IES Holdings, Inc. - Annual Report: 2007 (Form 10-K)

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FORM 10-K INTEGRATED ELECTRICAL SERVICES, INC. Table of Contents
Item 8. Financial Statements and Supplementary Data

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File Number 1-13783

Integrated Electrical Services, Inc.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes o No ý

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 ý No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o                Accelerated Filer ý                Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No ý

The aggregate market value of the voting stock of the Registrant on March 31, 2007 held by non-affiliates was approximately $193.7 million.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.    Yes ý No o

As of December 10, 2007, there were outstanding 15,408,486 shares of common stock of the Registrant (includes 15,204 shares reserved for issuance upon exchange of previously issued shares pursuant to the Company's Plan of Reorganization approved by the United States Bankruptcy Court for the Northern District of Texas, Dallas Division which became effective on May 12, 2006).

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the Proxy Statement for the Annual Meeting of Stockholders of the registrant to be held on February 7, 2008 is incorporated by reference into Part III of this Form 10-K.

FORM 10-K

INTEGRATED ELECTRICAL SERVICES, INC.
Table of Contents

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PART I

DEFINITIONS

        In this Annual Report on Form 10-K, the words "IES", the "Company", "we", "our", "ours", and "us" refer to Integrated Electrical Services, Inc. and, except as otherwise specified herein, to our subsidiaries.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K includes certain statements that may be deemed "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, all of which are based upon various estimates and assumptions that the Company believes to be reasonable as of the date hereof. 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:

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potential difficulty in fulfilling the covenant terms of our credit facilities and term loan;



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limitations on the availability of sufficient credit or cash flow to fund working capital needs;



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the increased costs of surety bonds affecting margins on work and the ability to obtain additional bonding;



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the inherent uncertainties relating to estimating future operating results and our ability to generate sales, operating income, or cash flow;



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potential difficulty in addressing material weaknesses identified by us and our independent auditors;



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fluctuations in operating results because of downturns in levels of construction, downturns in sections of construction particularly residential construction, seasonality and differing regional economic conditions;



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fluctuations in financial results from operations caused by the increasing cost of commodities used in our business, in particular copper, aluminum, steel, gasoline and certain plastics.



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general economic and capital markets conditions, including fluctuations in interest rates that affect the cost of construction financing and mortgages;



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inaccurate estimates used in entering into fixed-priced contracts;



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inaccuracies in estimating revenue and percentage of completion on contracts;



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difficulty in managing the operation of existing entities;



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the high level of competition in the construction industry both from third parties and former employees;



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increases in costs or limitations on availability of qualified labor, especially electricians and construction supervisors;



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accidents resulting from the physical hazards associated with our work and the number of miles driven in Company vehicles with the level of exposure to vehicle accidents;



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loss of key personnel or transition of new senior management;



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difficulties in integrating new types of work or new processes into divisions;



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difficulty incorporating new accounting, control and operating procedures;

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



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the loss of productivity, either at the corporate office or operating level;



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difficulty in transferring all our electrical and construction licenses after our recent consolidation of subsidiaries;



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growth in latent defect litigation in the residential market and the expansion into other states where we provide residential electrical work for new home builders; and



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the possibility that our restructuring program will not be successfully executed.

        You should understand that the foregoing, as well as other risk factors discussed in this document, including those listed in Part I, Item 1A of this report under the heading "Risk Factors" 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 information concerning our restructuring efforts, borrowing availability, or its 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 Form 10-K 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.    Business

        We are a leading provider of electrical contracting services in the United States. We provide a broad range of services including designing, building, maintaining and servicing electrical, data communications and utilities systems for commercial, industrial and residential customers.

        Our electrical contracting services include design of electrical distribution systems within a building or complex, procurement and installation of wiring and connection to power sources, end-use equipment and fixtures, as well as contract maintenance. We service commercial, industrial and residential markets and have a diverse customer base including: general contractors; property managers and developers; corporations; government agencies; municipalities; and homeowners. We provide services for a variety of projects including: high-rise residential and office buildings, power plants, manufacturing facilities, municipal infrastructure and health care facilities and residential developments. We also offer low voltage contracting services as a complement to our electrical contracting business. Our low voltage services include design and installation of external cables for corporations, universities, data centers and switching stations for data communications companies as well as the installation of fire and security alarm systems. Our utility services consist of overhead and underground installation and maintenance of electrical and other utilities transmission and distribution networks, installation and splicing of high-voltage transmission and distribution lines, substation construction and substation and right-of-way maintenance. Our maintenance services generally provide recurring revenues that are typically less affected by levels of construction activity. We focus on projects that require special expertise, such as design-and-build projects that utilize the capabilities of our in-house experts or projects that require specific market expertise such as hospitals or power generation facilities, as well as service, maintenance and certain renovation and upgrade work, which tends to either be recurring, have lower sensitivity to economic cycles, or both.

        As of December 2007, we provide our services from 122 locations serving the continental 48 states. We continue to focus internally on integrating our information technology systems to enhance operating controls of our organization, as well as integrating a consolidated procurement program to manage vendors on a national basis.

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Voluntary Reorganization Under Chapter 11

        On February 14, 2006, we filed voluntary petitions for reorganization under Chapter 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The Bankruptcy Court jointly administered these cases as "In re Integrated Electrical Services, Inc. et. al., Case No. 06-30602-BJH-11." On April 26, 2006, the Bankruptcy Court entered an order approving and confirming the plan of reorganization. The plan was filed as Exhibit 2.1 to our current report on Form 8-K, filed on April 28, 2006. We operated our businesses and managed our properties as debtors-in-possession in accordance with the Bankruptcy Code from the commencement date through emergence from Chapter 11 on May 12, 2006, the effective date of the plan.

        In accordance with the plan:

          (i)  The holders of the senior subordinated notes received on the date we emerged from bankruptcy, in exchange for their total claims (including principal and interest), 82% of the fully diluted new common stock representing 12,631,421 shares, before giving effect to options to be issued under a new employee and director stock option plan which could be up to 10% of the fully diluted shares of new IES common stock outstanding as of the effective date of the plan.

         (ii)  The holders of old common stock received 15% of the fully diluted new common stock representing 2,310,614 shares, before giving effect to the 2006 equity incentive plan.

        (iii)  Certain members of management received up to 384,850 restricted shares of new common stock equal to 2.5% of the fully diluted new common stock with an additional 0.5% reserved for new key employees, before giving effect to the 2006 Equity Incentive Plan. The restricted shares of new common stock vest over an approximately 31.5 month period.

        (iv)  $50 million in senior convertible notes were refinanced from the proceeds of the $53 million term loan.

         (v)  All other allowed claims were either paid in full in cash or reinstated.

Competitive Strengths

        Our competitive strengths include the following:

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Geographic diversity—We have 122 locations serving the continental 48 states, and we worked on more than 900 contracts over $250,000 and nearly 3,100 contracts overall in 2007. Our national presence sometimes mitigates much of the region specific economic slowdowns. Since 1997, much of our revenues have been derived from the Sunbelt states, which have had higher growth rates than overall U.S. construction. Our geographic diversity also enables us to serve national customers with multiple locations.



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Customer diversity—Our diverse customer base includes general contractors, property developers and managers, facility owners and managers of large retail establishments, manufacturing and processing facilities, utilities, government agencies and homeowners. No single customer accounted for more than 10% of our revenues for the year ended September 30, 2007. We believe that customer diversity provides us with many advantages including reducing our dependence on, or exposure to, any single customer. Additionally, our expertise in a variety of industries coupled with our national reach allows us to be flexible and to share our expertise across regions.



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Expertise—We have expertise in high-rise buildings including hotels, condominiums and office buildings, retail centers, hospitals, switching centers and utility substations and single-family and multi-family residential homes. We believe we have advantages in technical expertise provides us with (1) access to higher margin design-and-build projects; (2) access to growth markets

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including wireless telecommunications, high voltage line work, video and security and fire systems; and (3) the ability to deliver quality service with greater reliability than that of many of our competitors.

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Licensing—Our master electricians are licensed in one or more cities or other jurisdictions in order to obtain the permits required in our business. Some employees have also obtained specialized licenses in areas including security systems and fire alarm installation. In some areas, licensing boards have set continuing education requirements for maintenance of licenses. Because of the lengthy and difficult training and licensing process for electricians, we believe that the number, skills and licenses of our employees constitute a competitive strength in the industry.



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Ability to service national projects—Our nationwide presence helps us compete for larger, national contracts with customers that operate throughout the United States and large government contracts. Additionally, we believe our size and national service offering uniquely positions us as the only single source open shop electrical contracting service provider able to execute projects on a national basis. We are able to take on very large and complex projects, often with a national scope, that would strain the capabilities and resources of most of our competitors. This type of work represents a growing market and we have made progress in pursuing these sizable accounts.



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Access to resources—Access to resources is a key to success, especially in this robust market environment. Losses experienced by the surety industry in recent years have caused surety providers to limit capacity and increase prices for all participants, including us, even though we have incurred no surety losses on any project in our over ten-year history. We believe we have adequate remaining available bonding capacity, subject to the sole discretion of our surety providers (See Part II, Item 7. "Surety"). We also had $46.7 million in aggregate face value of bonds issued under Scarborough. As of September 30, 2007, the expected aggregate cost to complete for projects covered by CHUBB, SureTec and Scarborough was $98.4 million. We believe we have adequate remaining available bonding capacity, subject to the sole discretion of our surety providers (See Part II, Item 7. "Surety"). Additionally, we have access to our credit facility. As of September 30, 2007, we had cash and cash equivalents of $69.7 million, restricted cash of $20.0 million, $45.6 million in outstanding borrowings under our term loan and $43.1 million of letters of credit outstanding.



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Proprietary systems and processes—We have proprietary systems and processes that help us bid on projects, manage projects once they have been awarded and maintain and track customer information. In addition, we developed techniques and processes for installation on a variety of different projects that utilize a proprietary project management operating system and best practices.



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Utilization of prefabrication processes—Our size and 100% merit shop environment has allowed us to implement best prefabrication practices across our company quickly. We prefabricate and preassemble or prepackage significant portions of electrical installations off-site and ship materials to the installation sites in specific sequences to optimize materials management, improve efficiency and minimize our employees' time on job sites. This is safer, more efficient and more cost effective for both us and our customers.



