containsAgreement continues to contain other customary affirmative, negative and financial covenants whichas well as events of default.
As of March 31, 2017, we were adjustedin compliance with the financial covenants under the Amended Credit Agreement, requiring that we maintain:
Applicable Amount | Applicable Period | |||
$ | 30,000,000 | For each four quarter period ending March 31, 2017, June 30, 2017, and September 30, 2017 | ||
$ | 32,500,000 | For the four quarter period ending December 31, 2017 | ||
$ | 35,000,000 | For each four quarter period ending March 31, 2018 and eachquarter-end thereafter |
At June 30, 2016,March 31, 2017, our Liquidity was $53.2 and$61.5 million, our Excess Availability was $30.4,$40.7 million (or greater than 50% of minimum Liquidity), our FCCR was 15.4:1.0; and our EBITDA for the four quarters ended March 31, 2017 was $36.2 million.
Our FCCR is calculated as follows (with capitalized terms as defined in the Amended Credit Agreement): (i) our trailing twelve month EBITDA, lessnon-financed capital expenditures (other than capital expenditures financed by means of an advance under the credit facility), cash taxes and all Restricted Junior Payments consisting of certain pass-through tax liabilities, divided by (ii) the sum of our cash interest (other thaninterest paid-in-kind, amortization of financing fees, andother non-cash interest expense) and principal debt payments (other than repayment of principal on advances under the credit facility and including cash payments with respect to capital leases), any management, consulting, monitoring, and advisory fees paid to an affiliate, and all Restricted Junior Payments (other than pass-through tax liabilities) and other cash distributions; provided, that if any acquisition is consented to by lender after the date of the Amended Credit Agreement, the components of the FCCR will be calculated for such we were not requiredfiscal period after giving pro forma effect to maintain a Fixed Charge Coverage Ratio of 1.0:1.0 asthe acquisition assuming that such transaction has occurred on the first day of such date. Nonetheless, at June 30, 2016, our Fixed Charge Coverage Ratio was 14.2:1.0. Complianceperiod (including pro forma adjustments arising out of events which are directly attributable to such acquisition, are factually supportable, and are expected to have a continuing impact, in each case to be reasonably agreed to by the lender).
As defined in the Amended Credit Agreement, EBITDA is calculated as consolidated net income (or loss), less extraordinary gains, interest income,non-operating income and income tax benefits and decreases in any change in LIFO reserves, plus stock compensation expense,non-cash extraordinary losses (including, but not limited to,a non-cash impairment charge or write-down), interest expense, income taxes, depreciation and amortization and increases in any change in LIFO reserves, in each case, determined on a consolidated basis in accordance with our Fixed Charge Coverage Ratio, while not required at June 30, 2016, provides us withGAAP; provided, that if any acquisition is consented to by lender after the abilitydate of the Amended Credit Agreement, EBITDA for such fiscal period shall be calculated after giving pro forma effect to use cashthe acquisition assuming that such transaction has occurred on hand orthe first day of such period (including pro forma adjustments arising out of events which are directly attributable to draw on our 2012 Credit Facility such that we can fall below the $7 million Excess Availabilityacquisition, are factually supportable, and $14 million Liquidity thresholds described above without violating our financial covenant.are expected to have a continuing impact, in each case to be reasonably agreed to by Lender).
If in the future our Liquidity orfalls below $30 million (or Excess Availability fallfalls below $14 million or $7 million, respectively, and at that time50% of our Fixed Charge Coverage Ratiominimum Liquidity), our FCCR is less than 1.0:1.1:1.0, we fail to meet our minimum EBITDA requirement, or if we otherwise fail to perform or otherwise comply with certain of our covenants or other agreements under our 2012the Amended Credit Facility,Agreement, it would result in an event of default under our 2012the Amended Credit Facility,Agreement, which could result in some or all of our indebtedness becoming immediately due and payable.
Borrowings under the 2012 Credit Facility may not exceed a “borrowing base” that is determined monthly by our lenders based on available collateral, primarily certain accounts receivables, inventories and personal property and equipment. The amendment modified the calculation of amounts available under the 2012 Credit Facility, by increasing our advance rates and expanding the types of assets to be included
At March 31, 2017, we had $6.6 million in our borrowing base, resulting in an increase in available borrowing capacity.
Under the terms of the 2012 Credit Facility, amounts outstanding bear interest at a per annum rate equal to a Daily Three Month LIBOR (as defined in the Credit Agreement), plus an interest rate margin, which is determined quarterly, based on the thresholds below. The amendment reduced the interest rate margin from between 2.00 and 3.00 percent to a range from 1.75 to 2.25 percent.
