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 December 31, 20172018

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

 

 

 

LOGOLOGO

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  ☒    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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” inRule 12b-2 of the Exchange Act.

 

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  ☒

On February 5, 2018,January 31, 2019, there were 21,338,99521,138,486 shares of common stock outstanding.

 

 

 


IES HOLDINGS, INC. AND SUBSIDIARIES

INDEX

 

   Page 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets as of December  31, 20172018 and September 30, 20172018

   6 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 20172018 and 20162017

   7 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2018 and 2017

8

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 20172018 and 20162017

   89 

Notes to Condensed Consolidated Financial Statements

   910 

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   2024 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   2731 

Item 4. Controls and Procedures

   2731 

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   2731 

Item 1A. Risk Factors

   2831 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   2932 

Item 3. Defaults Upon Senior Securities

   2932 

Item 4. Mine Safety Disclosures

   2932 

Item 5. Other Information

   2932 

Item 6. Exhibits

   3032 

Signatures

   3134 


PART I. FINANCIAL INFORMATION

DEFINITIONS

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 onForm10-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:

 

the ability of our controlling shareholder to take action not aligned with other shareholders;

 

the sale or disposition of the shares of our common stock held by our controlling shareholder, which, under certain circumstances, would trigger change of control provisions in our severance plan or financing and surety arrangements, or any other substantial sale of our common stock, which could depress our stock price;

 

the possibility that certain tax benefits of our net operating losses may be restricted or reduced in a change in ownership or a further change in the federal tax rate;

 

the potential recognition of valuation allowances or further write-downs on deferred tax assets;

 

the inability to carry out plans and strategies as expected, including our inability to identify and complete acquisitions that meet our investment criteria in furtherance of our corporate strategy, or the subsequent underperformance of those acquisitions;

 

limitations on the availability of sufficient credit or cash flow to fund our working capital needs and capital expenditures and debt service;

 

difficulty in fulfilling the covenant terms of our revolving credit facility,facilities, including liquidity, EBITDA and other financial requirements, which could result in a default and acceleration of our indebtedness under our revolving credit facility;

 

the possibility that we issue additional shares of common stock or convertible securities that will dilute the percentage ownership interest of existing stockholders and may dilute the book value per share of our common stock;

 

the relatively low trading volume of our common stock, which could depress our stock price;

 

competition in the industries in which we operate, both from third parties and former employees, which could result in the loss of one or more customers or lead to lower margins on new projects;

 

future capital expenditures and refurbishment, repair and upgrade costs; and delays in and costs of refurbishment, repair and upgrade projects;

 

a general reduction in the demand for our services;

 

our ability to enter into, and the terms of, future contracts;

 

success in transferring, renewing and obtaining electrical and other licenses;

 

challenges integrating new businesses into the Company or new types of work, products or processes into our segments;

 

credit and capital market conditions, including changes in interest rates that affect the cost of construction financing and mortgages, and the inability for some of our customers to retain sufficient financing, which could lead to project delays or cancellations;

backlog that may not be realized or may not result in profits;

 

the possibility of errors when estimating revenue and progress to date onpercentage-of-completion contracts;

 

uncertainties inherent in estimating future operating results, including revenues, operating income or cash flow;

 

complications associated with the incorporation of new accounting, control and operating procedures;

 

closures or sales of facilities resulting in significant future charges, including potential warranty losses or other unexpected liabilities, or a significant disruption of our operations;

 

an increased cost of surety bonds affecting margins on work and the potential for our surety providers to refuse bonding or require additional collateral at their discretion;

 

fluctuations in operating activity due to downturns in levels of construction or the housing market, seasonality and differing regional economic conditions;

 

our ability to successfully manage projects;

 

inaccurate estimates used when entering into fixed-priced contracts;

 

the cost and availability of qualified labor and the ability to maintain positive labor relations;

 

our ability to pass along increases in the cost of commodities used in our business, in particular, copper, aluminum, steel, fuel and certain plastics;

 

a change in the mix of our customers, contracts or business;

 

increases in bad debt expense and days sales outstanding due to liquidity problems faced by our customers;

 

the recognition of potential goodwill, long-lived assets and other investment impairments;

 

potential supply chain disruptions due to credit or liquidity problems faced by our suppliers;

 

accidents resulting from the physical hazards associated with our work and the potential for accidents;

 

the possibility that our current insurance coverage may not be adequate or that we may not be able to obtain a policy at acceptable rates;

 

the possibility that our internal controls over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur;

 

disagreements with taxing authorities with regard to tax positions we have adopted;

 

the recognition of tax benefits related to uncertain tax positions;

 

the effect of litigation, claims and contingencies, including warranty losses, damages or other latent defect claims in excess of our existing reserves and accruals;

 

growth in latent defect litigation in states where we provide residential electrical work for home builders not otherwise covered by insurance;

 

interruptions to our information systems and cyber security or data breaches;

 

liabilities under laws and regulations protecting the environment; and

loss of key personnel and effective transition of new management.

You should understand that the foregoing, as well as other risk factors discussed in this document and those listed in Part I, Item 1A of our Annual Report onForm10-K for the fiscal year ended September 30, 2017,2018, 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.

Item 1.Financial Statements

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Information)

 

  December 31,
2017
 September 30,
2017
   December 31,
2018
 September 30,
2018
 
  (Unaudited)     (Unaudited)   
ASSETS            

CURRENT ASSETS:

      

Cash and cash equivalents

  $31,888  $28,290   $20,578  $26,247 

Accounts receivable:

      

Trade, net of allowance of $546 and $650, respectively

 �� 127,232  142,946 

Trade, net of allowance of $870 and $868, respectively

   161,290  151,578 

Retainage

   19,792  21,360    22,568  24,312 

Inventories

   17,006  16,923    23,881  20,966 

Costs and estimated earnings in excess of billings

   13,912  13,438    24,431  31,446 

Prepaid expenses and other current assets

   10,752  8,795    13,035  8,144 
  

 

  

 

   

 

  

 

 

Total current assets

   220,582  231,752    265,783  262,693 
  

 

  

 

   

 

  

 

 

Property and equipment, net

   24,764  24,643    26,126  25,364 

Goodwill

   46,738  46,693    50,702  50,702 

Intangible assets, net

   30,452  31,413    29,545  30,590 

Deferred tax assets

   52,113  86,211    45,019  46,580 

Othernon-current assets

   6,017  3,782    5,962  6,065 
  

 

  

 

   

 

  

 

 

Total assets

  $380,666  $424,494   $423,137  $421,994 
  

 

  

 

   

 

  

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY            

CURRENT LIABILITIES:

      

Accounts payable and accrued expenses

   108,249  120,710    125,877  130,591 

Billings in excess of costs and estimated earnings

   27,411  29,918    35,304  33,826 
  

 

  

 

   

 

  

 

 

Total current liabilities

   135,660  150,628    161,181  164,417 
  

 

  

 

   

 

  

 

 

Long-term debt

   29,452  29,434    29,597  29,564 

Othernon-current liabilities

   4,718  4,457    3,797  4,374 
  

 

  

 

   

 

  

 

 

Total liabilities

   169,830  184,519    194,575  198,355 
  

 

  

 

   

 

  

 

 

Noncontrolling interest

   3,327  3,271    3,331  3,232 

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 issued and 21,338,745 and 21,336,975 outstanding, respectively

   220  220 

Treasury stock, at cost, 710,784 and 712,554 shares, respectively

   (6,881 (6,898

Common stock, $0.01 par value, 100,000,000 shares authorized; 22,049,529 issued and 21,286,103 and 21,205,536 outstanding, respectively

   220  220 

Treasury stock, at cost, 763,426 and 843,993 shares, respectively

   (8,896 (8,937

Additionalpaid-in capital

   197,312  196,955    194,607  196,810 

Retained earnings

   16,858  46,427    39,300  32,314 
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   207,509  236,704    225,231  220,407 
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $380,666  $424,494   $423,137  $421,994 
  

 

  

 

   

 

  

 

 

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 December 31,   Three Months Ended December 31, 
          2017                   2016           2018 2017 

Revenues

  $198,300   $192,178   $243,842  $198,300 

Cost of services

   165,236    156,996    202,241  165,236 
  

 

   

 

   

 

  

 

 

Gross profit

   33,064    35,182    41,601  33,064 

Selling, general and administrative expenses

   30,089    28,194    32,086  30,089 

Contingent consideration

   34   —   

Gain on sale of assets

   (14   (7   (3 (14
  

 

   

 

   

 

  

 

 

Operating income

   2,989    6,995    9,484  2,989 
  

 

   

 

   

 

  

 

 

Interest and other (income) expense:

       

Interest expense

   441    446    547  441 

Other income, net

   (98   (4

Other (income) expense, net

   47  (98
  

 

   

 

   

 

  

 

 

Income from operations before income taxes

   2,646    6,553    8,890  2,646 

Provision for income taxes

   32,159    2,629    1,907  32,159 
  

 

   

 

   

 

  

 

 

Net income (loss)

   (29,513   3,924    6,983  (29,513
  

 

   

 

   

 

  

 

 

Net income attributable to noncontrolling interest

   (56   (52   (99 (56
  

 

   

 

   

 

  

 

 

Comprehensive income (loss) attributable to IES Holdings, Inc.

  $(29,569  $3,872   $6,884  $(29,569
  

 

   

 

   

 

  

 

 

Earnings (loss) per share attributable to IES Holdings, Inc.:

       

Basic

  $(1.39  $0.18   $0.32  $(1.39

Diluted

  $(1.39  $0.18   $0.32  $(1.39

Shares used in the computation of earnings per share:

    

Shares used in the computation of earnings (loss) per share:

   

Basic

   21,196,854    21,286,090    21,233,132  21,196,854 

Diluted

   21,196,854    21,557,838    21,261,065  21,196,854 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

(In Thousands, Except Share Information)

   Common Stock   Treasury Stock  APIC  Retained
Earnings
  Total
Stockholders’
Equity
 
   Shares   Amount   Shares  Amount 

BALANCE, September 30, 2018

   22,049,529   $220    843,993  $(8,937 $196,810  $32,314  $220,407 

Issuances under compensation plans

   —      —      (212,688  2,252   (2,252  —     —   

Cumulative effect adjustment from adoption of ASU2014-09

   —      —      —     —     —     102   102 

Acquisition of treasury stock

   —      —      132,121   (2,211  —     —     (2,211

Non-cash compensation

   —      —      —     —     49   —     49 

Net income attributable to IES Holdings, Inc.