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Experienced management—We have developed a strong team of executive officers, which have a vast range of experiences and well-known reputations in the markets they have served. This team has been put in place to identify challenges that may arise within their business area, seek opportunities for change and improvement and react accordingly. Our focus as management is to drive operational improvements, set strategy and build capabilities. We believe management and our employees currently own approximately 3% of our outstanding common stock.

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Short Term Initiatives

        During the fall of 2006, under the leadership of our Executive Management Team, we began a systematic program to strengthen our core processes, which included a review of all key elements of the IES enterprise, including our personnel, processes and business systems. This systematic review was guided by an assembly of expert teams from within our business units supported by our Executive Management Team and operational management.

        In fiscal year 2007, in response to the strategies and recommendations of this review, we:

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hired a new Chief Financial Officer who has strong operational finance experience and demonstrated strategic leadership;



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hired vice presidents to lead our supply-chain management and marketing efforts;



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embarked on a strategic reorganization within our Commercial and Industrial and our Residential operating segments, which aligned businesses along industry lines, created shared services centers within these groups and permitted the elimination of redundant positions throughout the Company;



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implemented the first phase of a comprehensive project management system which provides us with a unique operating tool versus our competitors on a both a local and national level;



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the divestiture or closure of non-core and underperforming subsidiaries;



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worked to turn around underperforming subsidiaries; and



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continued our focus on safety, again exceeding the prior year's safety performance. We are resolute that a culture focused on safety is central to excellence in project execution and significantly reduces risks to our employees and consequent costs to the business.

        We remain focused on strengthening the foundation of the Company.

Industry Overview

        The residential and non-residential construction industries have both experienced strong growth rates for several years. Since the middle of 2007, economic conditions, notably restricted access to credit, have lead to a sharp decrease in demand for residential housing. Reviewing the most recently available data from McGraw Hill Construction Analytics and FMI Construction Outlook, we believe the effects of reduced availability of credit are a significant concern for the construction industry, and we have already experienced a downturn in our residential construction business. Using data from both sources mentioned above, for the period from 2001 to 2006, the five-year compounded annual growth rate for non-residential construction was 3.5%. For the same period, the five-year compounded annual growth rate for residential construction was 9.5%. Fiscal year 2007 forecasts indicate that non-residential construction will increase approximately 8.2% from the previous year; however, residential construction could decline by up to 16%.

        Looking forward, the housing market is projected to return to a moderate growth rate. Based on research provided by FMI Construction Outlook and McGraw-Hill Construction, residential construction is expected to continue to grow, but at a modest rate with the projected five-year compounded annual growth rate to be 0.7%. In contrast to the decreased growth in residential construction, growth in non-residential construction is still expected to outpace the economy as a whole. The projected five-year compounded annual growth rate for non-residential construction is approximately 7.3%.

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The Markets We Serve

        Commercial and Industrial Market.    Our commercial and industrial work consists primarily of electrical, communications, utility installations and upgrade, renovation, replacement and service and maintenance work in:

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airports;



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community centers;



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high-rise apartments and condominiums;



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hospitals and health care centers;



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hotels;



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manufacturing and processing facilities;



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military installations;



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office buildings;



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refineries, petrochemical and power plants;



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retail stores and centers;



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schools; and



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theaters, stadiums and arenas.

        Our commercial and industrial customers include:

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general contractors;



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developers;



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building owners and managers;



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engineers;



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architects; and



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consultants.

        Demand for our commercial and industrial services is driven by construction and renovation activity levels, as well as more stringent local and national electrical codes. From fiscal 2003 through 2007, our compound annual growth rate from commercial and industrial revenue has fallen approximately 1.4% per year, due in large part to a more selective strategy focused on higher margin projects. The industry average for non-residential construction services has grown at a compound annual rate of approximately 6.7% per year. Commercial and industrial work represented approximately 62%, 58% and 63% of our consolidated revenues for the twelve month periods ended September 30, 2007, 2006 and 2005, respectively. For additional segment information see Note 12 to the Consolidated Financial Statements.

        New commercial and industrial work begins with either a design request or engineer's plans from the owner or general contractor. Initial meetings with the parties allow us to prepare preliminary, detailed design specifications, engineering drawings and cost estimates. Projects we design and build generally provide us with higher margins. "Design and build" gives the Company full or partial responsibility for the design specifications of the installation. Design and build is an alternative to the traditional "plan and spec" model, where the contractor builds to the exact specifications of the architect and engineer. We prefer to perform "design and build" work, because it allows us to use our specialized expertise to install a more value-added system to our customer with higher profitability to

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us. Once a project is awarded, it is conducted in scheduled phases and progress billings are rendered to our customer for payment, less retention of 5% to 10% of the construction cost of the project. We generally provide the materials to be installed as a part of these contracts, which vary significantly in size from a few hundred dollars to several million dollars and vary in duration from less than a day to more than a year. Actual fieldwork is coordinated during this time, including:

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ordering of equipment and materials;



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fabricating or assembling of certain components (pre-fabrication);



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delivering of materials and components to the job site; and



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scheduling of work crews, inspection and quality control.

        We design and install communications and utility infrastructure systems and low voltage systems for the commercial and industrial market as a complement to our primary electrical contracting services. We believe the demand for our communications services is driven by the following factors: the pace of technological change; the overall growth in voice and data traffic; and the increasing use of personal computers, with particular emphasis on the market for broadband internet access. Demand for our utilities services is driven by industry deregulation, limited maintenance or capital expenditures on existing systems and increased loads and supply and delivery requirements. Demand for our low voltage systems is driven by the construction industry growth rate and our ability to cross-sell among our customers.

        Service and maintenance revenues, which represent less than ten percent of consolidated revenues, are derived from service calls and routine maintenance contracts, which tend to be recurring and less sensitive to economic fluctuations. Service and maintenance is supplied on a per-call basis. Per-call service and maintenance is initiated when a customer requests emergency repair service. Service technicians are scheduled for the call or routed to the customer's place of business by the dispatcher. We will then follow up with the customer to schedule periodic maintenance work. Most service work is warranted for thirty days. Service personnel work out of our service vehicles, which carry an inventory of equipment, tools, parts and supplies needed to complete the typical variety of jobs. The technician assigned to a service call:

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travels to the place of business;



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interviews the customer;



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diagnoses the problem;



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prepares and discusses a price quotation; and



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performs the work and often collects payment from the customer immediately.

        Residential Market—Our work for the residential market consists primarily of electrical installations in new single-family housing and low-rise, multi-family housing, for local, regional and national homebuilders and developers. We believe demand for our residential services is dependent on the number of single-family and multi-family home starts in the markets we serve. Single-family home starts are affected by the level of interest rates, demand and general economic conditions. A competitive factor particularly important in the residential market is our ability to develop relationships with homebuilders and developers by providing services in multiple areas of their operations. This ability has become increasingly important as consolidation has occurred in the residential construction industry, and homebuilders and developers have sought out service providers that can provide consistent service in all of their operating regions.

        We are currently one of the largest providers of electrical contracting services to the U.S. residential construction market, and our residential business has experienced significant growth over the

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last five years. During the last year however, we have been impacted by the residential industry down turn that has resulted in a 25% decline in revenues compared to fiscal year 2006. Our compound annual growth rate from residential electrical revenue has grown 9.1% from fiscal 2003 through 2007 compared to an industry average of approximately 9.5% over the same period. Residential electrical contracting represented approximately 38%, 42% and 37% of our consolidated revenues for the twelve month periods ended September 30, 2007, 2006 and 2005, respectively.

        The residential business is generally more profitable and less capital intensive than our commercial and industrial business; however, the recent housing market has produced increased competition that has impacted margins. It also has lower barriers to entry and has a much lower requirement for surety bonding. Our results of operations from residential construction are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues during fall and winter. For additional segment information see Note 12 to the Consolidated Financial Statements.

Customers

        We have a diverse customer base. We will continue our emphasis on developing and maintaining relationships with our customers by providing superior, high-quality service. During the twelve month periods ended September 30, 2007, 2006 and 2005, no single customer accounted for more than 10% of our revenues.

Backlog

        On September 30, 2007, we had backlog of approximately $334.3 million compared to a backlog of approximately $370.3 million as of September 30, 2006. Of the $36.0 million decline, approximately 70% was associated with our Residential segment due to reductions in multi-family housing demand. The remaining 30% of the decrease was in the Commercial and Industrial segment and is attributed to a shift toward time and materials projects which do not typically have large backlogs.

Company Operations

        We are committed to providing the highest level of customer service through the development of a highly trained workforce. Employees are encouraged to complete a progressive training program to advance their technical competencies and to ensure that they understand and follow the applicable codes, our safety practices and other internal policies. We support and fund continuing education for our employees, as well as apprenticeship training for technicians under the Bureau of Apprenticeship and Training of the Department of Labor and similar state agencies. Employees who train as apprentices for four years may seek to become journeymen electricians and, after additional years of experience, master electricians. We pay progressive increases in compensation to employees who acquire this additional training, and more highly trained employees serve as foremen, estimators and project managers. We also actively recruit and screen applicants for our technical positions and have established programs in some locations to recruit apprentice technicians directly from high schools and vocational technical schools.

Competition

        The electrical contracting industry is highly fragmented and is served by many small, owner-operated private companies. There are also several large private regional and also a small number of large public companies in our industry. We could also face competition in the future from new competitors entering these markets because electrical contracting has a relatively low capital requirement for entry.

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Regulations

        Our operations are subject to various federal, state and local laws and regulations, including:

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licensing requirements applicable to electricians;



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building and electrical codes;



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regulations relating to consumer protection, including those governing residential service agreements;



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regulations relating to worker safety and protection of the environment; and



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qualifications of our business legal structure in the jurisdictions where we do business.

        We expect to have all licenses required to conduct our operations and are in substantial compliance with applicable regulatory requirements. Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses or an inability to perform government work.

        Many state and local regulations governing electricians require permits and licenses to be held by individuals. In some cases, a required permit or license held by a single individual may be sufficient to authorize specified activities for all our electricians who work in the state or county that issued the permit or license. It is our policy to ensure that, where possible, any permits or licenses that may be material to our operations in a particular geographic area are held by multiple IES employees within that area.

Risk Management and Insurance

        The primary risks in our operations include health, bodily injury, property damage and injured workers' compensation. We maintain automobile and general liability insurance for third party health, bodily injury and property damage and workers' compensation coverage, which we consider appropriate to insure against these risks. Our third-party insurance is subject to large deductibles for which we establish reserves and, accordingly, we effectively self-insure for much of our exposures.