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Certain amounts up to $3 million, as set forth in the Amended Credit Agreement, accrue interest based on an Interest Rate Margin of 3.25%. In addition, we are charged monthly in arrears for (1) an unused commitment fee of 0.375% per annum, (2) a collateral monitoring fee ranging from $1 to $2, based on the then-applicable interest rate margin, (3) a letterletters of credit fee based on the then-applicable interest rate marginwith Wells Fargo Bank, N.A and (4) certain other fees and charges as specified in the Amended Credit Agreement.outstanding borrowings of $30.2 million.
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.
Operating activities provided net cash of $13.9$2.7 million during the ninesix months ended June 30, 2016,March 31, 2017, as compared to $6.2$18.3 million of net cash provided in the ninesix months ended June 30, 2015.March 31, 2016. The increasedecrease in operating cash flow was primarily the result of increased earnings.working capital needs within our Communications segment due to the increase in cost-plus arrangements, under which the timing of invoices to the customer is later as compared to a typical fixed price contract.
Investing Activities
Net cash used in investing activities was $59.7$14.5 million for the ninesix months ended June 30, 2016,March 31, 2017, compared with $5.5$9.4 million for the ninesix months ended June 30, 2015. We used $59.7 million in conjunction with business acquisitions in the nine months ended June 30,March 31, 2016. We used cash of $2.2$11.7 million related to the acquisition of Freeman and $2.9 million for purchases of fixed assets offset by $2.2 million of cash received forin the HK asset sale.six months ended March 31, 2017. For the ninesix months ended June 30, 2015,March 31, 2016, we used $3.1$8.3 million related to the May 2015 acquisitionacquisitions of Southern RewindingCalumet and $2.4Shanahan, and $1.1 million for the purchase of fixed assets.
Financing Activities
Cash provided byNet cash used in financing activities for the ninesix months ended June 30, 2016March 31, 2017 included $20.0$0.4 million borrowed underpaid pursuant to our 2012 Credit Facilitycontingent consideration agreement with the former owners of Calumet, and $0.1 million distributed to ournon-controlling interest holders, offset by the return of $0.2 million in connection with our acquisitioncash which had been restricted in support of Technibus, as well as $0.6 million usedletters of credit. There was no significant use of cash for financing activities in the repurchase of Company stock. For the ninesix months ended June 30, 2015, we paid $3.2 million for the repurchase of common stock, pursuant to the stock repurchase plan described below.March 31, 2016.
Stock Repurchase Program
Our Board of Directors has authorized a stock repurchase program for the purchase from time to time of up to 1.5 million shares of the Company’s common stock. 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 Rule10b5-1 trading plan, which allows repurchases underpre-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 or reinstated at any time at the Company’s discretion and without notice. The Company initiateddid not repurchase any of its common stock during the programsix months ended March 31, 2017.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes in February 2015our contractual obligations and duringcommitments from those disclosed in our Annual Report on Form10-K for the fiscal year ended September 30, 2015, pursuant to the program, we repurchased 482,156 shares of common stock at an average price of $7.22 per share for a total aggregate purchase price of $3.5 million. We repurchased 39,237 shares of our common stock during the three months ended June 30, 2016, in open market transactions at an average price of $11.82 per share. We repurchased 46,929 shares of our common stock during the nine months ended June 30, 2016, in open market transactions at an average price of $11.07 per share.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
During the nine months ended June 30, 2016, our Infrastructure Solutions segment entered into an extension of a lease for an office building, operating facility, and warehouse space. The revised lease has a term of ten years and aggregate rent payments of approximately $5.3 million. In connection with our business acquisitions during the nine months ended June 30, 2016, we entered into leases of office and operating facility space with terms ranging from five to seven years, with aggregate rent payments of approximately $5.0 million.
Our Residential segment has entered into purchase orders for $0.8 million of copper wire, which we expect to use in our operations within the next 12 months.2016.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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 commodity prices for copper, aluminum, steel 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. We are also exposed to interest rate risk with respect to our outstanding debt obligations on the 2012 Credit Facility.revolving credit facility. For additional information see“Disclosure Regarding Forward-Looking Statements” in Part I of this Quarterly Report onForm 10-Q.
Commodity Risk
Our exposure to significant market risks includes fluctuations in commodity prices for copper, aluminum, steel and fuel. Commodity price risks may have an impact on our results of operations due to the fixed 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 construction industry will allow. The Company has not entered into any commodity price risk hedging instruments.
Interest Rate Risk
We are subject to interest rate risk on our floating interest rate borrowings. If LIBOR were to increase, our interest payment obligations on outstanding borrowings would increase, having a negative effect on our cash flow and financial condition. We currently do not maintain any hedging contracts that would limit our exposure to variable rates of interest when we have outstanding borrowings. Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates.