   —      —      —     —     —     6,884   6,884 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

BALANCE, December 31, 2018

   22,049,529   $220    763,426  $(8,896 $194,607  $39,300  $225,231 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   Common Stock   Treasury Stock  APIC  Retained
Earnings
  Total
Stockholders’
Equity
 
   Shares   Amount   Shares  Amount 

BALANCE, September 30, 2017

   22,049,529   $220    (712,554 $(6,898 $196,955  $46,427  $236,704 

Grants under compensation plans

   —      —      270   3   (3  —     —   

Options exercised

   —      —      1,500   15   (4  —     11 

Non-cash compensation

   —      —      —     —     364   —     364 

Net loss attributable to IES Holdings, Inc.

   —      —      —     —     —     (29,569  (29,569
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

BALANCE, December 31, 2017

   22,049,529   $220    (710,784 $(6,881 $197,312  $16,858  $207,509 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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)

 

  Three Months Ended December 31,   Three Months Ended
December 31,
 
          2017                 2016           2018 2017 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income (loss)

  $(29,513 $3,924   $6,983  $(29,513

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Bad debt expense

   (3 (12   38  (3

Deferred financing cost amortization

   70  85    77  70 

Depreciation and amortization

   2,208  2,059    2,372  2,208 

Gain on sale of assets

   (14 (7   (3 (14

Non-cash compensation expense

   49  364 

Deferred income taxes

   32,159  2,137    1,907  32,159 

Non-cash compensation

   364  510 

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:

   

Changes in operating assets and liabilities:

   

Accounts receivable

   15,717  3,208    (9,750 15,717 

Inventories

   (80 (978   (2,915 (80

Costs and estimated earnings in excess of billings

   (474 (3,601   7,015  (474

Prepaid expenses and other current assets

   (389 (6,035   (3,012 (389

Othernon-current assets

   (69 323    (1,449 (69

Accounts payable and accrued expenses

   (12,727 (7,988   (3,552 (12,727

Billings in excess of costs and estimated earnings

   (2,506 758    1,478  (2,506

Othernon-current liabilities

   242  (18   (603 242 
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) operating activities

   4,985  (5,635   (1,365 4,985 
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchases of property and equipment

   (1,203 (1,796   (2,088 (1,203

Proceeds from sale of property and equipment

   17  8 

Cash paid for acquisitions

   (175  —   

Proceeds from sale of assets

   3  17 

Cash paid in conjunction with business combinations

   —    (175
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (1,361 (1,788   (2,085 (1,361
  

 

  

 

   

 

  

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Borrowings of debt

   24  13    93  24 

Repayments of debt

   (61 (37   (101 (61

Options exercised

   11  75 

Issuance of shares

   —    11 

Purchase of treasury stock

   —    (14   (2,211  —   
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) financing activities

   (26 37 

Net cash used in financing activities

   (2,219 (26
  

 

  

 

   

 

  

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   3,598  (7,386   (5,669 3,598 

CASH, CASH EQUIVALENTS and RESTRICTED CASH, beginning of period

   28,290  33,221    26,247  28,290 
  

 

  

 

   

 

  

 

 

CASH, CASH EQUIVALENTS and RESTRICTED CASH, end of period

  $31,888  $25,835   $20,578  $31,888 
  

 

  

 

   

 

  

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

      

Cash paid for interest

  $392  $388   $524  $392 

Cash paid for income taxes

  $15  $709 

Cash paid for income taxes (net)

  $92  $15 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

1. BUSINESS AND ACCOUNTING POLICIES

Description of the Business

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 services:

 

  

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.

 

  

Communications – Nationwide provider of technology infrastructure products and services to large corporations and independent businesses.

 

  

Infrastructure Solutions– Provider of electro-mechanical solutions for industrial operations.operations, including apparatus repair and custom-engineered products.

 

  

Residential – Regional provider of electrical installation services for single-family housing and multi-family apartment complexes.

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 Commercial & Industrial, Communications 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. 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, its wholly-owned subsidiaries, and entities that we control due to ownership of a majority of voting interest 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 onForm10-K for the fiscal year ended September 30, 2017.2018. 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.

Noncontrolling Interest

In connection with our acquisitions of STR Mechanical, LLC (“STR Mechanical”) in fiscal 2016 and NEXT Electric, LLC (“NEXT Electric”) in fiscal 2017, we acquired an 80 percent interest in each of the entities, with the remaining 20 percent interest in each such entity being retained by the respective third party seller. The interests retained by those third party sellers are identified on our Condensed Consolidated Balance Sheets as noncontrolling interest, classified outside of permanent equity. Under the terms of each entity’s operating agreement, after five years from the date of the acquisition, we may elect to purchase, or the third party seller may

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

require us to purchase, part or all of the remaining 20 percent interest in the applicable entity. The purchase price is variable, based on

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

a multiple of earnings as defined in the operating agreements. Therefore, this noncontrolling interest is carried at the greater of the balance determined under ASC 810 and the redemption amounts assuming the noncontrolling interests were redeemable at the balance sheet date. If all of these interests had been redeemable at December 31, 2017,2018, the redemption amount would have been $2,368. See Note 13, “Business Combinations” for further discussion.$2,126.

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, realizability of deferred tax assets, unrecognized tax benefits and self-insured claims liabilities and related reserves.

Income Taxes

In December 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted, which, among other changes, reduced the federal statutory corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of this change, the Company’s statutory tax rate for fiscal 2018 will bewas a blended rate of 24.53% and will decreasedecreased to 21% thereafter.in 2019. For the three months ended December 31, 2017, our effective tax rate differed from the statutory tax rate as a result of a preliminary charge of $31,306 tore-measure our deferred tax assets and liabilities to reflect the estimated impact of the new statutory tax rate. This preliminary charge is subject to completion of our analysis ofThe company completed its accounting for the impactincome tax effects of the Act including as it relates to future deductions for executive compensation expense, as well asand fully recorded the effect of changesimpact in the utilization of net deferred tax assets that reverse in fiscal 2018 as compared to subsequent years.year ended September 30, 2018.

Accounting Standards Not Yet Adopted

In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASUNo. 2014-09, Revenue from Contracts with Customers, 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, and we currently plan to use the modified retrospective basis on the adoption date. We are continuing to evaluate the impact of the adoption of this standard on our Condensed Consolidated Financial Statements. In particular, we continue to analyze areas including contract termination provisions, customer furnished materials, 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 are also continuing to assess the necessary changes in processes and controls to meet the disclosure requirements of the new standard.

In February 2016, the FASB issued ASUAccounting Standard UpdateNo. 2016-02,Leases (“ASU2016-02”). UnderASU2016-02, 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 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 Condensed Consolidated Financial Statements.

In June 2018, the FASB issued Accounting Standard UpdateNo. 2018-07, Compensation—Stock Compensation(“ASU 2018-07”), to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments for employees, with certain exceptions. Under the new guidance, the cost for nonemployee awards may be lower and less volatile than under current US GAAP because the measurement generally will occur earlier and will be fixed at the grant date. This update is effective for annual financial reporting periods, and interim periods within those annual periods, beginning after December 15, 2018, although early adoption is permitted.

In August 2018, the FASB issued Accounting Standard UpdateNo. 2018-13, Fair Value Measurement Disclosure Framework(“ASU 2018-13”), to modify certain disclosure requirements for fair value measurements. Under the new guidance, registrants will need to disclose weighted average information for significant unobservable inputs for all Level 3 fair value measurements. The guidance does not specify how entities should calculate the weighted average, but requires them to explain their calculation. The new guidance also requires disclosing the changes in unrealized gain and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period. This guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, although early adoption is permitted for either the entire standard or only the provisions that eliminate or modify the requirements.

We do not expect ASU2018-07, orASU 2018-13 to have a material effect on our Condensed Consolidated Financial Statements.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

Accounting Standards Recently Adopted

In May 2014, the FASB issued Accounting Standard UpdateNo. 2014-09, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes prior industry-specific guidance. The new standard requires companies to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the company expects to be entitled. The new model requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time for each obligation. The new standard also expands disclosure requirements regarding revenue and cash flows arising from contracts with customers. The impact on our results for the quarter ended December 31, 2018, of applying the new standard to our contracts was not material.

We adopted the new standard on October 1, 2018 (“Adoption Date”), using the modified retrospective method, which provides for a cumulative effect adjustment to beginning fiscal 2019 retained earnings for uncompleted contracts impacted by the adoption. We recorded an adjustment of $102 to beginning fiscal 2019 retained earnings as a result of adoption of the new standard. The changes to the method and/or timing of our revenue recognition associated with the new standard primarily affect revenue recognition within our Infrastructure Solutions segment for which as of October 1, 2018 certain of our contracts do not qualify for revenue recognition over time. In addition, we have now combined in process contracts that historically had been accounted for as separate contracts in cases where those contracts meet the criteria for combination of contracts under the new standard, and we now capitalize certain commissions which were previously expensed when incurred.

Consistent with our adoption method, the comparative prior period information for the quarter ended December 31, 2017 continues to be reported using the previous accounting standards in effect for the period presented. We have elected to utilize the modified retrospective transition practical expedient that allows us to evaluate the impact of contract modifications as of the Adoption Date rather than evaluating the impact of the modifications at the time they occurred prior to the Adoption Date.

See Note 3, “Revenue Recognition” for additional discussion of our revenue recognition accounting policies and expanded disclosures.

In January 2016, the FASB issued Accounting Standard UpdateNo. 2016-01, Financial Instruments. This standard is associated with the recognition and measurement of financial assets and liabilities, with further clarifications made in February 2018 with the issuance of Accounting Standard UpdateNo. 2018-03. The amended guidance requires certain equity investments that are not consolidated and not accounted for under the equity method to be measured at fair value with changes in fair value recognized in net income rather than as a component of accumulated other comprehensive income (loss). It further states that an entity may choose to measure equity investments that do not have readily determinable fair values using a quantitative approach, or measurement alternative, which is equal to its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Our adoption of this standard on October 1, 2018 had no impact our condensed consolidated financial statements.

In January 2017, the FASB issued ASUAccounting Standard UpdateNo. 2017-01, Business Combinations (“ASU2017-01”).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 newOur adoption of this standard is effective for interim and annual reporting periods beginning after December 15, 2017. Theon October 1, 2018 using the prospective transition method will be required for this new guidance.had no impact our condensed consolidated financial statements.