Employees

        At September 30, 2007, we had 5,746 employees. We are not a party to any collective bargaining agreements with our employees. We believe that our relationship with our employees is satisfactory.

Available Information

        General information about us can be found on our website at www.ies-co.com under "Investor Relations". We file our interim and annual financial reports, as well as other reports required by the Securities Exchange Act of 1934 with the United States Securities and Exchange Commission (the "SEC"). Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports are free of charge through our website as soon as it is reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (the "SEC"). You may also contact our Investor Relations department and they will provide you with a copy.

        We have adopted a Code of Ethics for Financial Executives, a Code of Business Conduct and Ethics for directors, officers and employees (the Legal Compliance and Corporate Policy Manual), and established Corporate Governance Guidelines and adopted charters outlining the duties of our Audit, Human Resources and Compensation and Nominating/ Governance Committees, copies of which may be found on our website. Paper copies of these documents are also available free of charge upon written request to us. We have designated an "audit committee financial expert" as that term is defined

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by the SEC. Further information about this designee may be found in the Proxy Statement for the Annual Meeting of Stockholders of the Company.

Item 1A.    Risk Factors

        You should consider carefully the risks described below, as well as the other information included in this document before making an investment decision. Our business, results of operations or financial condition could be materially and adversely affected by any of these risks, and the value of your investment may decrease due to any of these risks.

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Our internal control over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur. Internal control over financial reporting and disclosure controls and procedures, no matter how well designed and operated can provide only reasonable, not absolute, assurance that the control system's objective will be met.

        Evaluations are made of our internal control over financial reporting and our disclosure controls and procedures, which include a review of the objectives, design, implementation and effect of the controls and the information generated for use in our periodic reports. In the course of our controls evaluation, we sought (and seek) to identify data errors, control problems and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation is conducted on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our periodic reports.

        A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be satisfied. Internal control over financial reporting and disclosure controls and procedures are designed to give a reasonable assurance that they are effective and achieve their objectives. We cannot provide absolute assurance that all possible future control issues within our company have been detected. These inherent limitations include the possibility that our judgments can be faulty, and that isolated breakdowns can occur because of simple human error or mistake. The design of our system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed absolutely in achieving our stated goals under all potential future or unforeseeable conditions. Because of the inherent limitations in a cost-effect control system, misstatements due to error could occur and not be detected.

        Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2007 and concluded that we did not maintain effective internal control over financial reporting as a result of the identification of a material weakness. The material weakness that we identified relates to control deficiencies at one of our subsidiaries that resulted in the inadequate preparation of estimated costs to complete for certain contracts accounted for under the percentage of completion method. For more information related to this material weakness, see Part II, Item 9A. "Management's Report on Internal Control Over Financial Reporting".

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Downturns in the construction industry could adversely affect our business because more than half of our business is dependent on levels of new construction activity.

        The majority of our business involves the installation of electrical systems in newly constructed and renovated buildings, plants and residences. The construction industry is cyclical and is presently experiencing a downturn in levels of housing starts. This downturn has begun to affect our business, financial condition and results of operations. Our ability to maintain or increase revenues from new installation services will be impacted by the number of new construction starts and renovations, which will likely correlate with the cyclical nature of the construction industry. The number of new building starts will be affected by local economic conditions, and other factors, including the following:

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interest rates and other factors affecting the availability and cost of financing;

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employment and income levels;



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tax implications for homebuyers and commercial construction;



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consumer confidence and demand;



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housing demand; and



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commodity costs such as copper, aluminum, steel, lumber and gasoline.

        A majority of our business is focused in the southeastern and southwestern portions of the United States, concentrating our exposure to local economic conditions in those regions. The residential construction portion of our business experienced slowed growth and cost pressures in the second half of our 2007 fiscal year which affected the profitability of that portion of our business.

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The highly competitive nature of our industry could affect our profitability by reducing our profit margins.

        The electrical contracting industry is served by many small, owner-operated private companies, public companies and several large regional companies. We could also face competition in the future from new competitors entering these markets because electrical contracting has a relatively low capital requirement for entry. Some of our competitors offer a greater range of services, including mechanical construction, facilities management, plumbing and heating, ventilation and air conditioning services. Competition in our markets depends on a number of factors, including price. Some of our competitors may have lower overhead cost structures and may, therefore, be able to provide services comparable to ours at lower rates than we do. If we are unable to offer our services at competitive prices or if we have to reduce our prices to remain competitive, our profitability would be impaired.

•

There is a shortage of qualified electricians. Since the majority of our work is performed by electricians, this shortage may negatively impact our business, including our ability to grow.

        There is a shortage of qualified electricians in the United States. In order to conduct our business, it is necessary to employ electricians and have those electricians qualified in the states where they do business. While overall economic growth has diminished, our ability to increase productivity and profitability may be limited by our ability to employ, train and retain skilled electricians required to meet our needs. Accordingly there can be no assurance, among other things, that:

•

we will be able to maintain the skilled labor force necessary to operate efficiently;



•

our labor expenses will not increase as a result of a shortage in the skilled labor supply; and



•

we will be able to maintain the skilled labor force necessary to implement our planned growth.

•

Due to seasonality and differing regional economic conditions, our results may fluctuate from period to period.

        Our business is subject to seasonal variations in operations and demand that affect the construction business, particularly in residential construction. Untimely weather delay from rain, heat, ice, cold or snow can not only delay our work but can negatively impact our schedules and profitability by delaying the work of other trades on a construction site. Our quarterly results may also be affected by regional economic conditions that affect the construction market. Accordingly, our performance in any particular quarter may not be indicative of the results that can be expected for any other quarter or for the entire year. Additionally, increases in construction materials such as steel, aluminum, copper and lumber can alter the rate of new construction.

13

•

The availability and cost of surety bonds affect our ability to enter into new contracts and our margins on those engagements.

        Many of our customers require us to post performance and payment bonds issued by a surety. Those bonds guarantee the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. We obtain our surety bonds from three different providers; however, there is no commitment from these providers to guarantee our ability to issue bonds for projects as they are required. Our ability to access this bonding capacity is at the sole discretion of our surety providers and is subject to certain limitations such as limits on the size of any individual bond and restrictions on the total amount of bonds that can be issued in a given month. We believe that our relationships with these providers will allow us to provide surety bonds if and when they are required; however, we cannot guarantee that such bonds will be available.

•

The estimates we use in placing bids could be materially incorrect. The use of incorrect estimates could result in losses on a fixed price contract. These losses could be material to our business.

        We currently generate, and expect to continue to generate, more than half of our revenues under fixed price contracts. The cost of gasoline, labor and materials, however, may vary significantly from the costs we originally estimate. Variations from estimated contract costs along with other risks inherent in performing fixed price contracts may result in actual revenue and gross profits for a project differing from those we originally estimated and could result in losses on projects. Depending upon the size of a particular project, variations from estimated contract costs can have a significant impact on our operating results.

•

Commodity costs may fluctuate materially and we may not be able to pass on all cost increases during the term of a contract.

        We enter into many contracts at fixed prices and if the cost associated with commodities such as copper, aluminum, steel, gasoline and certain plastics increase, our expected profit may decline under that contract.

•

We may experience difficulties in managing consolidations.

        We expect to expend significant time and effort managing and merging existing operations. We cannot guarantee that our systems, procedures and controls will be adequate to support operations, including the timely receipt of financial information. As we have consolidated some support functions of human resources, payroll, estimating, safety, accounting, and other administrative support functions it has offered some cost savings. Those savings only arise after the consolidations and after additional time and effort managing that consolidation.

•

We may experience difficulties in managing our billings and collections.

        Our billings under fixed price contracts are generally based upon achieving certain benchmarks and will be accepted by the customer once we demonstrate those benchmarks have been met. If we are unable to demonstrate compliance with billing requests, or if we fail to issue a project billing, our likelihood of collection could be delayed or impaired, which could have a materially adverse effect on our operations if this occurred over several large projects.

•

To service our indebtedness and to fund working capital, we will require a significant amount of cash. Our ability to generate cash depends on many factors.

        Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to our operational performance, as well as general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

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        We cannot provide assurance that our business will generate sufficient cash flow from operations or asset sales and that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before maturity. We cannot provide assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our inability to refinance our debt on commercially reasonable terms would materially adversely affect our business.

•

We have restrictions and covenants under our credit facilities and term loan.

        We may not be able to remain in compliance with the covenants in the term loan or the credit facility. A failure to fulfill the terms may result in a default under one or more of the material agreements.

•

We have adopted tax positions that a taxing authority may view differently. If a taxing authority differs with our tax positions, our results may be adversely affected.

        Our effective tax rate and cash paid for taxes are impacted by tax positions that we have adopted. Taxing authorities may not always agree with the positions we have taken. We believe that we have adequate reserves in the event that a taxing authority differs with positions we have taken, however, there can be no assurance that our results of operations will not be adversely affected.

•

Our reported operating results could be adversely affected as a result of goodwill impairment write-offs.

        When we acquire a business, we record an asset called "goodwill" if the amount we pay for the business, including liabilities assumed, is in excess of the fair value of the assets of the business we acquire. Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" established accounting and reporting requirements for goodwill and other intangible assets. SFAS No. 142 requires that goodwill attributable to each of our reporting units be tested at least annually (absent any impairment indicators). The testing includes comparing the fair value of each reporting unit with its carrying value. Fair value is determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each of the reportable units. On an ongoing basis (absent any impairment indicators), we expect to perform impairment tests at least annually during the last fiscal quarter of each year. Impairment adjustments recognized after adoption, if any, generally are required to be recognized as operating expenses. We cannot assure that we will not have future impairment adjustments to our recorded goodwill.

•

Our operations are subject to numerous physical hazards associated with the construction of electrical systems. If an accident occurs, it could result in an adverse effect on our business.

        Hazards related to our industry include, but are not limited to, electrocutions, fires, machinery caused injuries, mechanical failures or transportation accidents. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and may result in suspension of operations. Our insurance does not cover all types or amounts of liabilities. Our third-party insurance is subject to deductibles for which we establish reserves and, accordingly, we effectively self-insure for much of our exposures. No assurance can be given either that our insurance or our provisions for incurred claims and incurred but not reported claims will be adequate to cover all losses or liabilities we may incur in our operations or that we will be able to maintain adequate insurance at reasonable rates.