All of the long-term debt outstanding under our 2012 Credit Facilityrevolving credit facility is structured on floating interest rate terms. A one percentage point increase in the interest rates on our long-term debt outstanding under our 2012 Credit Facilitythe credit facility as of June 30, 2016March 31, 2017, would cause a $0.3 millionpre-tax annual increase in interest expense.
Item 4. | Controls and Procedures |
Changes in Internal Control Over Financial Reporting
There have not been noany changes in ourthe Company’s internal control over financial reporting that occurred(as such term is defined in Rules13a-15 and15d-15 under the Exchange Act) during the nine months ended June 30, 2016fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
Disclosure Controls and Procedures
In accordance withRules 13a-15 and15d-15 of the Securities Exchange Act Rule 13a-15 and 15d-15,of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of management, including our President 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 President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2016March 31, 2017, 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’sSEC’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 President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Item 1. | Legal Proceedings |
For information regarding legal proceedings, see Note 12“ — Commitments and Contingencies — Legal Matters”Matters in the Notes to our Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form10-Q, which is incorporated herein by reference.
Risk Factors |
There have been no material changes to the risk factors disclosed under Item 1A, “Risk Factors”in our Annual Report on Form10-K for the fiscal year ended September 30, 2015.2016.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table presents information with respect to purchases of common stock of the Company made during the three months ended June 30, 2016:None.
Date | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan (2) | Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plan | ||||||||||||
April 1, 2016 – April 30, 2016 | 761 | $ | 14.88 | — | 1,010,152 | |||||||||||
May 1, 2016 - May 31, 2016 | 3,183 | $ | 13.44 | — | 1,010,152 | |||||||||||
June 1, 2016 - June 30, 2016 | 39,237 | $ | 11.82 | 39,237 | 970,915 | |||||||||||
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Total | 43,181 | $ | 12.01 | 39,237 | 970,915 | |||||||||||
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Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
None.
Item 5. | Other Information |
Name Change
On May 24, 2016, the Company amended its charter to change its name to IES Holdings, Inc. following approval by shareholders at a meeting held on May 24, 2016.None.
Item 6. | Exhibits |
See Index to Financial Statements under Item 8, “Financial Statements and Supplementary Data”of this Form 10-Q.
Exhibit No. | Description | |
2.1 — | Stock Purchase Agreement dated as of June 1, 2016, by and among IES Infrastructure Solutions, LLC, IES Holdings, Inc., Technibus, Inc. and Technibus, LLC. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form8-K filed on June 15, 2016) | |
| Second Amended and Restated Certificate of Incorporation of IES Holdings, Inc., as amended by the Certificate of Amendment thereto, effective May 24, 2016 (composite). (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form10-Q filed on August 8, 2016) | |
3.2 — | Certificate of Designations of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form8-K filed on January 28, 2013) | |
3.3 — | Amended and Restated Bylaws of IES Holdings, Inc., effective May 24, 2016. (Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form8-K filed on May 24, 2016) | |
4.1 — | Specimen common stock certificate. (Incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form10-K filed on December 9, 2016) | |
4.2 — | Tax Benefit Protection Plan Agreement by and between IES Holdings, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent, dated as of November 8, 2016, including the form of Rights Certificate and Summary of Stockholder Rights Plan attached thereto as Exhibits A and B, respectively. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form8-K filed on November 9, 2016) | |
10.1 — | Second |
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(1)31.1 — | Rule13a-14(a)/15d-14(a) Certification of Robert W. Lewey, President, | |
(1)31.2 — | Rule13a-14(a)/15d-14(a) Certification of Tracy A. McLauchlin, Senior Vice President, Chief Financial Officer and Treasurer | |
(1)32.1 — | Section 1350 Certification of Robert W. Lewey, President | |
(1)32.2 — | Section 1350 Certification of Tracy A. McLauchlin, Senior Vice President, Chief Financial Officer and Treasurer | |
(1)101.INS | XBRL Instance Document | |
(1)101.SCH | XBRL Schema Document | |
(1)101.LAB | XBRL Label Linkbase Document | |
(1)101.PRE | XBRL Presentation Linkbase Document | |
(1)101.DEF | XBRL Definition Linkbase Document | |
(1)101.CAL | XBRL Calculation Linkbase Document |
(1) | Filed herewith. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 8, 2016.May 5, 2017.
IES HOLDINGS, INC.
By: | /s/ TRACY A. MCLAUCHLIN | |
Tracy A. McLauchlin | ||
Senior Vice President, Chief Financial Officer and Treasurer | ||
(Principal Financial Officer and Authorized Signatory) |
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