In May 2017, the FASB issued ASUAccounting Standard UpdateNo. 2017-09, Compensation—Stock Compensation, (“ASU2017-09”), to reduce the diversity in practice and the cost and complexity when changing the terms or conditions of a share-based payment award. This update is effective for interim and annual financial reporting periods beginning after December 15, 2017, although earlyOur adoption is permitted. The

of this standard on October 1, 2018 using the prospective transition method will be required for this new guidance.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

We do not expect ASU2017-01 or ASU2017-09 to have a material effect onhad no impact our Condensed Consolidated Financial Statements.condensed consolidated financial statements.

2. CONTROLLING SHAREHOLDER

At December 31, 2017, Tontine Capital Partners, L.P., together withAssociates, L.L.C. and its affiliates (collectively, “Tontine”), wasis the Company’s controlling shareholder, owning approximately 58%57.5 percent of the Company’s outstanding common stock according to a Form 4Schedule 13D/A filed with the SEC by Tontine on October 3, 2017.January 11, 2019. 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, the Company has filed a shelf registration statement to register all of the shares of IES common stock owned by Tontine at the time of registration. As long as the shelf registration statement remains effective and the Company remains eligible to use FormS-3,it, Tontine has the ability to resell any or all of its registered 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.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

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 November 8, 2016, the Company implemented a new tax benefit protection plan (the “NOL Rights Plan”). 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 control 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 control 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.

Jeffrey L. Gendell was appointed as a member of the Board 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 as Interim Director of Operations of the Company sincefrom November 2017 to January 2019, and who previously served asnon-executive Vice Chairman of the Board from November 2016 to November 2017 and asnon-executive Chairman of the Board from January 2015 to November 2016. David B. Gendell was an employee of Tontine from 2004 until December 31, 2017.

The Company is party to a sublease agreement with Tontine Associates, LLC, an affiliate of Tontine, for corporate office space in Greenwich, Connecticut. The lease was renewed 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.

On December 6, 2018, the Company entered into a Board Observer Letter Agreement with Tontine Associates, LLC in order to assist Tontine in managing its investment in the Company. Subject to the terms and conditions set forth in the Agreement, the Company granted Tontine the right, at any time that Tontine holds at least 20% of the outstanding common stock of the Company, to appoint a representative to serve as an observer to the Board (the “Board Observer”). The Board Observer, who must be reasonably acceptable to those members of the Board who are not affiliates of Tontine, shall have no voting rights or other decision making authority. Subject to the terms and conditions set forth in the Agreement, so long as Tontine has the right to appoint a Board Observer, the Board Observer will have the right to attend and participate in meetings of the Board and the committees thereof, subject to confidentiality requirements, and to receive reimbursement for reasonableout-of-pocket expenses incurred in his or her capacity as a Board Observer and such rights to coverage under the Company’s directors’ and officers’ liability insurance policy as are available to the Company’s directors.

3. REVENUE RECOGNITION

Contracts

Our revenue is derived from contracts with customers, and we determine the appropriate accounting treatment for each contract at contract inception. Our contracts primarily relate to electrical and mechanical contracting services, technology infrastructure products and services, and electro-mechanical solutions for industrial operations. Revenue is earned based upon an agreed fixed price or actual costs incurred plus an agreed upon percentage.

We account for a contract when: (i) it has approval and commitment from both parties, (ii) the rights of the parties are identified, (iii) payment terms are identified, (iv) the contract has commercial substance, and (v) collectability of consideration is probable. We consider the start of a project to be when the above criteria have been met and we have written authorization from the customer to proceed.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

We recognize revenue over time for the majority of the services we perform as (i) control continuously transfers to the customer as work progresses at a project location controlled by the customer and (ii) we have the right to bill the customer as costs are incurred. Within our Infrastructure Solutions segment, we often perform work inside our own facilities, where control does not continuously transfer to the customer as work progresses. In such cases, we evaluate whether we have the right to bill the customer as costs are incurred. Such assessment involves an evaluation of contractual termination clauses. Where we have a contractual right to payment for work performed to date, we recognize revenue over time. If we do not have such a right, we recognize revenue upon completion of the contract, when control of the work transfers to the customer.

For fixed price arrangements, we use the percentage of completion method of accounting under which revenue recognized is measured principally by the costs incurred and accrued to date for each contract as a percentage of the estimated total cost for each contract at completion. Contract costs include all direct material, labor and indirect costs related to contract performance. Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income and the effects of these revisions are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments and judgments.

Variable Consideration

The transaction price for our contracts may include variable consideration, which includes increases to transaction price for approved and unapproved change orders, claims and incentives, and reductions to transaction price for liquidated damages. Change orders, claims and incentives are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation. We estimate variable consideration for a performance obligation at the probability weighted value we expect to receive (or the most probable amount we expect to incur in the case of liquidated damages, if any), utilizing estimation methods that best predict the amount of consideration to which we will be entitled (or will be incurred in the case of liquidated damages, if any). We include variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulativecatch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in our favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.

Costs of Obtaining a Contract

In certain of our operations, we incur commission costs related to entering into a contract that we only incurred because of that contract. When this occurs, we capitalize that cost and amortize it over the expected term of the contract. At December 31, 2018, we had capitalized commission costs of $119.

We generally do not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. On rare occasions, when significantpre-contract costs are incurred, they will be capitalized and amortized on a percentage of completion basis over the life of the contract.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by activity and contract type, as these categories reflect how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Our consolidated 2018 revenue was derived from the following service activities. See details in the following tables:

   Three Months Ended
December 31,
 
   2018   2017 

Commercial & Industrial

    

Commercial

  $43,282   $29,141 

Industrial

   29,301    23,861 
  

 

 

   

 

 

 

Total

   72,583    53,002 

Communications

   69,325    54,459 

Infrastructure Solutions

    

Industrial Services

   12,223    11,053 

Custom Power Solutions

   17,256    10,632 
  

 

 

   

 

 

 

Total

   29,479    21,685 

Residential

    

Single-family

   50,476    44,614 

Multi-family

   14,517    17,218 

Other

   7,462    7,322 
  

 

 

   

 

 

 

Total

   72,455    69,154 
  

 

 

   

 

 

 

Total Revenue

  $243,842   $198,300 
  

 

 

   

 

 

 

   Three Months Ended December 31, 2018 
   Commercial &
Industrial
   Communications   Infrastructure
Solutions
   Residential   Total 

Fixed-price

  $65,830   $48,829   $27,511   $72,455   $214,625 

Time-and-material

   6,753    20,496    1,968    —      29,217 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $72,583   $69,325   $29,479   $72,455   $243,842 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Three Months Ended December 31, 2017 
   Commercial &
Industrial
   Communications   Infrastructure
Solutions
   Residential   Total 

Fixed-price

  $48,920   $44,156   $19,673   $69,154   $181,903 

Time-and-material

   4,082    10,303    2,012    —      16,397 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $53,002   $54,459   $21,685   $69,154   $198,300 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accounts Receivable

Accounts receivable include amounts which we have billed or have an unconditional right to bill our customers. As of December 31, 2018, Accounts receivable included $9,973 of unbilled receivables for which we have an unconditional right to bill.

Contract Assets and Liabilities

Project contracts typically provide for a schedule of billings on percentage of completion of specific tasks inherent in the fulfillment of our performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current asset in our balance sheet under the caption “Costs and estimated earnings in excess of billings”. To the extent amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized are reflected as a current liability in our balance sheet under the caption “Billings in excess of costs and estimated earnings”.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

The net asset (liability) position for contracts in process consisted of the following:

   December 31,
2018
   September 30,
2018
 

Costs and estimated earnings on uncompleted contracts

  $554,909   $539,226 

Less: Billings to date and unbilled accounts receivable

   (565,782   (541,606
  

 

 

   

 

 

 
  $(10,873  $(2,380
  

 

 

   

 

 

 

The net asset (liability) position for contracts in process included in the accompanying consolidated balance sheets was as follows:

   December 31,
2018
   September 30,
2018
 

Costs and estimated earnings in excess of billings

  $24,431   $31,446 

Billings in excess of costs and estimated earnings

   (35,304   (33,826
  

 

 

   

 

 

 
  $(10,873  $(2,380
  

 

 

   

 

 

 

In the quarters ended December 31, 2018 and 2017, we recognized revenue of $20,167 and $16,555 related to our contract liabilities at October 1, 2018 and 2017, respectively.

We did not have any impairment losses recognized on our receivables or contract assets for the quarters ended December 31, 2018 or 2017.

Remaining Performance Obligations

Remaining performance obligations represent the unrecognized revenue value of our contract commitments. New awards represent the total expected revenue value of new contract commitments undertaken during a given period, as well as additions to the scope of existing contract commitments. Our new performance obligations vary significantly each reporting period based on the timing of our major new contract commitments. At December 31, 2018, we had remaining performance obligations of $406,917. The Company expects to recognize revenue on approximately $386,990 of the remaining performance obligations over the next 12 months, with the remaining recognized thereafter.

In the first quarter of fiscal 2019, net revenue recognized from our performance obligations satisfied in previous periods was not material.

4. DEBT

At December 31, 2017,2018, and September 30, 2017,2018, our long-term debt of $29,452$29,597 and $29,434,$29,564, respectively, primarily related to amounts drawn on our revolving credit facility. Our weighted-average annual interest rate on these borrowings was 3.34%4.52% at December 31, 2017,2018, and 3.04%3.86% at September 30, 2017.2018. At December 31, 2017,2018, we also had $6,408$6,809 in outstanding letters of credit and total availability of $43,199$57,920 under this facility without violating our financial covenants.

There have been no changesPursuant to our Second Amended and Restated Credit and Security Agreement (as amended, the “Credit Agreement”), the Company is subject to the financial or other covenants disclosed in Item 7 of our Annual Report onForm10-K for the year ended September 30, 2017. 2018.

The Company was in compliance with the financial covenants as of December 31, 2017.2018.

At December 31, 2017,2018, the carrying value of amounts outstanding on our 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)

 

4.5. PER SHARE INFORMATION

The following table reconcilestables reconcile the components of basic and diluted earnings per share for the three months ended December 31, 2017,2018, and 2016:2017:

 

  Three Months Ended December 31,   Three Months Ended December 31, 
  2017   2016   2018   2017 

Numerator:

        

Net income (loss) attributable to common shareholders of IES Holdings, Inc.

  $(29,569  $3,841 

Net income attributable to restricted shareholders of IES Holdings, Inc.