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•

The loss of a group of key personnel, either at the corporate or operating level, could adversely affect our business.

        The loss of key personnel or the inability to hire and retain qualified employees could have an adverse effect on our business, financial condition and results of operations. Our operations depend on the continued efforts of our current and future executive officers, senior management and management personnel at the companies. We cannot guarantee that any member of management at the corporate or subsidiary level will continue in their capacity for any particular period of time. If we lose a group of key personnel or even one key person at a company, our operations could be adversely affected. We do not maintain key man life insurance.

•

We have restrictions and covenants under our credit facilities and term loan.

        We may not be able to remain in compliance with the covenants in the term loan or the credit facility. A failure to fulfill the terms may result in a default under one or more of the material agreements.

•

The loss of productivity, either at the corporate office or operating level, could adversely affect our business.

        Our business is primarily driven by labor. The ability to perform contracts at acceptable margins depends on our ability to deliver substantial labor productivity. We cannot guarantee that productivity will continue at acceptable levels at our corporate office and our operating subsidiaries for a particular period of time. With the increased activity of de-levering our balance sheet and the uncertainty in the market there is an increased difficulty in maintaining morale and focus of employees. The loss of productivity could adversely affect the margins on existing contracts or the ability to obtain new contracts.

•

Litigation and claims can cause unexpected losses.

        In the construction business there are always claims and litigation. Latent defect litigation is a normal course for residential home builders in some parts of the country. Legislation in other states indicates such litigation may increase in other markets. There is also the inherent claims and litigation risk of the number of people that work on construction sites and the fleet of vehicles on the road everyday. Those claims and litigation risks are managed through safety programs, insurance programs, litigation management at the corporate office and the local level and attorneys and law firms throughout the country. Nevertheless, claims are sometimes made and lawsuits filed and some for amounts in excess of their value or amounts for which they are eventually resolved. Claims and litigation normally follow a predictable course of time to resolution. Given our size, with many contracts and employees, there can be periods of time where a disproportionate amount of the claims and litigation may be concluded in the same quarter or year. If these matters resolve near the same time then the cumulative effect can be higher than the ordinary level in any one reporting period.

        Latent defect litigation is increasing in states where we perform work. Such increases can put additional pressure on the profitability of the residential segment of our business.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        We operate a fleet of approximately 2,200 owned and leased service trucks, vans and support vehicles. We believe these vehicles generally are adequate for our current operations.

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        At September 30, 2007, we maintained branch offices, warehouses, sales facilities and administrative offices at 122 locations. Substantially all of our facilities are leased. We lease our corporate office located in Houston, Texas.

        Our properties are generally adequate for our present needs, and we believe that suitable additional or replacement space will be available as required.

Item 3.    Legal Proceedings

        Refer to Note 16 of Notes to Consolidated Financial Statements which is incorporated herein by reference.

Item 4.    Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of our fiscal year ended September 30, 2007.

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PART II

Item 5.    Market for Registrant's Common Equity; Related Stockholder Matters and Issuer Purchases of Equity Securities

        Prior to December 15, 2005, our common stock traded on the NYSE under the symbol "IES". Between December 15, 2005 and May 12, 2006, our common stock traded over-the-counter on the pink sheets under the symbol "IESR". On May 12, 2006, concurrent with the completion of our restructuring and emergence from bankruptcy, our common stock effectively underwent a reverse stock split which converted 17.0928 shares of old common stock into the right to receive one share of new common stock. On May 15, 2006, our common stock commenced trading on NASDAQ under the ticker symbol "IESC". The following table sets forth (1) the high and low close price on any given day within the quarter for our common stock as reported on the NYSE for the portion of the first quarter of fiscal 2006 for the period from October 1, 2005 through December 14, 2005, (2) the high and low bid quotation on any given day within the quarter for our common stock as reported in the over-the-counter market on the pink sheets for the portion of the first quarter of fiscal 2006 from December 15, 2005 through December 31, 2005, the second quarter of fiscal 2006 and the portion of the third quarter of fiscal 2006 from April 1, 2006 to May 12, 2006, and (3) the high and low close price on any given day within the quarter for our common stock as reported on NASDAQ for the portion of the third quarter of fiscal 2006 from May 15, 2006 to June 30, 2006, the fourth quarter of fiscal 2006, and each of the four quarters of fiscal 2007. The over-the-counter quotations reflect inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. The following per share amounts prior to May 1, 2006 have been adjusted for the effect of the 17.0928 to 1 reverse stock split.

Predecessor Company

Successor Company

        As of December 10, 2007, the closing market price of our Common Stock was $19.20 per share and there were approximately 294 holders of record.

        We have never paid cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. We expect that we will utilize all available earnings generated by our operations, proceeds from sales of operations and borrowings under our credit facility for the development and operation of our business or the repurchase of Company common stock. Any future determination as to the payment of dividends will be made at the discretion of our Board of Directors

18

and will depend upon our operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. Our debt instruments restrict us from paying cash dividends and also place limitations on our ability to repurchase our common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources".

Five-Year Stock Performance Graph

        The following performance graph compares the Company's cumulative total stockholder return on its Common Stock with the cumulative total return of (i) the Russell 2000, (ii) a new peer group stock index (the "New Peer Group") selected in good faith by the Company made up of the following publicly traded companies: Comfort Systems USA, Inc., Dycom Industries, Inc., Mastec, Inc. and Pike Electric Corp., and (iii) a previously used peer group stock index (the "Old Peer Group") which had been selected in good faith by the Company made up of the following publicly traded companies: Comfort Systems USA, Inc., Dycom Industries, Inc., Infrasource Services, Inc. and Mastec, Inc. Due to the Company's reduction in revenues as a result of the disposition and elimination of several operating units and a reduction in the scope of operations of several of the remaining units the Company believes the removal of Infrasource Services and the addition of Pike Electric more accurately represents the Company's peers. The cumulative total return computations set forth in the Performance Graph assume the investment of $100 in the Company's Common Stock, the Russell 2000, the New Peer Group and the Old Peer Group on September 30, 2002, and that all dividends have been reinvested. Shareholder returns over the period indicated should not be considered indicative of future shareholder returns.

        The information contained in the Performance Graph shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such filing.

Copyright© 2007. Standard and Poor's, a division of the McGraw Hill Companies, Inc. All rights reserved www.researchdatagroup.com/s&p.htm

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        The reverse split of one share of New Common Stock for 17.0928 shares of Old Common Stock which occurred on the Plan Effective Date resulted in the beginning number of shares on 9/30/02 to be restated.

Issuer Purchases of Equity Securities

(1)

These shares were withheld upon the vesting of an employee restricted stock grant in order to pay required withholding taxes.

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Item 6.    Selected Financial Data

        The following selected consolidated historical financial information for IES should be read in conjunction with the audited historical consolidated financial statements of Integrated Electrical Services, Inc. and subsidiaries and the notes thereto included in Item 8, "Financial Statements and Supplementary Data".

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in the Form 10-K. See "Disclosure Regarding Forward-Looking Statements".

General

        The terms, "IES", the "Company", "we", "our", and "us", when used with respect to the periods prior to our emergence from Chapter 11, are references to the Predecessor, and when used with respect to the period commencing after our emergence, are references to the Successor, as the case may be, unless otherwise indicated or the context otherwise requires.

Voluntary Reorganization Under Chapter 11

        On February 14, 2006, we filed voluntary petitions for reorganization under Chapter 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. The Bankruptcy Court jointly administered these cases as "In re Integrated Electrical Services, Inc. et. al. Case No. 06-30602-BJH-11". On April 26, 2006, the Bankruptcy Court entered an order approving and confirming the plan of reorganization. The plan was filed as Exhibit 2.1 to our current report on Form 8-K, filed on May 1, 2006. Capitalized terms used in this section but not defined herein shall have the meaning set forth in the plan. We operated our businesses and managed our properties as debtors-in-possession in accordance with the Bankruptcy Code from February 14, 2006, the commencement date, through emergence from Chapter 11 on May 12, 2006.

Basis of Presentation

        In accordance with Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), we applied "fresh-start" accounting as of April 30, 2006. Fresh-start accounting requires us to allocate the reorganization value to our assets and liabilities in a manner similar to that which is required under Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). Under the provisions of fresh-start accounting, a new entity has been deemed created for financial reporting purposes. References to "Successor" in the financial statements are in reference to reporting dates on and after April 28, 2006. References to "Predecessor" in the financial statements are in reference to reporting dates through April 30, 2006, including the impact of plan provisions and the adoption of fresh-start reporting. As such, our financial information for the Successor is presented on a basis different from, and is therefore not comparable to, our financial information for the Predecessor for the period ended and as of April 30, 2006 or for prior periods. For further information on fresh-start accounting, see Note 2 to our Consolidated Financial Statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature.

The Plan of Reorganization

        The plan was approved by the Bankruptcy Court on the confirmation date, April 26, 2006. In accordance with the plan:

(i)

The holders of the senior subordinated notes received on the date we emerged from bankruptcy, in exchange for their total claims (including principal and interest), 82% of the fully diluted new common stock representing 12,631,421 shares, before giving effect to options to be issued under a new employee and director stock option plan which could be up to 10% of the fully diluted shares of new IES common stock outstanding as of the effective date of the plan.

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(ii)

The holders of old common stock received 15% of the fully diluted new common stock representing 2,310,614 shares, before giving effect to the 2006 equity incentive plan.



(iii)

Certain members of management received 384,850 restricted shares of new common stock equal to 2.5% of the fully diluted new common stock with an additional 0.5% reserved for new key employees, before giving effect to the 2006 equity incentive plan. The restricted shares of new common stock vest over an approximately 31.5 month period.



(iv)

The $50 million in senior convertible notes were refinanced from the proceeds of the $53 million term loan (see Note 9 to our Consolidated Financial Statements).



(v)

All other allowed claims were either paid in full in cash or reinstated.

Reorganization Items

        Reorganization items refer to revenues, expenses (including professional fees), realized gains, losses and provisions for losses that are realized or incurred as a result of the bankruptcy proceedings. There were no reorganization items recorded during the year ended September 30, 2007 or the year ended September 30, 2005. The following table summarizes the components included in reorganization items on the consolidated statements of operations for the five months ended September 30, 2006 (Successor) and for the seven months ended April 30, 2006 (Predecessor) (in thousands):

(1)

Gain on extinguishment of the senior subordinated notes in exchange for common stock of the Successor in accordance with the plan.

(2)

Adjustments to reflect the fair value of assets and liabilities in accordance with fresh-start accounting.

(3)

Costs for professional services including legal, financial advisory and related services.

(4)

Write off of unamortized debt discounts, premiums and other costs related to the allowed claims for the senior subordinated notes and senior convertible notes.

(5)

Write off of embedded derivatives related to the allowed claim for the senior convertible notes.

(6)

Write off of unamortized debt issuance costs related to the allowed claims for the senior subordinated notes and senior convertible notes.

Delisting from the NYSE

        On December 15, 2005 the NYSE suspended trading of our common stock and informed us of the NYSE's intent to submit an application to the SEC to delist our common stock after completion of applicable procedures, including any appeal by us of the NYSE's staff's decision. We appealed the NYSE's staff's decision. On April 11, 2006, we received notification from the NYSE that the NYSE

23

staff's decision was affirmed to suspend and delist the common stock. In addition, the NYSE staff was directed to submit an application to the SEC to strike the common stock from listing in accordance with Section 12 of the Securities Exchange Act of 1934. On June 26, 2006, our listing on the NYSE was removed.

Listing on NASDAQ

        We submitted the initial application to list our new common stock on NASDAQ upon emerging from Chapter 11. Our application was approved and listed for quotation commencing on May 15, 2006. Our new common stock now trades under the ticker symbol IESC.

Exit or Disposal Activities

        As a result of disappointing operating results, the Board of Directors directed us to develop alternatives with respect to certain underperforming subsidiaries. These subsidiaries were included in our Commercial and Industrial segment. On March 28, 2006, we committed to an exit plan with respect to those underperforming subsidiaries. The exit plan committed to a shut-down or consolidation of the operations of these subsidiaries, or the sale or other disposition of the subsidiaries, whichever came sooner. Further information can be obtained by referring to Part II, Item 7. "Discontinued Operations" for a summary of the exit plan.

        In our assessment of the estimated net realizable value related to accounts receivable at these subsidiaries, in March 2006, we increased our general allowance for doubtful accounts having considered various factors including the risk of collection and the age of the receivables. We believe this approach is reasonable and prudent.

        In June 2007, we shut down our Mid-States Electric operating company, located in Jackson, Tennessee. Mid-States' operating equipment was either transferred to other IES companies or will be sold to third parties. All project work was completed prior to the subsidiary being closed. Mid-States' assets, liabilities and operating results for both the current and prior periods have been reclassified as discontinued operations.

        Remaining net working capital related to these subsidiaries was $4.3 million and $15.9 million at September 30, 2007 and 2006, respectively. As a result of the inherent uncertainty in the exit plan and the monetization of these subsidiaries' working capital, we could experience additional losses of working capital. We believe we have recorded adequate reserves to reflect the net realizable value of the working capital; however, subsequent events may impact our ability to monetize these assets.

        The exit plan is substantially complete for the subsidiaries that we elected to exit in March 2006, and the operations of these subsidiaries ceased as of September 30, 2006. Mid-States' operations were shut down as of September 30, 2007. We have included the results of operations related to these subsidiaries in discontinued operations for both the current period and all prior periods. Accordingly, previously reported results of these operations have been reclassified. Revenue for these subsidiaries totaled $9.1 million, $20.9 million, $74.8 million and $360.2 million for the year ended September 30, 2007, the five month period ended September 30, 2006, the seven month period ended April 30, 2006, and the year ended September 30, 2005 respectively.

Restricted Stock Compensation Error

        In January 2007, we became aware of a bookkeeping error in which we had under-recorded compensation expense related to unvested restricted stock. On May 12, 2006, we granted various employees restricted stock. The restricted stock vested in equal amounts on January 1, 2007, 2008, and 2009. At the time of grant, we estimated the total compensation expense related to the restricted shares and began amortizing the expense straight-line over the vesting periods. However, the straight-line

24

amortization did not consider that the first tranche of restricted stock vested in 7.5 months and not at 12 month intervals as did tranche two and tranche three. As such, the results for the year ended September 30, 2007 include a charge to compensation expense of $0.5 million attributable to the five month period ended September 30, 2006.

        We have considered the guidance in Statement of Financial Accounting Standard No. 154 "Accounting Changes & Error Corrections" ("SFAS 154"), Accounting Principles Board No. 28 "Interim Financial Reporting," SEC Staff Accounting Bulletin No. 99 "Materiality," and SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," in evaluating whether a restatement of prior financial statements is required as a result of the misstatement to such financial statements. SFAS 154 and its predecessor, Accounting Principles Board No. 20 "Accounting Changes," both require that corrections of errors be recorded by restatement of prior periods if the error is material. Based on an evaluation of quantitative and qualitative factors, we have concluded that the restatement of previously issued financial statements is not necessary, as we currently believe the identified misstatement is immaterial to our consolidated financial statements.

Surety

The CHUBB Surety Agreement

        We are party to an underwriting, continuing indemnity and security agreement, dated May 12, 2006, since amended, with Federal Insurance Company and its affiliates (collectively "CHUBB"), which provides for the provision of surety bonds to support our contracts with certain of our customers. As of September 30, 2007, we had $87.9 million in bonded costs to complete under outstanding CHUBB bonds.

        In connection with our restructuring and the order confirming our plan of reorganization under Chapter 11 of the Bankruptcy Code, we entered into a post-confirmation financing agreement with CHUBB. Effective June 1, 2006, this agreement provides (1) for CHUBB, at its sole and absolute discretion, to issue up to an aggregate of $70 million in new surety bonds, with not more than $10 million in new surety bonds to be issued in any given month; (2) no single bond will be issued under the facility with a penal sum in excess of $3 million, or with respect to a contract having a completion date more than 18 months from the commencement of work thereunder, and (3) CHUBB's consent is required for our use of cash collateral in the form of proceeds of all contracts as to which CHUBB has issued surety bonds. We paid a facility fee of $1.0 million to CHUBB at inception of this agreement. This fee was capitalized and fully amortized through December 31, 2006.

        On October 30, 2006, we entered into an amendment to the surety agreement with CHUBB. Under the amendment, we agreed to pay a facility fee of $500,000, of which $250,000 was paid concurrently with the entry into the amendment. The balance was paid on January 2, 2007. The amendment allowed us to have up to $80 million cost to complete on bonded projects at any time. The amendment deleted the expiration date for issuance of bonds under the surety agreement and deleted the cap on the aggregate amount of bonds that may be issued in any calendar month. The amendment also provided for the reduction of the existing pledged cash collateral amount to $14.0 million by January 2, 2007. The excess collateral amount of $5.0 million was returned to us on November 1, 2006, net of the $250,000 facility fee. This $5.0 million was included in prepaid expenses and other current assets at September 30, 2006. Further details can be obtained on the amendment in our current report on Form 8-K dated October 30, 2006. The amendment removes prior restrictions on writing bonds to two of our subsidiaries. The Amendment reduces the bond premium from $17.50 per thousand dollars to $15.00 per thousand dollars. Additionally, the Amendment amends the definition of "Surety Loss" to exclude certain professional fees incurred before October 31, 2006, from the Surety's costs.

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        On May 31, 2007, CHUBB returned an additional $5.0 million of collateral to us. This $5.0 million was included in other non-current assets, net on September 30, 2006 and was classified as an increase in cash flow from operations for the year ended September 30, 2007.

        On October 1, 2007, we amended the surety agreement with CHUBB to allow us to have up to $150 million cost to complete on bonded projects at any time.

        We expensed $0.9 million for the year ended September 30, 2007 in facility fees in connection with the CHUBB agreements.

The SureTec Bonding Facility

        We are party to a general agreement of indemnity dated September 21, 2005, since amended, with SureTec Insurance Company ("SureTec"), which provides for the provision of surety bonds to support our contracts with certain of our customers.

        The SureTec facility provides for SureTec in its sole and absolute discretion to issue up to an aggregate of $10 million in surety bonds. Bonding in excess of $5 million is subject to SureTec's receipt of additional collateral in the form of an additional irrevocable letter of credit from Bank of America in the amount of $1.5 million. As of September 30, 2007, we had $0.7 million bonded cost to complete under the SureTec bonding facility.

The Scarborough Bonding Facility

        We are party to a general agreement of indemnity dated March 21, 2006, since amended, with Edmund C. Scarborough, Individual Surety ("Scarborough"), to supplement the bonding capacity under the CHUBB facility and the SureTec facility.

        Under the Scarborough facility, Scarborough has agreed to extend aggregate bonding capacity not to exceed $150 million in additional bonding capacity with a limitation on individual bonds of $15 million. Scarborough is an individual surety (as opposed to a corporate surety, like CHUBB or SureTec), and these bonds are not rated. However, the issuance of Scarborough's bonds to an obligee/contractor is backed by an instrument referred to as an irrevocable trust receipt issued by First Mountain Bancorp as trustee for investors who pledge assets to support the receipt and thus the bond. The bonds are also reinsured.

        Scarborough's obligation to issue new bonds is discretionary, and the aggregate bonding was subject to Scarborough's receipt of $2.0 million in collateral to secure all of our obligations to Scarborough. Bank of America and Scarborough have entered into an inter-creditor agreement. As of September 30, 2007, we have $46.7 million in aggregate face value of bonds issued under the Scarborough bonding facility. As of September 30, 2007, we had $9.8 million of bonded cost to complete under the Scarborough bonding facility.

Financing

Pre-Petition Credit Facility

        On August 1, 2005, we entered into a three-year $80 million pre-petition asset-based revolving credit facility with Bank of America, N.A., as administrative agent. The pre-petition credit facility allowed us and our subsidiaries to obtain revolving credit loans and provided for the issuance of letters of credit. The amount available at any time under the pre-petition credit facility for revolving credit loans or the issuance of letters of credit was determined by a borrowing base calculated as a percentage of accounts receivable, inventory and equipment. The borrowings were limited to $80 million.

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        We amended the pre-petition credit facility several times between August 2005 and February 2006 prior to filing for Chapter 11 bankruptcy. The pre-petition credit facility was replaced by a debtor-in-possession credit facility on February 14, 2006.

Debtor-in-Possession Financing

        On February 14, 2006, in connection with our Chapter 11 filing, we entered into the debtor-in-possession loan and security agreement with Bank of America. The debtor-in-possession credit facility was approved by the Bankruptcy Court on an interim basis on February 15, 2006, and on a final basis on March 10, 2006.