   —      31 
  

 

   

 

 

Net income (loss) attributable to IES Holdings, Inc.

  $(29,569  $3,872   $6,884   $(29,569
  

 

   

 

   

 

   

 

 

Denominator:

        

Weighted average common shares outstanding — basic

   21,196,854    21,286,090    21,233,132    21,196,854 

Effect of dilutive stock options andnon-vested restricted stock

   —      271,748    27,933    —   
  

 

   

 

   

 

   

 

 

Weighted average common and common equivalent shares outstanding — diluted

   21,196,854    21,557,838    21,261,065    21,196,854 
  

 

   

 

   

 

   

 

 

Earnings (loss) per share attributable to IES Holdings, Inc.:

        

Basic

  $(1.39  $0.18   $0.32   $(1.39

Diluted

  $(1.39  $0.18   $0.32   $(1.39

When an entity has a net loss, it is prohibited from including potential common shares in the computation of diluted per share amounts. Accordingly, we have utilized basic shares outstanding to calculate both basic and diluted loss per share for the three months ended December 31, 2017. The number of potential anti-dilutive shares excluded from the calculation was 255,306 shares. For the three months ended December 31, 2016,2018, 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.

5.6. OPERATING SEGMENTS

We manage and measure performance of our business in four distinct operating segments: Commercial & Industrial, Communications, Infrastructure Solutions and Residential. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purpose of allocating resources and assessing performance. The Company’s CODM is its President.

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 months ended December 31, 2017,2018, and 20162017 is as follows:

 

  Three Months Ended December 31, 2017   Three Months Ended December 31, 2018 
  Commercial &
Industrial
 Communications Infrastructure
Solutions
 Residential   Corporate Total   Commercial &
Industrial
 Communications   Infrastructure
Solutions
   Residential   Corporate Total 

Revenues

  $53,002  $54,459  $21,685  $69,154   $—    $198,300   $72,583  $69,325   $29,479   $72,455   $—    $243,842 

Cost of services

   48,159  45,339  17,000  54,738    —    165,236    63,908  57,359    23,552    57,422    —    202,241 
  

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Gross profit

   4,843  9,120  4,685  14,416    —    33,064    8,675  11,966    5,927    15,033    —    41,601 

Selling, general and administrative

   5,795  6,084  4,557  10,366    3,287  30,089    6,716  6,934    4,481    11,137    2,818  32,086 

Gain on sale of assets

   (12 (1 (1  —      —    (14

Contingent consideration

   —     —      34    —      —    34 

Loss (gain) on sale of assets

   (3  —      —      —      —    (3
  

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Income (loss) from operations

  $(940 $3,037  $129  $4,050   $(3,287 $2,989 

Operating income (loss)

  $1,962  $5,032   $1,412   $3,896   $(2,818 $9,484 
  

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Other data:

                  

Depreciation and amortization expense

  $557  $216  $1,243  $141   $51  $2,208   $626  $415   $1,094   $209   $28  $2,372 

Capital expenditures

  $510  $75  $140  $478   $—    $1,203   $852  $500   $187   $447   $102  $2,088 

Total assets

  $63,085  $66,522  $101,026  $50,342   $99,691  $380,666   $78,924  $88,534   $114,475   $55,352   $85,852  $423,137 

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

  Three Months Ended December 31, 2016   Three Months Ended December 31, 2017 
  Commercial &
Industrial
   Communications   Infrastructure
Solutions
 Residential   Corporate Total   Commercial &
Industrial
 Communications Infrastructure
Solutions
 Residential   Corporate Total 

Revenues

  $53,956   $53,303   $18,477  $66,442   $—    $192,178   $53,002  $54,459  $21,685  $69,154   $—    $198,300 

Cost of services

   47,850    45,332    13,102  50,712    —    156,996    48,159  45,339  17,000  54,738    —    165,236 
  

 

   

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

 

Gross profit

   6,106    7,971    5,375  15,730    —    35,182    4,843  9,120  4,685  14,416    —    33,064 

Selling, general and administrative

   4,324    5,714    4,100  10,553    3,503  28,194    5,795  6,084  4,557  10,366    3,287  30,089 

Loss on sale of assets

   1    —      (8  —      —    (7

Loss (gain) on sale of assets

   (12 (1 (1  —      —    (14
  

 

   

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

 

Income (loss) from operations

  $1,781   $2,257   $1,283  $5,177   $(3,503 $6,995 

Operating income (loss)

  $(940 $3,037  $129  $4,050   $(3,287 $2,989 
  

 

   

 

   

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

 

Other data:

                  

Depreciation and amortization expense

  $348   $174   $1,323  $150   $64  $2,059   $557  $216  $1,243  $141   $51  $2,208 

Capital expenditures

  $209   $1,079   $81  $239   $188  $1,796   $510  $75  $140  $478   $0  $1,203 

Total assets

  $53,922   $69,884   $89,110  $49,307   $129,769  $391,992   $63,085  $66,522  $101,026  $50,342   $99,691  $380,666 

6.7. STOCKHOLDERS’ EQUITY

Equity Incentive Plan

The Company’s 2006 Equity Incentive Plan, as amended and restated (the “Equity Incentive 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 Equity Incentive Plan, of which approximately 1,059,9211,299,815 shares were available for issuance at December 31, 2017.2018.

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 aRule10b5-1 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. We repurchased 46,133 shares of our common stock during the three months ended December 31, 2018, in open market transactions at an average price of $16.08 per share. We made no purchases of stock pursuant to this plan during the three months ended December 31, 2017.

Treasury Stock

During the three months ended December 31, 2018, we issued 212,688 shares of common stock from treasury stock to employees and repurchased 85,988 shares of common stock from our employees to satisfy statutory tax withholding requirements upon the vesting of certain performance phantom stock units under the Equity Incentive Plan. We also repurchased 46,133 shares of common stock on the open market pursuant to our stock repurchase program.

During the three months ended December 31, 2017, we issued 270 unrestricted shares of common stock from treasury stock to members of our Board of Directors as part of their overall compensation and 1,500 unrestricted shares of common stock to satisfy the exercise of outstanding options for employees and directors.

During the three months ended December 31, 2016, we repurchased 683 shares of common stock from our employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock issued under the Equity Incentive Plan. During the three months ended December 31, 2016, we issued 667 unrestricted shares of common stock from treasury stock to members of our Board of Directors as part of their overall compensation and 13,000 unrestricted shares to satisfy the exercise of outstanding options for employees.

Restricted Stock

During the three months ended December 31, 2017,2018, and 2016,2017, we recognized $114zero and $137,$114, respectively, in compensation expense

related to our restricted stock awards. At December 31, 2017,2018, the unamortized compensation cost related to outstanding unvested restricted stock was $142.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

Performance Based Phantom Cash Units

Performance based phantom cash units (“PPCUs”) are a contractual right to a cash payment of $20 per PPCU. The PPCUs will generally become vested, if at all, upon achievement of certain specified performance objectives. During the three months ended December 31, 2017, and 2016, we recognized compensation expense of zero and $135, respectively, related to these units.zero.

Phantom Stock Units

PhantomDirector phantom stock units (“Director PSUs”) are primarily granted to the members of the Board of Directors as part of their overall compensation. These Director 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. During the three months ended December 31, 2017,2018, and 2016,2017, we recognized $36$42 and $44,$36, respectively, in compensation expense related to these grants.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

Performance Based Phantom Stock Units

A performance based phantom stock unit (a “PPSU”) is a contractual right to receive one share of the Company’s common stock upon the achievement of certain specified performance objectives and continued performance of services. At December 31, 2017, the Company had outstanding an aggregate of 399,027 three-year 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 and continued performance of services, throughmid-December 2018, each of which measure as of December 31, 2017, is deemed probable. During the three months ended December 31, 2017, and 2016, we recognized compensation expense2018, the Company’s aggregate of $203 and $303, respectively, relatedthree-year PPSUs vested, resulting in the issuance of common stock to these grants.

Stock Options

As of December 31, 2017, there wereemployees, leaving no outstanding unvested stock options or related unamortized compensation cost. We did not recognize any compensation expense related to our stock option awards during the three months ended December 31, 2017.

PPSUs at quarter end. During the three months ended December 31, 2016,2018, and December 31, 2017, we recognized compensation expense of $21zero and $203, respectively, related to our stock option awards.these grants.

7.8. 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,At December 31, 2018 and September 30, 2018, we havecarried a cost method investment in EnerTech Capital Partners II L.P. (“EnerTech”). We estimate the fair value ofat $558, which is equal to our investment in EnerTech (Level 3) using cash flow projections and market multiples of the underlyingnon-public companies.cost less impairment.

Investment in EnerTech

The following table presents the reconciliation of the carrying value and unrealized gains to the fair value of the investment in EnerTech as of December 31, 2017, and September 30, 2017:

   December 31,
2017
   September 30,
2017
 

Carrying value

  $558   $558 

Unrealized gains

   171    171 
  

 

 

   

 

 

 

Fair value

  $729   $729 
  

 

 

   

 

 

 

At each reporting date, the Company performs an evaluation of impairment for securities to determine if any unrealized losses are other-than temporary. Based on the results of this evaluation, we believe the unrealized gain at December 31, 2017, or September 30, 2017 indicated our investment was not impaired.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

8.9. EMPLOYEE BENEFIT PLANS

401(k) Plan

The Company offersIn November 1998, we established the IES Holdings, Inc. 401(k) Retirement Savings Plan. All full-time IES employees the opportunityare eligible to participate on the first day of the month subsequent to completing sixty days of service and attaining agetwenty-one. Participants become vested in its 401(k)our matching contributions following three years of service. We also maintain several subsidiary retirement savings plans. During the three months ended December 31, 2017,2018 and 2016,2017, we recognized $429$423 and $144,$429, 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 $775$755 recorded as of December 31, 2017,2018 and $815 as of September 30, 2017,2018, related to such plans.

9.10. 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 December 31, 2017,2018, 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 contingent consideration liabilities related to certain of our acquisitions.