        The debtor-in-possession credit facility provided for an aggregate financing of $80 million while we were in bankruptcy, consisting of a revolving credit facility of up to $80 million, with a $72 million sub-limit for letters of credit. All letters of credit and other obligations outstanding under the pre-petition credit facility constituted obligations and liabilities under the debtor-in-possession credit facility. Accordingly, we wrote off approximately $3.8 million in unamortized deferred financing costs related to the pre-petition credit facility during the quarter ended March 31, 2006.

        We utilized the debtor-in-possession credit facility to issue letters of credit for (1) certain insurance programs; (2) our surety programs; and (3) certain projects.

        On our emergence from bankruptcy, in accordance with the plan, the debtor-in-possession credit facility was replaced by a new credit facility. As a result, previously capitalized deferred issuance costs of $0.7 million were written off to interest expense and are reflected in the statements of operations for the seven month period ended April 30, 2006. Amortization during the seven months period ended April 30, 2006 was $0.5 million.

The Revolving Credit Facility

        On the date we emerged from bankruptcy, May 12, 2006, we entered an agreement (the "Loan and Security Agreement") for a revolving credit facility (the "Revolving Credit Facility") with Bank of America and certain other lenders. The Revolving Credit Facility provides us access to revolving borrowings in the aggregate amount of up to $80 million, with a $72 million sub-limit for letters of credit, for the purpose of refinancing the debtor-in-possession credit facility and to provide letters of credit and financing subsequent to confirmation of the plan. At September 30, 2007, we had $31.1 million availability on the Revolving Credit Facility and $43.1 million in letters of credit issued against the Revolving Credit Facility with remaining availability of $28.9 million for letters of credit; however, in order to remain in compliance with our financial covenants, we can only borrow up to $2.5 million of this amount.

        On October 13, 2006, we entered into an amendment and waiver to the Loan and Security Agreement. This amended the loan agreement to change the minimum amount of the Shutdown EBIT (as defined in the loan and security agreement under Exhibit 10.1 on the Form 8-K filed on May 17, 2006) for the period of October 1, 2005 through September 30, 2006 from a loss of $18.0 million to a loss of $21.0 million. The amendment also provided a waiver of any violation of the loan and security agreement resulting from our failure to achieve the minimum Shutdown EBIT on the August 31, 2006 measurement date.

        On November 30, 2006, we entered into an amendment, dated October 1, 2006, to the Loan and Security Agreement. This amended the loan and security agreement to change the minimum amount of the Shutdown EBIT (as defined in the loan and security agreement under Exhibit 10.1 on the Form 8-K filed on May 17, 2006) for the period beginning on October 1, 2006 and thereafter from zero to negative $2.0 million. Additionally, the definition of Consolidated Fixed Charge Conversion Ratio was modified.

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        On December 11, 2006, we entered into an amendment to the Loan and Security Agreement. This amended the loan agreement to change the minimum amount of the Shutdown EBIT (as defined in the loan and security agreement under Exhibit 10.1 on the Form 8-K filed on May 17, 2006) for the period of October 1, 2005 through September 30, 2006 from a loss of $21.0 million to a loss of $22.0 million.

        On May 7, 2007, we entered into an amendment to the Loan and Security Agreement dated May 12, 2006. This amended the loan agreement to allow us to pay down $15 million in principal on the senior secured term loan. The amendment also included the reduction of the Leverage Ratio, and the elimination of the Residential EBIT and Commercial EBIT (all defined terms in the loan and security agreement under Exhibit 10.1 on the Form 8-K filed on May 17, 2006) covenant tests. There was a $0.1 million non-refundable amendment fee included as part of the amendment.

        On December 12, 2007, we entered into an amendment to the Loan and Security Agreement. The amendment allowed for the exclusion from the calculation of fixed charges, in determining the fixed charge coverage ratio, certain capital investments made in September 2007 by the Company as part of its transformation program to implement operational improvements. The amendment also permitted the Company to pay off its existing term loan and enter into a new subordinated note agreement for a reduced principal amount. Finally, the amendment allowed the Company to implement a stock repurchase program for up to $27.5 million over the following 24 months.

        Loans under the Revolving Credit Facility bear interest at LIBOR plus 3.5% or the base rate plus 1.5% on the terms set in the credit agreement. In addition, we are charged monthly in arrears (1) an unused line fee of either 0.5% or 0.375%, depending on the utilization of the credit line, (2) a letter of credit fee equal to the applicable per annum LIBOR margin times the amount of all outstanding letters of credit and (3) certain other fees and charges as specified in the credit agreement.

        The Revolving Credit Facility will mature on May 12, 2008, and we are currently developing refinancing alternatives. The Revolving Credit Facility is guaranteed by our subsidiaries and is secured by first priority liens on substantially all of our existing and future acquired assets, exclusive of collateral provided to sureties. The Revolving Credit Facility contains customary affirmative, negative and financial covenants. The financial covenants are described below in the section titled "Financial Covenants."

The Eton Park/Flagg Street Term Loan

        On the date we emerged from bankruptcy, May 12, 2006, we entered into a $53 million senior secured term loan (the "Term Loan") with Eton Park Fund L.P. and its affiliate and Flagg Street Partners LP and certain of its affiliates for refinancing the senior convertible notes.

        The Term Loan bears interest at 10.75% per annum, subject to adjustment as set forth in the Term Loan agreement. Interest is payable in cash, quarterly in arrears, provided that, at our sole discretion, until the third anniversary of the closing date that we have the option to direct that interest be paid by capitalizing that interest as additional loans under the Term Loan. We capitalized interest as additional loans of $5.0 million and $2.6 million for the year ended September 30, 2007 and the five month period ending on September 30, 2006, respectively. As of September 30, 2007, we have capitalized interest as additional loans of $7.6 million. Subject to the Term Loan lenders' right to demand repayment in full on or after the fourth anniversary of the closing date, the Term Loan will mature on the seventh anniversary of the closing date at which time all principal will become due. The Term Loan contains customary affirmative, negative and financial covenants binding on us, including, without limitation, a limitation on indebtedness of $90 million under the Revolving Credit Facility with a sub-limit on funded outstanding indebtedness of $25 million, as more fully described in the Term Loan agreement. Additionally, the Term Loan includes provisions for optional and mandatory prepayments on the conditions as set forth in the Term Loan agreement. The Term Loan is guaranteed by our subsidiaries, is secured by substantially the same collateral as the Revolving Credit Facility, and is second in priority to the liens securing the Revolving Credit Facility. The interest rate on the Term Loan is adjusted at

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the end of each quarter based on our performance for the period from January 1, 2006 through the end of the quarter. Based on this criterion, the adjusted interest rate on the Term Loan was as follows:

        On November 30, 2006, we entered into an amendment, dated October 1, 2006, to the Term Loan agreement, dated May 12, 2006, with Eton Park Fund, L.P. and its affiliate, Flagg Street Partners LP and certain of its affiliates, and Wilmington Trust Company as administrative agent. This amends the Term Loan to, among other things, change the amount of EBIT permitted for the companies associated with the exit plan ((See Part II, Item 7, "Costs Associated with Exit or Disposal Activities" above for a summary of the exit plan)) from not less than zero to not less than negative $2.0 million. The covenant requiring these subsidiaries to have certain minimum amounts of cash in order to convert a minimum amount of their aggregate net working capital into cash was deleted. Additionally, the definition of Consolidated Fixed Charge Conversion Ratio was modified.

        On May 8, 2007, we entered into an amendment to the loan agreement, dated May 12, 2006, with Eton Park Fund, L.P. and its affiliate, Flagg Street Partners LP and certain of its affiliates, and Wilmington Trust Company as administrative agent. This amends the loan agreement to reduce the Consolidated Leverage Ratio, and to eliminate the requirement of the Residential EBIT and Commercial EBIT (all as defined in the Term Loan agreement filed as Exhibit 10.3 to our Form 8-K dated May 12, 2006) covenant tests. There was a $0.1 million non-refundable amendment fee and a $0.7 million prepayment penalty included as part of the amendment.

        As described in Note 18 "Subsequent Events" to our Consolidated Financial Statements, on December 12, 2007, we terminated the Term Loan by prepaying in full all outstanding principal and accrued interest on the loan. On the same day, we entered into a $25 million senior subordinated loan agreement with a group led by Tontine Capital Partners, L.P., a related party.

Financial Covenants

        The financial covenants for both the Revolving Credit Facility and Term Loan were the same until December 12, 2007. As discussed in Note 18 "Subsequent Events" to our Consolidated Financial Statements, on December 12, 2007, we entered into an amendment to the Loan and Security Agreement. The amendment allowed for the exclusion from the calculation of fixed charges, in determining the fixed charge coverage ratio, of certain capital investments we made in September 2007 as part of our transformation program to implement operational improvements. As also discussed in Note 18 "Subsequent Events," we repaid the Term Loan in its entirety on December 12, 2007; therefore, we did not seek an amendment to the financial covenant calculations on the Term Loan. We were in compliance with all of the amended financial covenants under the Revolving Credit Facility, which are shown in the table that follows:

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As of September 30, 2006, we were also in compliance with all of our financial covenants.

Restructuring Program

        We are restructuring our operations into three major lines of business: Industrial, Commercial and Residential from our geographic structure. This operational restructuring is a part of our long-term strategic plan to reduce our cost structure, reposition our business to better serve our customers, strengthen financial controls and, as a result, position us to implement a market-based growth strategy in the future. The operational restructuring plan will consolidate administrative support functions, eliminating redundant functions currently performed at our 27 business units. We estimate we will achieve a 15-20% reduction in non-operational field resource compensation costs through this restructuring and, along with improved operational efficiencies, will result in approximately $15 million in annualized savings. We expect to incur pre-tax restructuring charges, including severance benefits and facility consolidations and closings, of approximately $10 million over the course of the restructuring process, which will be implemented over approximately 18 months. Of this $10 million, we expect approximately 70% to be used in our Commercial and Industrial segment and approximately 30% to be used in our Residential segment.

        The first component of this program was initiated in June 2007. Under this portion of the restructuring, five of our business units were integrated under the IES Industrial division, and the support and administrative functions of those businesses were combined at an operating location in Houston, Texas. In connection with this realignment, we approved a transition and severance benefits plan for 10 employees who were separated from the Company on or before September 30, 2007 through the elimination of redundant positions. We recognized approximately $0.2 million in severance liabilities for the value of cash compensation and payroll taxes which will be paid through March 2008.