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017, and September 30, 2017, are summarized in the following tables by the type of inputs applicable to the fair value measurements:

   December 31, 2017 
   Total Fair Value   Quoted Prices
(Level 1)
   Significant
Unobservable
Inputs (Level 3)
 

Executive savings plan assets

  $670   $670   $—   

Executive savings plan liabilities

   (557   (557   —   

Contingent consideration

   (786   —      (786
  

 

 

   

 

 

   

 

 

 

Total

  $(673  $113   $(786
  

 

 

   

 

 

   

 

 

 

   September 30, 2017 
   Total Fair Value   Quoted Prices
(Level 1)
   Significant
Unobservable
Inputs (Level 3)
 

Executive savings plan assets

  $641   $641   $—   

Executive savings plan liabilities

   (529   (529   —   

Contingent consideration

   (786   —      (786
  

 

 

   

 

 

   

 

 

 

Total

  $(674  $112   $(786
  

 

 

   

 

 

   

 

 

 

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 December 31, 2018, and September 30, 2018, are summarized in the following tables by the type of inputs applicable to the fair value measurements:

 

   December 31, 2018 
   Total Fair Value   Quoted Prices
(Level 1)
   Significant
Unobservable
Inputs (Level 3)
 

Executive savings plan assets

  $654   $654   $—   

Executive savings plan liabilities

   (540   (540   —   

Contingent consideration

   (714   —      (714
  

 

 

   

 

 

   

 

 

 

Total

  $(600  $114   $(714
  

 

 

   

 

 

   

 

 

 
   September 30, 2018 
   Total Fair Value   Quoted Prices
(Level 1)
   Significant
Unobservable
Inputs (Level 3)
 

Executive savings plan assets

  $747   $747   $—   

Executive savings plan liabilities

   (631   (631   —   

Contingent consideration

   (680   —      (680
  

 

 

   

 

 

   

 

 

 

Total

  $(564  $116   $(680
  

 

 

   

 

 

   

 

 

 

In fiscal years 2016, 2017 and 2017,2018, we entered into contingent consideration arrangements related to certain acquisitions. Please see Note 13, “Business Combinations” for further discussion. At December 31, 2017,2018, we estimated the fair value of these contingent consideration liabilities at $786.$714. The table below presents a reconciliation of the fair value of these obligations, which used significant unobservable inputs (Level 3).

 

   Contingent
Consideration
Agreements
 

Fair Value at September 30, 2017

  $786 

Issuances

   —   

Settlements

   —   
  

 

 

 

Fair Value at December 31, 2017

  $786 
  

 

 

 
   Contingent
Consideration
Agreements
 

Fair value at September 30, 2018

  $(680

Net adjustments to fair value

   (34
  

 

 

 

Fair value at December 31, 2018

  $(714
  

 

 

 

10.11. INVENTORY

Inventories consist of the following components:

 

  December 31,
2017
   September 30,
2017
   December 31,
2018
   September 30,
2018
 

Raw materials

  $3,382   $4,104   $4,385   $4,453 

Work in process

   4,429    3,731    5,926    5,168 

Finished goods

   1,530    1,692    1,830    1,746 

Parts and supplies

   7,665    7,396    11,740    9,599 
  

 

   

 

   

 

   

 

 

Total inventories

  $17,006   $16,923   $23,881   $20,966 
  

 

   

 

   

 

   

 

 

11.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

12. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following is a progression of goodwill by segment for the three months ended December 31, 2017:2018:

 

   Commercial &
Industrial
   Infrastructure
Solutions
   Residential   Total 

Goodwill at September 30, 2017

  $7,176   $30,886   $8,631   $46,693 

Adjustments

   —      45    —      45 
  

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at December 31, 2017

  $7,176   $30,931   $8,631   $46,738 
  

 

 

   

 

 

   

 

 

   

 

 

 

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

   Commercial &
Industrial
   Communications   Infrastructure
Solutions
   Residential   Total 

Goodwill at September 30, 2018

  $6,976   $2,816   $30,931   $9,979   $50,702 

Adjustments

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill at December 31, 2018

  $6,976   $2,816   $30,931   $9,979   $50,702 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible Assets

Intangible assets consist of the following:

 

      December 31, 2017   Estimated
Useful Lives
(in Years)
   December 31, 2018 
  Estimated
Useful Lives
(in Years)
   Gross Carrying
Amount
   Accumulated
Amortization
   Net  Gross Carrying
Amount
   Accumulated
Amortization
   Net 

Trademarks/trade names

   5-20   $4,643   $531   $4,112    5 - 20   $5,084   $941   $4,143 

Technical library

   20    400    86    314    20    400    106    294 

Customer relationships

   6-15    31,229    5,461    25,768    6 - 15    33,539    8,665    24,874 

Backlog

   1    2,412    2,412    —      1    378    267    111 

Non-competition arrangements

   5    40    3    37 

Construction contracts

   1    2,399    2,141    258    1    2,184    2,098    86 
    

 

   

 

   

 

     

 

   

 

   

 

 

Total

    $41,083   $10,631   $30,452 

Total intangible assets

    $41,625   $12,080   $29,545 
    

 

   

 

   

 

     

 

   

 

   

 

 
  Estimated
Useful Lives
(in Years)
   September 30, 2018 
Gross Carrying
Amount
   Accumulated
Amortization
   Net 

Trademarks/trade names

   5 - 20   $5,084   $831   $4,253 

Technical library

   20    400    101    299 

Customer relationships

   6 - 15    33,539    7,870    25,669 

Non-competition arrangements

   5    40    1    39 

Backlog

   1    378    176    202 

Construction contracts

   1    2,184    2,056    128 
    

 

   

 

   

 

 

Total intangible assets

    $41,625   $11,035   $30,590 
    

 

   

 

   

 

 

       September 30, 2017 
   Estimated
Useful Lives
(in Years)
   Gross Carrying
Amount
   Accumulated
Amortization
   Net 

Trademarks/trade names

   5-20   $4,643   $440   $4,203 

Technical library

   20    400    81    319 

Customer relationships

   6-15    31,115    4,741    26,374 

Backlog

   1    2,412    2,130    282 

Construction contracts

   1    2,399    2,164    235 
    

 

 

   

 

 

   

 

 

 

Total

    $40,969   $9,556   $31,413 
    

 

 

   

 

 

   

 

 

 

12.13. 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.

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 claimed $10,406 in damages, plus attorneys’ fees and costs against Capstone, which Capstone sought to recover from the subcontractors. The claims against the Company were based on alleged defects in the mechanical design, construction and installation of the HVAC and electrical systems performed by our former subsidiaries.

Following mediation in June and November 2017, the Company reached an agreement in late December 2017 to settle all claims brought against it. At December 31, 2017, the Company had accrued a liability of $700 and a corresponding insurance receivable of $500 related to this settlement agreement, resulting in a charge of $200 recorded in the quarter ended December 31, 2017. In January 2018, the agreed upon settlement amounts were funded by the Company and our insurance carriers, and a mutual settlement and release agreement was executed by the plaintiffs and the Company.

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:

USAMRIID Claim

On December 6, 2017, IES Commercial, Inc. filed suit in the United States District Court of Maryland in the matterUSA for the use and benefit of IES Commercial, Inc. and IES Commercial, Inc. v. Manhattan Construction Co., Torcon, Inc., Manhattan Torcon A Joint Venture, Federal Ins. Co., Fidelity & Deposit Co. of Maryland, Zurich American Ins. Co., and Travelers Casualty & Surety Co. This suit relatesrelated to a large project (“USAMRIID”) which has been ongoing since 2009, and washaving originally been scheduled for completion in early 2013. As the Company has previously disclosed, the Company entered into a subcontract in 20092013 with Manhattan Torcon A Joint Venture to perform subcontracting services at the U.S. Army Medical Research Institute for Infectious Diseases (“USAMRIID”) replacement facility project for a contract value of approximately $61,146, subject to additions or deductions. Because of delays onThe Company had sought in the project and additional work the Company performed, the Company believes it is owedsuit approximately $21,000$25,500 for claims incurred as of August 31, 2017, and an additional approximate $4,500 for claims the Company expectsexpected to incur from August 31, 2017,be incurred through completion of the project. On January 22, 2018, the defendants in this matter filed a motion to dismiss the suit, and on FebruarySeptember 26, 2018, the District Court ruled on the motion, granting it in part and denying it in part. The ruling, were it to withstand an appeal, would likely have reduced the size of the Company’s estimated damages claim by approximately 50%.

Following mediation in September 2018, the parties entered into a memorandum of agreement to settle all claims brought in the suit, and entered into a formalized settlement agreement on December 21, 2018. IES moved to dismiss the case on December 28, 2018, and the case was dismissed with prejudice on January 2, 2018,2019. Pursuant to the settlement agreement, the parties have agreed that in exchange for IES Commercial, Inc.’s dismissal of the suit and completion of a limited scope of subcontracting work, as well as mutual releases and parent guaranties by the parties, among other items, MTJV will make $2,500 in cash payments to IES Commercial, Inc., including $1,000 up front and $1,500 contingent upon completion of the remaining work, less an agreed credit amount of $150 in connection with a pending change order. In January 2019, we filed our response. We are awaiting a decision on this matter.received the initial $1,000.

Given the uncertainty litigation poses, theThe Company has not made any material change to the charge it recorded any recoveryin the quarter ended September 30, 2018, in connection with this claim. There can be no assurance thatAt December 31, 2018, based on our most current revised cost estimates, the Company will prevail inestimates this litigation matter or that, if the Company does prevail, it will receive an amount substantially similarproject to the amount sought or not receive a significantly lower award.be 99% complete.

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 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 December 31, 2017,2018, and September 30, 2017,2018, we had $6,985$5,931 and $6,204,$6,202, respectively, accrued for self-insurance liabilities. We are also subject to construction defect liabilities, primarily within our Residential segment. As of December 31, 2017,2018, and September 30, 2017,2018, we had $244$154 and $218,$171, 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 December 31, 2017,2018, and September 30, 2017, $5,9002018, $6,351 and $5,985,$6,101, respectively, of our outstanding letters of credit was utilized to collateralize our insurance program.

Surety

As of December 31, 2017,2018, the estimated cost to complete our bonded projects was approximately $66,794.$60,948. 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.

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 both December 31, 2017,2018, and September 30, 2017,2018, $458 and $508, 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 December 31, 2017,2018, we had no such commitments.

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

13. BUSINESS COMBINATIONS

2017

The Company completed three acquisitions in the year ended September 30, 2017, for a total aggregate consideration of $20,979. See Note 18, “Business Combinations and Divestitures” in our Annual Report on Form10-K for the year ended September 30, 2017, for further information.

Freeman Enclosure Systems, LLC – We acquired 100% of the membership interests and associated real estate of Freeman and its affiliate Strategic Edge LLC on March 16, 2017. Strategic Edge LLC was subsequently merged into Freeman, with Freeman as the surviving entity. Freeman is included in our Infrastructure Solutions segment. Freeman’s ability to manufacture custom generator enclosures has expanded our solutions offering.