        The second component of this program was initiated in September 2007. Under this portion of the restructuring, 17 of our business units were integrated under the IES Commercial division, and the support and administrative functions of those businesses were combined at an operating location in Tempe, Arizona. In connection with this realignment, we approved a transition and severance benefits plan for approximately 35 employees who will be separated through the elimination of redundant positions. The affected employees will continue to work for the Company for up to six months. We recognized approximately $0.1 million in severance liabilities for cash compensation and payroll taxes which we incurred in the fourth quarter of our 2007 fiscal year, and we expect to recognize an additional $0.5 million in severance liabilities for the estimated fair value of cash compensation which we expect to incur our 2008 fiscal year. These severance payments will be paid through October 2008.

        The third component of this program was initiated in September 2007. Under this portion of the restructuring, five of our business units will be integrated under the IES Residential division during our 2008 fiscal year, and the support and administrative functions of those businesses will be combined at an operating location near Houston, Texas. In connection with this realignment, we approved a transition and severance benefits plan for approximately five employees who will be separated through the elimination of redundant positions. As of September 30, 2007, we have not recognized a liability for any severance liabilities because we had not determined how many or which employees would be affected as of that date. Ultimately, we expect to recognize $0.1 million in severance liabilities for the estimated fair value of cash compensation which we expect to incur in fiscal year 2008.

        In addition to the severance costs described above, we incurred charges of approximately $0.5 million for consulting services associated with the restructuring program during the year ended September 30, 2007.

Investment in Energy Photovoltaics, Inc.

        On July 16, 2006, we entered into a stock purchase agreement with Tontine Capital Overseas Master Fund, L.P. ("Tontine"). Tontine, together with its affiliates, owns approximately 48% of our

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outstanding stock. Joseph V. Lash, a member of Tontine Associates, LLC, an affiliate of Tontine, is a member of our Board of Directors.

        Pursuant to the stock purchase agreement, on July 17, 2006 we issued 58,072 shares of our common stock to Tontine for a purchase price of $1.0 million in cash. The purchase price per share was based on the closing price of our common stock quoted on the NASDAQ Stock Market on July 14, 2006. The proceeds of the sale were used to make a new $1.0 million investment in Energy Photovoltaics, Inc. ("EPV"), a company in which we, prior to this new investment, held and continue to hold a minority interest. The IES common stock was issued to Tontine in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

        We had previously accounted for our original investment in EPV under the equity method of accounting and accordingly recorded our share of EPV's losses. The carrying amount of the original investment prior to this new investment was zero at September 30, 2005 as a result of recording our pro-rata share of losses and an impairment charge of $0.7 million. Additionally, we had a note receivable from EPV of $1.8 million that was completely written off prior to September 30, 2005. In conjunction with the new investment of $1.0 million in exchange for EPV common stock, we converted the previous note receivable investment and the previous preferred stock investment into common stock of EPV. As of September 30, 2007, we owned 18.3% of EPV common stock, which can be diluted down to 14.1% assuming full exercise of all available stock options for grant and the exercise of all outstanding warrants. We began accounting for this new investment in EPV using the cost method of accounting in July 2006.

Critical Accounting Policies

        In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we have identified the accounting principles, which we believe are most critical to our reported financial status by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to revenue recognition, the assessment of goodwill impairment, our allowance for doubtful accounts receivable, the recording of our self-insurance liabilities and estimation of the valuation allowance for deferred tax assets. These accounting policies, as well as others, are described in Note 5 of "Notes to Consolidated Financial Statements" and at relevant sections in this discussion and analysis.

        As a result of the Chapter 11 bankruptcy proceedings, we prepared our financial statements in accordance with SOP 90-7 from the commencement date through April 30, 2006, the date of adoption of fresh-start reporting. SOP 90-7 requires us to, among other things, (1) identify and disclose separately transactions that are directly associated with the bankruptcy proceedings from those events that occur during the normal course of business, (2) segregate pre-petition liabilities subject to compromise from those that are not subject to compromise or post-petition liabilities, (3) assess the applicability of fresh-start accounting upon emergence from bankruptcy and (4) allocate the reorganization value to our assets and liabilities only if fresh-start is applicable. This allocation requires certain assumptions and estimates to determine the fair value of asset groups including estimates about future cash flows and discount rates, among other things.

        We enter into contracts principally on the basis of competitive bids. We frequently negotiate the final terms and prices of those contracts with the customer. Although the terms of our contracts vary considerably, most are made on either a fixed price or unit price basis in which we agree to do the work for a fixed amount for the entire project (fixed price) or for units of work performed (unit price). We also perform services on a cost-plus or time and materials basis. We currently generate, and expect to continue to generate, more than half of our revenues under fixed price contracts. Our most significant cost drivers are the cost of labor, the cost of materials and the cost of casualty and health insurance. These costs may vary from the costs we originally estimated. Variations from estimated

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contract costs along with other risks inherent in performing fixed price and unit price contracts may result in actual revenue and gross profits or interim projected revenue and gross profits for a project differing from those we originally estimated and could result in losses on projects. Depending on the size of a particular project, variations from estimated project costs could have a significant impact on our operating results for any fiscal quarter or year. We believe our exposure to losses on fixed price contracts is limited in aggregate by the high volume and relatively short duration of the fixed price contracts we undertake. Additionally, we derive a significant amount of our revenues from new construction and from the southern part of the United States. Downturns in new construction activity in the southern part of the United States could negatively affect our results.

        We complete most projects within one year. We frequently provide service and maintenance work under open-ended, unit price master service agreements which are renewable annually. We recognize revenue on service, time and material work when services are performed. Work performed under a construction contract generally provides that the customers accept completion of progress to date and compensate us for services rendered, measured in terms of units installed, hours expended or some other measure of progress. Revenues from construction contracts are recognized on the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"). Percentage-of-completion for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total costs for each contract at completion. We generally consider contracts substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs, profitability and final contract settlements may result in revisions to costs and income, and the effects of such revisions are recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined.

        We evaluate goodwill for potential impairment in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Included in this evaluation are certain assumptions and estimates to determine the fair values of reporting units such as estimates of future cash flows and discount rates, as well as assumptions and estimates related to the valuation of other identified intangible assets. Changes in these assumptions and estimates or significant changes to the market value of our common stock could materially impact our results of operations or financial position. During the year ended September 30, 2005, we recorded goodwill impairments of $51.8 million. We did not record goodwill impairment during the year ended September 30, 2007, the five month period ended September 30, 2006, or the seven month period ended April 30, 2006.

        In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," we periodically assess whether any impairment indicators exist. If we determine impairment indicators exist, we conduct an evaluation to determine whether any impairment has occurred. This evaluation includes certain assumptions and estimates to determine fair value of asset groups, including estimates about future cash flows and discount rates, among others. Changes in these assumptions and estimates or significant changes to the market value of our common stock could materially impact our results of operations or financial projections. During the year ended September 30, 2007, the seven month period ended April 30, 2006 and the year ended September 30, 2005, we recorded a non-cash impairment charge of $11,000, $0.4 million and $3.0 million, respectively, related to long-lived assets of continuing operations. We did not record a non-cash impairment charge during the five month period ended September 30, 2006.

        We provide an allowance for doubtful accounts for unknown collection issues, in addition to reserves for specific accounts receivable where collection is considered doubtful. Inherent in the

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assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, our customers' access to capital, our customers' willingness to pay, general economic conditions and the ongoing relationships with our customers.

        In addition to these factors, the method of accounting for construction contracts requires the review and analysis of not only the net receivables, but also the amount of billings in excess of costs and costs in excess of billings. The analysis management utilizes to assess collectibility of our receivables includes detailed review of older balances, analysis of days sales outstanding where we include in the calculation, in addition to accounts receivable balances net of any allowance for doubtful accounts, the level of costs in excess of billings netted against billings in excess of costs, and the ratio of accounts receivable, net of any allowance for doubtful accounts plus the level of costs in excess of billings, to revenues. These analyses provide an indication of those amounts billed ahead or behind the recognition of revenue on our construction contracts and are important to consider in understanding the operational cash flows related to our revenue cycle.

        We are insured for workers' compensation, automobile liability, general liability, employment practices and employee-related health care claims, subject to large deductibles. Our general liability program provides coverage for bodily injury and property damage that is neither expected nor intended. Losses up to the deductible amounts are accrued based upon our estimates of the liability for claims incurred and an estimate of claims incurred but not reported. The accruals are derived from actuarial studies, known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of the ultimate expected loss. We believe such accruals to be adequate; however, self-insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. Therefore, if actual experience differs from the assumptions used in the actuarial valuation, adjustments to the reserve may be required and would be recorded in the period that the experience becomes known.

        We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation at least annually at the end of each fiscal year. The estimation of required valuation allowances includes estimates of future taxable income. In assessing the realizability of deferred tax assets at September 30, 2007, we considered that it was more likely than not that some or all of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

New Accounting Pronouncements

        In accordance with SOP 90-7, we are required to adopt all new accounting pronouncements upon emergence from bankruptcy, if issued prior to and have effective dates within one year of the date of adoption of fresh-start reporting. We adopted fresh-start reporting on April 30, 2006. These accounting policies, as well as others, are described in Note 5 of "Notes to Consolidated Financial Statements" and at relevant sections in this discussion and analysis.

Results of Operations

        Effective April 30, 2006, we implemented fresh-start reporting in accordance with SOP 90-7. As a result of the application of fresh-start reporting, the financial statements for the Predecessor are considered to be presented on a different basis than those of the Successor. Therefore, the financial statements of the Predecessor and Successor are not considered comparable, and we are unable to present financial statements for our Fiscal 2006 period, which we define as the twelve month period ended September 30, 2006. To the extent that material basis differences exist between the Predecessor and Successor, we have disclosed such differences.

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        The following table presents selected historical results of operations of IES and subsidiaries with dollar amounts in millions. These historical statements of operations include the results of operations for businesses acquired through purchases beginning on their respective dates of acquisition.