Technical Services II, LLC – STR Mechanical, our 80% owned subsidiary which is consolidated, acquired all of the membership interests of Technical Services, a Chesapeake, Virginia-based provider of mechanical maintenance services, including commercial heating, ventilation and air conditioning, food service equipment, electrical and plumbing services, on June 15, 2017. Technical Services will operate as a subsidiary of STR Mechanical within the Company’s Commercial & Industrial segment. The acquisition of Technical Services has expanded our geographic reach and diversified our customer base for mechanical maintenance services.

NEXT Electric, LLC – On July 14, 2017, the Company acquired 80% of the membership interests of NEXT Electric, a Milwaukee, Wisconsin-based electrical contractor specializing in the design, installation and maintenance of electrical systems for commercial, industrial, healthcare, water treatment and education end markets. NEXT Electric will operate within the Company’s Commercial & Industrial segment.

The total purchase consideration for the Freeman and Technical Services acquisitions included contingent consideration payments based on the acquired company’s earnings, as defined in the applicable purchase and sale agreement. The fair value of the total contingent consideration liability was estimated at $786 at December 31, 2017, and is included in othernon-current liabilities on our Condensed Consolidated Balance Sheets.

The Company accounted for the transactions 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 asset valuations and assessment of deferred taxes. The valuation of NEXT Electric is derived from estimated fair value assessments and assumptions used by management, and it is preliminary, pending finalization of the valuations of certain tangible and intangible asset valuations and assessment of deferred taxes.

Unaudited Pro Forma Information

The following unaudited 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 months ended December 31, 2017, and 2016, are as follows:

   Unaudited 
   Three Months Ended
December 31, 2017
   Three Months Ended
December 31, 2016
 

Revenues

  $198,300   $210,929 

Net Income (loss) attributable to IES Holdings, Inc.

  $(29,569  $3,264 

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” as set forth in our Annual Report on Form10-K for the year ended September 30, 2017,2018, and the Condensed Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report onForm10-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 onForm10-Q.

OVERVIEW

Executive Overview

Please refer to Item 1. “Business”of our Annual Report onForm10-K for the year ended September 30, 2017,2018, 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 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: Commercial & Industrial, Communications, Infrastructure Solutions and Residential.

RESULTS OF OPERATIONS

We report our operating results across our four operating segments: Commercial & Industrial, Communications, Infrastructure Solutions and Residential. 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 December 31,   Three Months Ended December 31, 
  2017 2016   2018 2017 
  $   % $   %   $   % $   % 
  (Dollars in thousands, Percentage of revenues)   (Dollars in thousands, Percentage of revenues) 

Revenues

  $198,300    100.0 $192,178    100.0  $243,842    100.0 $198,300    100.0

Cost of services

   165,236    83.3 156,996    81.7   202,241    82.9 165,236    83.3
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Gross profit

   33,064    16.7 35,182    18.3   41,601    17.1 33,064    16.7

Selling, general and administrative expenses

   30,089    15.2 28,194    14.7   32,086    13.2 30,089    15.2

Loss (gain) on sale of assets

   (14   0.0 (7   0.0

Contingent consideration

   34    0.0  —      0.0

Gain on sale of assets

   (3   0.0 (14   0.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating Income

   2,989    1.5 6,995    3.6

Operating income

   9,484    3.9 2,989    1.5
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Interest and other (income) expense, net

   343    0.2 442    0.2   594    0.2 343    0.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Income from operations before income taxes

   2,646    1.3 6,553    3.4   8,890    3.6 2,646    1.3

Provision for income taxes(1)

   32,159    16.2 2,629    1.4   1,907    0.8 32,159    16.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net income

   (29,513   (14.9)%  3,924    2.0

Net income (loss)

   6,983    2.9 (29,513   (14.9)% 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Net income attributable to noncontrolling interest

   (56   0.0 (52   0.0   (99   0.0 (56   0.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Comprehensive income attributable to IES Holdings, Inc.

  $(29,569   (14.9)%  $3,872    2.0

Net income (loss) attributable to IES Holdings, Inc.

  $6,884    2.8 $(29,569   (14.9)% 
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

 

(1)

2017 includes a charge of $31.3 million tore-measure our net deferred tax assets in connection with the Tax Cuts and Jobs Act.

Consolidated revenues for the three months ended December 31, 2017,2018, were $6.1$45.5 million higher than for the three months ended December 31, 2016,2017, an increase of 3.2%, with increases at23.0%. Revenues increased within all four of our operating segments driven by an increase in demand for their service offerings combined with the exceptioncontinued improvement of Commercial & Industrial. Our three businesses acquiredconditions in fiscal 2017 contributed $12.2 millioncertain of the increase, partly offset by a $7.2 million decrease at two underperforming branches within our Commercial & Industrial segment,markets in which are in the process of winding down operations.they operate.

Consolidated gross profit for the three months ended December 31, 2017, decreased $2.12018, increased $8.5 million compared with the three months ended December 31, 2016.2017. Our overall gross profit percentage decreasedincreased to 17.1% during the three months ended December 31, 2018, as compared to 16.7% during the three months ended December 31, 2017, as compared to 18.3% during the three months ended December 31, 2016.2017. Gross profit as a percentage of revenue increased at our

Communications segment, but decreased atall of our other three segments. Our resultssegments except for the quarter ended December 31, 2017, were affected by a $1.3 million increase in self-insurance costs compared to the quarter ended December 31, 2016,Infrastructure Solutions as discussed in further detail for each segment below.

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

During the three months ended December 31, 2017,2018, our selling, general and administrative expenses were $30.1$32.1 million, an increase of $1.9$2.0 million, or 6.7%6.6%, over the three months ended December 31, 2016. Selling,2017. The increase is primarily attributable to increased personnel costs to accommodate growth, as well as increased profit-sharing incentive compensation expense in connection with higher earnings. On a consolidated basis, our selling, general and administrative expense decreased as a percent of revenue increased from 14.7% for the three months ended December 31, 2016, to 15.2% for the three months ended December 31, 2017. This increase was primarily attributable2017, to expense incurred at businesses acquired during fiscal 2017, which contributed $1.6 million of the increase13.2% for the three months ended December 31, 2017. We also incurred additional expense2018, as a resultwe continued to benefit from the increasing scale of increased activity levels across our business, as increased volume levels required additional personnel to support our growth.operations.

Commercial & Industrial

 

  Three Months Ended December 31,   Three Months Ended December 31, 
  2017 2016   2018 2017 
  $   % $   %   $   % $   % 
  (Dollars in thousands, Percentage of revenues)   (Dollars in thousands, Percentage of revenues) 

Revenue

  $53,002    100.0 $53,956    100.0  $72,583    100.0 $53,002    100.0

Cost of services

   48,159    90.9 47,850    88.7   63,908    88.0 48,159    90.9
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Gross profit

   4,843    9.1 6,106    11.3   8,675    12.0 4,843    9.1

Selling, general and administrative expenses

   5,795    10.9 4,324    8.0   6,716    9.3 5,795    10.9

Gain on sale of assets

   (12   0.0 1    0.0   (3   0.0 (12   0.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating Income

   (940   -1.8 1,781    3.3

Operating income (loss)

   1,962    2.7 (940   -1.8

Revenue.Revenues in our Commercial & Industrial segment decreased $1.0increased $19.6 million, or 1.8%36.9%, during the three months ended December 31, 2017,2018, compared to the three months ended December 31, 2016.2017. The decreaseincrease in revenue over this period was driven by increased bid volume and improving market conditions across several of our branches. The market for this segment’s services in many geographic regions remains highly competitive. This increase was partially offset by a $7.2$2.9 million decrease relatingin revenue attributable to the winding down of operations at our Denver and Roanoke branches, which are in the process of winding down operations, as well as to the impact of project delays. These decreases were largely offset by revenues at businesses acquired in the third and fourth quarters of fiscal 2017, which contributed $9.1 million duringlocations for the three months ended December 31, 2017,2018, as compared towith the three months ended December 31, 2016. The market for this segment’s services remains highly competitive.2017.

Gross Profit. Our Commercial & Industrial segment’s gross profit during the three months ended December 31, 2017, decreased2018, increased by $1.3$3.8 million, as compared to the three months ended December 31, 2016. The decrease was driven by an increase in workers’ compensation expense, as2017. As a resultpercentage of claims incurred related to certain incidents which occurred prior to fiscal 2018. As we are effectively self-insured with respect to workers’ compensation, we may incur costs related to a claim in a reporting period subsequent to the incident related to the claim, and expense can vary significantly from period to period, depending on the timing of claims development. See Note 12, “Commitments and Contingencies” for further discussion. Additionally, results for the quarter ended December 31, 2016, benefitted by $0.5 million related to a change order received during the period. These decreases were partly offset by $1.4 million of additionalrevenues, gross profit contributed by our fiscal 2017 acquisitions duringincreased from 9.1% for the three months ended December 31, 2017, compared to 12.0% for the three months ended December 31, 2016.2018. The increase was driven by improved conditions in certain markets, improved project efficiencies, and the benefit of higher volumes of activity over which we allocate our overhead costs.

Selling, General and Administrative Expenses.Our Commercial & Industrial segment’s selling, general and administrative expenses during the three months ended December 31, 2017,2018, increased $1.5$0.9 million, or 34.0%15.9%, compared to the three months ended December 31, 2016. Selling, general2017, and administrative expensesdecreased 1.6% as a percentage of revenues increased 2.9% to 10.9% during the three months ended December 31, 2017, compared to the three months ended December 31, 2016. Our fiscal 2017 acquisitions increased expense by $1.0 million.revenue. The remaining increase relates primarily to employee expense associated with management hired to provide additional oversight at the regional and branch levels.higher volumes of activity, as well as increased incentive compensation expense in connection with improved profitability.

The following table summarizes the results of our Denver and Roanoke branches, which are in the process of winding down operations. These results are included in the consolidated Commercial & Industrial results shown above:

 

Denver and Roanoke branches  Three Months Ended
December 31,
 
  2018   2017 
  Three
Months
Ended
December 31,
2017
   Three
Months
Ended
December 31,
2016
   (In thousands) 

Revenues

  $3,161   $10,398   $274   $3,161 

Cost of Service

   3,311    10,149 

Cost of services

   424    3,311 

Selling, general and administrative expenses

   489    648    99    489 
  

 

   

 

   

 

   

 

 

Loss from continuing operations

  $(639  $(399

Operating loss

  $(249  $(639
  

 

   

 

   

 

   

 

 

Communications

 

  Three Months Ended December 31,   Three Months Ended December 31, 
  2017 2016   2018 2017 
  $   % $   %   $   % $   % 
  (Dollars in thousands, Percentage of revenues)   (Dollars in thousands, Percentage of revenues) 

Revenue

  $54,459    100.0 $53,303    100.0  $69,325    100.0 $54,459    100.0

Cost of services

   45,339    83.3 45,332    85.0   57,359    82.7 45,339    83.3
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Gross profit

   9,120    16.7 7,971    15.0   11,966    17.3 9,120    16.7

Selling, general and administrative expenses

   6,084    11.2 5,714    10.7   6,934    10.0 6,084    11.2

Gain on sale of assets

   (1   0.0  —      0.0

Loss (gain) on sale of assets

   —      0.0 (1   0.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating Income

   3,037    5.6 2,257    4.2

Operating income

   5,032    7.3 3,037    5.6

Revenue.Our Communications segment’s revenues increased by $1.2$14.9 million, or 27.3%, during the three months ended December 31, 2017,2018. The increase in revenue was primarily as a result of an increase in work at high-tech distribution centers and manufacturing facilities.spending by several of our large data center customers. Revenues in our Communications segment can vary based on the capital spending cycles of our customers.

Gross Profit.Our Communications segment’s gross profit during the three months ended December 31, 2017,2018, increased by $1.1$2.8 million compared to the three months ended December 31, 2016.2017. Gross profit as a percentage of revenue increased 1.7%0.6% to 16.7%17.3% for the three months ended December 31, 2017,2018, primarily as a result of improvedstrong project execution. Additionally, during the quarter ended December 31, 2016, we hiredexecution and efficiencies associated with a large numberhigher volume of new employees in support of rapid growth, resulting in lower overall gross margins during this period.activity.

Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased by $0.4$0.8 million, or 6.5%14.0%, during the three months ended December 31, 2017,2018, compared to the three months ended December 31, 2016.2017. The increase was driven primarily by our acquisition of Azimuth during fiscal 2018, which incurred selling, general and administrative expense for the three months ended December 31, 2018, of $0.6 million, which includes amortization of intangible assets. Selling, general and administrative expenses as a percentage of revenues in the Communications segment increased 0.5%decreased 1.2% to 11.2%10.0% of segment revenue during the three months ended December 31, 2017,2018, compared to the three months ended December 31, 2016. The increase is a result2017, as we benefitted from the increased scale of higher personnel cost, particularly related to higher incentive compensation expense in connection with improved profitability, as well as continuing investment to support anticipated growth.our operations.

Infrastructure Solutions

 

   Three Months Ended December 31, 
   2017  2016 
   $   %  $   % 
   (Dollars in thousands, Percentage of revenues) 

Revenue

  $21,685    100.0 $18,477    100.0

Cost of services

   17,000    78.4  13,102    70.9
  

 

 

   

 

 

  

 

 

   

 

 

 

Gross profit

   4,685    21.6  5,375    29.1

Selling, general and administrative expenses

   4,557    21.0  4,100    22.2

Loss on sale of assets

   (1   0.0  (8   0.0
  

 

 

   

 

 

  

 

 

   

 

 

 

Operating income

   129    0.6  1,283    6.9

   Three Months Ended December 31, 
   2018  2017 
   $   %  $   % 
   (Dollars in thousands, Percentage of revenues) 

Revenue

  $29,479    100.0 $21,685    100.0

Cost of services

   23,552    79.9  17,000    78.4
  

 

 

   

 

 

  

 

 

   

 

 

 

Gross profit

   5,927    20.1  4,685    21.6

Selling, general and administrative expenses

   4,481    15.2  4,557    21.0

Contingent consideration

   34    0.1  —      0.0

Gain on sale of assets

   —      0.0  (1   0.0
  

 

 

   

 

 

  

 

 

   

 

 

 

Operating income

   1,412    4.8  129    0.6

Revenue.Revenues in our Infrastructure Solutions segment increased $3.2$7.8 million during the three months ended December 31, 2017,2018, an increase of 17.4%35.9% compared to the three months ended December 31, 2016.2017. The increase in revenue was driven primarily by $6.6 of additional revenue of $3.1from our bus duct and enclosure business, driven by increased demand for enclosures to be used at data centers, and a $1.2 million contributed by the acquisition of Freeman Enclosuresincrease in the second quarter of fiscal 2017.revenue from our motor repair business.

Gross Profit. Our Infrastructure Solutions segment’s gross profit during the three months ended December 31, 2017, decreased $0.72018, increased $1.2 million as compared to the three months ended December 31, 2016. The decrease is the result2017. Gross profit as a percentage of project delays, as well as an increase in self-insured medical expense during therevenue decreased 1.5% to 20.1%. Margins improved quarter ended December 31, 2017. Margins are also affectedover quarter at both our bus duct manufacturing business and our motor repair business. However, our overall gross margin was affect by the mix of work performed.performed, as our generator enclosure business has lower margins than our motor repair business, but represented a larger percentage of our total revenues.

Selling, General and Administrative Expenses.Our Infrastructure Solutions segment’s selling, general and administrative expenses during the three months ended December 31, 2017 increased $0.52018 decreased $0.1 million compared to the three months ended December 31, 2017. The decrease was primarily related to a decrease in intangible amortization expense related to the acquisition of Technibus, Inc. in fiscal 2016, as a result of generaloffset by additional selling and administrative expenses at Freeman Enclosures, which was acquired duringcosts in support of growth of the second quarter of fiscal 2017.business.

Residential

 

  Three Months Ended December 31,   Three Months Ended December 31, 
  2017 2016   2018 2017 
  $   % $   %   $   % $   % 
  (Dollars in thousands, Percentage of revenues)   (Dollars in thousands, Percentage of revenues) 

Revenue

  $69,154    100.0 $66,442    100.0  $72,455    100.0 $69,154    100.0

Cost of services

   54,738    79.2 50,712    76.3   57,422    79.3 54,738    79.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Gross profit

   14,416    20.8 15,730    23.7   15,033    20.7 14,416    20.8

Selling, general and administrative expenses

   10,366    15.0 10,553    15.9   11,137    15.4 10,366    15.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Operating income

   4,050    5.9 5,177    7.8   3,896    5.4 4,050    5.9

Revenue.Our Residential segment’s revenues increased by $2.7$3.3 million during the three months ended December 31, 2017,2018, an increase of 4.1%4.8% as compared to the three months ended December 31, 2016.2017. The increase iswas driven by our single-family business, where revenues increased by $5.5$5.9 million for the three months ended December 31, 2017,2018, compared with the three months ended December 31, 2016. Service and solar revenues also increased by $0.9 million for the three months ended December 31, 2017, compared with the same period in the prior year.2017. These increases were partlypartially offset by a decrease in multi-family revenues, which declined by $3.7 million. The quarter$2.7 million due to the timing of individual projects. Service and solar revenues also decreased by $0.1 million for the three months ended December 31, 2016, benefitted from a historically high level of backlog, which was2018, compared with the result of project delayssame period in the previous fiscalprior year. Our current multi-family backlog has returned to a more typical level.

Gross Profit.During the three months ended December 31, 2017,2018, our Residential segment experienced a $1.3$0.6 million, or 8.4%4.3%, decreaseincrease in gross profit as compared to the three months ended December 31, 2016.2017. The decreaseincrease in gross profit was driven primarily by an increase in copper and other commodity prices, as we experienced favorable commodity prices in the quarter ended December 31, 2016, as well as an increase in labor costs, as a result of tightening labor markets. Additionally, our results for the quarter ended December 31, 2017, were affected by an increase in self-insurance expense. Gross margin as a percentage of revenue decreased 2.9% to 20.8% during the quarter ended December 31, 2017, as compared with the quarter ended December 31, 2016.volume.

Selling, General and Administrative Expenses. Our Residential segment experienced a $0.2$0.8 million, or 1.8%7.4%, decreaseincrease in selling, general and administrative expenses during the three months ended December 31, 2017,2018, compared to the three months ended December 31, 2016,2017, primarily as a result of lower incentive compensation expensean increase in connection with lower profitability.employment and travel costs. Selling, general and administrative expenses as a percentage of revenues in the Residential segment decreasedincreased to 15.0%15.4% of segment revenue during the three months ended December 31, 2017,2018, compared to 15.9%15.0% in the three months ended December 31, 2016.2017.

INTEREST AND OTHER EXPENSE, NET

 

   Three Months Ended December 31, 
           2017                   2016         
   (In thousands) 

Interest expense

  $371   $361 

Deferred financing charges

   70    85 
  

 

 

   

 

 

 

Total interest expense

   441    446 

Other (income) expense, net

   (98   (4
  

 

 

   

 

 

 

Total interest and other expense, net

  $343   $442 
  

 

 

   

 

 

 

   Three Months Ended
December 31,
 
   2018   2017 
   (In thousands) 

Interest expense

  $470   $371 

Deferred financing charges

   77    70 
  

 

 

   

 

 

 

Total interest expense

   547    441 

Other (income) expense, net

   47    (98
  

 

 

   

 

 

 

Total interest and other expense, net

  $594   $343 
  

 

 

   

 

 

 

During the three months ended December 31, 2017,2018, we incurred interest expense of $0.4$0.5 million primarily comprised of interest expense from our term loan facility with Wells Fargo Bank, N.A. (“Wells Fargo”), an average letter of credit balance of $6.7 million under our revolving credit facility and an average unused line of credit balance of $63.0 million. This compares to interest expense of $0.4 million for the three months ended December 31, 2017, primarily comprised of interest expense from our revolving credit facility, an average letter of credit balance of $6.4 million under our revolving credit facility and an average unused line of credit balance of $63.4 million. This compares to interest expense of $0.4 million for the three months ended December 31, 2016, primarily comprised of interest expense from our term loan facility, an average letter of credit balance of $6.7 million under our revolving credit facility and an average unused line of credit balance of $33.1 million.

PROVISION FOR INCOME TAXES

We recorded income tax expense of $1.9 million for the three months ended December 31, 2018, compared to income tax expense of $32.2 million for the three months ended December 31, 2017, compared to income tax expense of $2.6 million for the three months ended December 31, 2016.2017. For the three months ended December 31, 2017, our income tax expense included a preliminary charge of $31.3 million tore-measure our deferred tax assets and liabilities to reflect the estimated impact of the new statutory tax rate enacted during the quarter. The company completed its accounting for the income tax effects of the Tax Cuts and Jobs Act and fully recorded the impact in the year ended September 30, 2018.

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 onForm10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our Condensed Consolidated Financial Statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the same time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from those estimates.

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 and our performance may vary. Not all of our work is performed under contracts included in backlog; for example, most of the apparatus repair work that is completed by our Infrastructure Solutions segment is performed under master service agreements on an as needed basis. Additionally, electrical installation services for single-family housing at our Residential segment is completed on a short-term basis and is therefore excluded from backlog. In addition, certain service work is performed under master service agreements on anas-needed basis. Backlog differs from remaining performance obligations as disclosed in Note 3 to the financial statements, as backlog is excluded from remaining performance obligations if it relates to a contract where work has not yet begun, and the customer can cancel the contract for convenience without incurring significant cost. Our backlog has increased from $331$482 million at September 30, 2017,2018, to $337$538 million at December 31, 2017.2018.

WORKING CAPITAL

During the three months ended December 31, 2017,2018, working capital exclusive of cash increased by $0.2$12.0 million from September 30, 2017,2018, reflecting a $14.8$8.8 million decreaseincrease in current assets excluding cash and a $15.0$3.2 million decrease in current liabilities during the period.

During the three months ended December 31, 2017,2018, our current assets exclusive of cash decreasedincreased to $188.7$245.2 million, as compared to $203.5$236.4 million as of September 30, 2017.2018. The decreaseincrease primarily relates to a $15.7$4.9 million decreaseincrease in accounts receivableprepaid expenses and retainage.other current assets, as a result of the timing of our annual insurance premium payments. Days sales outstanding decreased to 61 at December 31, 2017,2018, from 6662 at September 30, 2017.2018. 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, offers some protection that collection will occur eventually to the extent that our security retains value.

During the three months ended December 31, 2017,2018, our total current liabilities decreased by $15.0$3.2 million to $135.7$161.2 million, compared to $150.6$164.4 million as of September 30, 2017,2018, primarily related to a decrease in accounts payable and accrued liabilities.

The decreases in both accounts receivable and accounts payable are typical for the first quarter of our fiscal year, based on a slowing of activity around the end of the calendar year.

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 December 31, 2017,2018, the estimated cost to complete our bonded projects was approximately $66.8$60.9 million.

LIQUIDITY AND CAPITAL RESOURCES

The Revolving Credit Facility

We maintain a $100 million revolving credit facility with Wells Fargo Bank, N.A. that matures in August 9, 2021 (as amended, the “Credit Facility”), pursuant to a Second Amended and Restated Credit and Security Agreement with Wells Fargo, Bank, N.A., which was further amended on July 14, 2017, and August 2, 2017, and July 23, 2018 (as amended, the “Amended Credit Agreement”).

The Amended Credit FacilityAgreement contains customary affirmative, negative and financial covenants as well as events of default.

As of December 31, 2017,2018, we were in compliance with the financial covenants under the Amended Credit Agreement, requiring that we maintain:

 

a Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement), measured quarterly on a trailing four-quarter basis at the end of each quarter, of at least 1.1 to 1.0; and

 

minimum Liquidity (as defined in the Amended Credit Agreement) of at least thirty percent (30%) of the Maximum Revolver Amount (as defined in the Amended Credit Agreement), or $30 million; with, for purposes of this covenant, at least fifty percent (50%) of our Liquidity comprised of Excess Availability (as defined in the Amended Credit Agreement); and.

minimum EBITDA (as defined in the Amended Credit Agreement), measured at the end of each quarter, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto:

Applicable Amount

Applicable Period

$30.0 millionFor each four quarter period ending September 30, 2017, and December 31, 2017
$32.5 millionFor the four quarter period ending March 31, 2018
$35.0 millionFor each four quarter period ending June 30, 2018 and eachquarter-end thereafter

At December 31, 2017,2018, our Liquidity was $75.1$78.5 million, our Excess Availability was $43.2$57.9 million (or greater than 50% of minimum Liquidity), and our Fixed Charge Coverage Ratio was 7.5:1.0; and7.4:1.0. Since our Excess Availability at December 31, 2018, exceeded $30 million, we were not required to comply with minimum EBITDA financial covenant of the Amended Credit Agreement, which would have required that we have a minimum EBITDA for the four quarters ended December 31, 2018 of $35 million. Our EBITDA, as defined in the Amended Credit Agreement for the four quarters ended December 31, 20172018, was $34.7$42.5 million.

If in the future our Liquidity falls below $30 million (or Excess Availability falls below 50% or our minimum Liquidity), our Fixed Charge Coverage Ratio is less than 1.1:1.0, we fail to meet our minimum EBITDA requirement when it is required to be tested, or if we otherwise fail to perform or otherwise comply with certain of our covenants or other agreements under the Amended Credit Agreement, it would result in an event of default under the Amended Credit Agreement, which could result in some or all of our indebtedness becoming immediately due and payable.

At December 31, 2017,2018, we had $6.4$6.8 million in outstanding letters of credit with Wells Fargo Bank, N.A and 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.country; however, a seasonal decline in working capital may be offset by needs associated with higher growth or acquisitions.

Operating activities providedused net cash of $5.0$1.4 million during the three months ended December 31, 2017,2018, as compared to $5.6$5 million of net cash provided in the three months ended December 31, 2016.2017. The increasedecrease in operating cash flow resulted primarily from increased collectionsan increase in working capital at our Commercial & Industrial and Infrastructure Solutions segments, in support of accounts receivable of $12 million.growth in these businesses.

Investing Activities

Net cash used in investing activities was $2.1 million for the three months ended December 31, 2018, compared with $1.4 million for the three months ended December 31, 2017, compared with $1.8 million for the three months ended December 31, 2016.2017. We used cash of $1.2$2.1 million for purchases of fixed assets in the three months ended December 31, 2017.2018. For the three months ended December 31, 2016,2017, we used $1.8$1.2 million of cash for the purchase of fixed assets.

Financing Activities

Net cash used in financing activities for the three months ended December 31, 2018 was $2.2 million. For the three months ended December 31, 2018, we used $2.2 million to repurchase our shares to satisfy statutory withholding requirements upon the vesting of employee stock compensation, as well as in conjunction with our stock repurchase plan.

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 aRule10b5-1 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. We did not purchase any stockrepurchased 46,133 shares pursuant to this program during the three months ended December 31, 2017.2018.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

There have been no material changes in our contractual obligations and commitments from those disclosed in our Annual Report onForm10-K for the fiscal year ended September 30, 2017.2018.

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 labor costs and 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 Amended Credit Agreement.Facility. For additional information seeDisclosure Regarding Forward-Looking Statements in Part I of this Quarterly Report onForm 10-Q and our risk factors in Item 1A. “Risk Factorsin our Annual Report onForm10-K for the fiscal year ended September 30, 2017.2018.

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 on the Amended Credit Agreement. 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 revolving 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 theour revolving credit facility as of December 31, 2017,2018, 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 any changes in the Company’s internal control over financial reporting (as such term is defined inRules13a-15 and15d-15 under the Exchange Act) during the fiscal quarter to which this report relatesended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure Controls and Procedures

In accordance withRules 13a-15 and15d-15 ofunder the Securities Exchange Act, 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 thatthis evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017,2018, 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.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

For information regarding legal proceedings, see Note 12,13, “Commitments and Contingencies – Contingencies—Legal Matters” in the Notes to our Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report onForm10-Q, which is incorporated herein by reference.

Item 1A.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, 2017.2018.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.The following table presents information with respect to purchases of common stock of the Company made during the three months ended December 31, 2018:

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 as of
December 31, 2018
 

October 1, 2018 – October 31, 2018

   —      —      —      724,804 

November 1, 2018 – November 30, 2018

   —      —      —      724,804 

December 1, 2018 – December 31, 2018

   132,121   $16.74    46,133    678,671 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   132,121   $16.74    46,133    678,671 
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)

The total number of shares purchased includes shares purchased pursuant to the plan described in footnote (2) below. During the quarter ended December 31, 2018, 85,988 shares were surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of PPSU’s issued to employees.

(2)

Our Board of Directors has authorized a stock repurchase program for the purchase of up to 1.5 million shares of the Company’s common stock from time to time.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

Item 5.Other Information

At the Company’s Annual Meeting of Stockholders held on February 2, 2017 (the “2017 Annual Meeting”), the Company’s stockholders approved, bynon-binding advisory vote (the “Frequency of Say on Pay Vote”), that the stockholders’ advisory vote on the compensation of the Company’s named executive officers (the “Say on Pay Vote”) should be included in the Company’s proxy materials on an annual basis, as was recommended by the Company’s Board of Directors in the Company’s definitive proxy statement for the 2017 Annual Meeting. Following the 2017 Annual Meeting, the Board of Directors of the Company considered the outcome of the Frequency of Say on Pay Vote and decided, in light of the outcome of such vote, that the Company will include a Say on Pay Vote in its proxy materials every year until the next required Frequency of Say on Pay Vote in 2023. As such, in the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held on February 7, 2018, which was filed on December 28, 2017, the Company’s stockholders have been asked to approve, bynon-binding advisory vote, the compensation of the Company’s named executive officers, as disclosed therein.None.

Item 6.Exhibits

 

Exhibit
No.

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 (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report onForm  8-K filed on June 15, 2016)
 3.1   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 (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report onForm 10-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 onForm 8-K filed on January 28, 2013)
 3.3   Amended and Restated Bylawsof IES Holdings, Inc., effective May 24, 2016. (Incorporated by reference to Exhibit  3.2 to the Company’s Current Report onForm 8-K filed on May 24, 2016)

      4.1

Exhibit
No.

 

Description

4.1   Specimen common stock certificate. (Incorporated(Incorporated by reference to Exhibit 4.1 to the Company’s Annual Report onForm 10-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 onForm 8-K filed on November 9, 2016)
(1)31.1 10.1  Board Observer Letter Agreement between Tontine Associates, L.L.C. and IES Holdings, Inc., dated December  6, 2018. (Incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K filed December 7, 2018)
(1)31.1 —Rule13a-14(a)/15d-14(a) Certification of Robert W. Lewey, President,
(1)31.2 (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 (1)32.1   Section 1350 Certification of Robert W. Lewey, President
(1)32.2 (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.

SIGNATURES

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 February 6, 2018.5, 2019.

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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