YEAR ENDED SEPTEMBER 30, 2007 COMPARED TO FIVE MONTH PERIOD ENDED SEPTEMBER 30, 2006

Revenues

        The decline in residential revenues as a percentage of total revenues during the year ended September 30, 2007 is due mainly to the effects of the nationwide decline in single-family and multi-family housing construction. Recent industry reports forecast that by the end of 2007 the value of new housing construction starts will have declined by 16% compared to 2006. We estimate that our residential revenues declined approximately 15% in our 2007 fiscal year, which we attribute to the aforementioned decline in the housing market, buoyed somewhat by our ability to pass along increased material prices, in particular copper wire, in the current year. Partially offsetting the decline in residential revenues for the year ended September 30, 2007 is the increase in commercial and industrial revenues as a percentage of total revenues. We estimate that our commercial and industrial revenues

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increased approximately 4% in the 2007 fiscal year, which we attribute to new contracts in our office building, retail and hotel/condominium lines of business and also on growth in our communication services.

Gross Profit

        The improvement in our consolidated gross profit percentage for the year ended September 30, 2007 was due to increased margins as a percentage of revenue in both the commercial and industrial and residential sectors. Our commercial and industrial sector's gross margin percentage improved approximately 270 basis points due to better execution of new and existing contracts, improved control over our contract bidding process, and increased project oversight based on procedures put in place as a result of our transformation efforts. Gross margins in our residential segment also improved approximately 60 basis points during 2007 in spite of the decline in the number of housing starts in the second half of the year. We attribute much of the increase in residential gross margin to a stabilization of the pricing environment relative to prior periods for inputs, including copper wire and aluminum, as well as improved project execution. The improved margins enabled us to partially mitigate the effects of revenue declines in the second half of fiscal 2007 associated with the slowdown in the residential construction industry.

Selling, General and Administrative Expenses

        Selling, general, and administrative expenses include costs not directly associated with performing work for our customers. These costs primarily consist of compensation and benefits related to corporate management, occupancy and utilities, training, professional service and consulting fees, travel, certain types of depreciation and amortization, and repairs and maintenance expenses.

        During the year ended September 30, 2007, our selling, general and administrative expenses increased to 15% of revenue principally as a result of our strategic efforts to reorganize the Company and to recruit and train new leadership. Notable items included in our total selling, general and administrative costs were $81.0 million in salary and employment-related costs for corporate, regional and local management, $10.5 million in occupancy and utility charges, $7.1 million in consulting charges under a transformation program to implement operational improvements, $13.2 million in other professional fees, including legal, consulting, accounting and auditing, $2.8 million in insurance costs not charged to cost of services, and $4.4 million in depreciation and amortization expense that was not charged to cost of services.

        During the five month period ended September 30, 2006, our selling, general, and administrative expenses were 13% of revenue. Notable items included in our total selling, general and administrative costs were $33.2 million in salary and employment-related costs for corporate, regional and local management, $4.4 million in occupancy and utility charges, $4.8 million for professional service fees, $0.8 million in insurance costs not charged to cost of services and $1.7 million in depreciation and amortization expense that was not charged to cost of services.

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Restructuring Charges

        As discussed previously, during the year ended September 30, 2007, we commenced restructuring our operations from our current decentralized structure into three major lines of business: Industrial, Commercial and Residential. The first component of this program was initiated in June 2007. Under this portion of the restructuring, five of our business units were integrated under the IES Industrial division, and the support and administrative functions of those businesses are being combined at an operating location in Houston, Texas, and we recognized approximately $0.2 million in severance liabilities for the estimated fair value of cash compensation and payroll taxes which will be paid through March 2008. The second component of this program was initiated in September 2007. Under this portion of the restructuring, 17 of our business units are being integrated under the IES Commercial division, and the support and administrative functions of those businesses are being combined at an operating location in Tempe, Arizona, and we recognized approximately $0.1 million in severance liabilities for cash compensation and payroll taxes which we incurred in the fourth quarter of our 2007 fiscal year, and we expect to recognize approximately $0.5 million in severance liabilities for the estimated fair value of cash compensation which we expect to incur in our 2008 fiscal year. The severance payments will be paid through October 2008. The third component of this program was initiated in September 2007. Under this portion of the restructuring, five of our business units will be integrated under the IES Residential division during our 2008 fiscal year, and the support and administrative functions of those businesses will be combined at an operating location near Houston, Texas. We expect to recognize $0.1 million in severance liabilities for the estimated fair value of cash compensation which we expect to incur in fiscal year 2008.

        In addition to the severance costs described above, we also incurred charges of approximately $0.5 million for consulting services associated with the restructuring program during the year ended September 30, 2007.

Reorganization Items

        During the five months ended September 30, 2006, in connection with our reorganization under Chapter 11, we recorded a $1.4 million expense for professional fees. There were no reorganization charges during the year ended September 30, 2007.

Interest and Other Expense, net

        Interest and other expense (net) includes interest charged on the terms loan, and fees relating to letter of credit and line of credit availed by the company for routine operations. Financing costs related to debt amendments on our Term Loan are also included in interest expense. Interest income we earn related to cash balances and short-term investments is netted against interest expense in our consolidated statement of operations.

        During the year ended September 30, 2007, we maintained the interest and other expense (net) at 1% of revenue as compared to last year. Included in the $5.5 million in 2007 was interest expense of $6.3 million relating to the Term Loan, $1.8 million of fees on the line of credit and letter of credit. Non-cash deferred loan amortization fees were $0.8 million. Other financing costs included expenses associated with $15 million prepayment and related debt amendments on our Term Loan. Also included in the interest and other expense (net) was interest income of $4.2 million related to cash and short term investment balances. Our average debt balance for the year ended September 30, 2007 was $52.5 million.

        For the five month period ended September 30, 2006, interest and other expense (net) was 1% of revenue. The primary components of the interest and other expense (net) of $2.6 million were $2.8 million relating to interest expense on the Term Loan, $0.6 million of fees on the line of credit and letter of credit, and non-cash deferred loan amortization fees of $0.3 million. Offsetting interest

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expense was interest income relating to cash short term investment of $1.0 million. Our average debt balance for the five month period ended September 30, 2006 was $54.7 million.

Provision for Income Taxes

        On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. As such, our net operating loss utilization after the change date will be subject to Section 382 limitations for federal income taxes and some state income taxes. We have provided valuation allowances on all net operating losses where it is determined it is more likely than not that they will expire without being utilized.

        Our tax expense for continuing operations increased to $2.0 million for the year ended September 30, 2007 from $0.4 million for the five month period ended September 30, 2006. The change in the tax expense for the year ended September 30, 2007 is primarily attributable to an increase in federal tax expense and an increase in state income tax expense.

        For the year ended September 30, 2007 and the five month period September 30, 2006, no tax benefit was recorded for net operating losses in separate company state tax jurisdictions. In addition, under SOP 90-7, the reversal of valuation allowances provided against deferred tax assets in fresh-start reporting does not result in a reduction of tax expense.

SEVEN MONTH PERIOD ENDED APRIL 30, 2006 COMPARED TO YEAR ENDED SEPTEMBER 30, 2005

Revenues

        The increase in residential revenues as a percentage of total revenues during the seven month period ended April 30, 2006 was due to strong demand for new single-family and multi-family housing, notably in the southern and southwestern United States. The decrease in commercial and industrial revenues as a percent of total revenues is due partially to greater emphasis on residential projects at some of our operating locations and also because of a decrease in the award of bonded projects in certain locations due to our reorganization under Chapter 11.

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Gross Profit

        Gross profit margin as a percent of revenue increased from 14.9% for the year ended September 30, 2005 to 15.5% for the seven month period ended April 30, 2006. Gross profit margin as a percent of revenue in the commercial and industrial segment increased from 11.6% for the year ended September 30, 2005, to 13.3% million for the seven month period ended April 30, 2006. The increase in gross margin is a result of our focus on improving margins through more selective bidding techniques and the completion of older lower margin projects. In contrast to the improvement in commercial and industrial profitability, residential profit margin decreased from 20.6% for the year ended September 30, 2005, to 18.5% for the seven month period ended April 30, 2006. The reduction in residential gross profit was due to the increase in costs of materials, particularly copper wire, which were only partially passed on to customers due to competitive pressures.

Selling, General and Administrative Expenses

        Selling, general, and administrative expenses include costs not directly associated with performing work for our customers. These costs primarily consist of compensation and benefits related to corporate management, occupancy and utilities, training, professional service and consulting fees, travel, certain types of depreciation and amortization, and repairs and maintenance expenses.

        During the seven month period ended April 30, 2006, our selling, general, and administrative expenses were 13% of revenue. Notable items included in our total selling, general and administrative costs were $43.0 million in salary and employment-related costs for corporate, regional and local management, $7.0 million in occupancy and utility charges, $8.6 million for legal, consulting, accounting and auditing fees, $1.2 million in insurance costs not charged to cost of services, and $2.9 million in depreciation and amortization expense that was not charged to cost of services.

        During the year ended September 30, 2005, our selling, general and administrative expenses increased to 15% of revenue. Notable items included in our total selling, general and administrative costs were $73.3 million in salary and employment-related costs for corporate, regional and local management, $12.0 million in occupancy and utility charges, $18.5 million in professional service fees, including legal, consulting, accounting and auditing, $2.7 million in insurance costs not charged to cost of services, and $5.2 million in depreciation and amortization expense that was not charged to cost of services.

Goodwill Impairment Charge

        During the year ended September 30, 2005, we recorded a non-cash charge of $51.8 million related to impairments to the carrying value of goodwill. These charges were entirely associated with those regions that do not include Houston Stafford Electric, our largest residential subsidiary. We did not record a goodwill impairment charge during the seven month period ended April 30, 2006.

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Reorganization Items

        During the seven months ended April 30, 2006, in connection with our reorganization under Chapter 11, we recorded income from net reorganization items totaling $28.6 million. Reorganization items incurred include $46.1 million gain on extinguishment of the senior subordinated notes in exchange for common stock of the Successor in accordance with the plan and a non-cash fresh-start revaluation gain of $0.1 million. Partially offsetting these gains were $13.6 million in professional fees related to the bankruptcy and a non-cash charge of $4.0 million to write off certain unamortized debt issuance costs, debt discounts and premiums, and embedded derivative liabilities related to our senior convertible notes and senior subordinated notes.

Interest and Other Expense, net

        Interest and other expense (net) include interest charged on the senior subordinated notes and the embedded conversion option within our senior convertible notes. The amount also included amortization of deferred financing costs associated with the pre-petition credit facility and amortization of deferred issuance cost associated with the debtor-in-possession facility. Interest income we earned related to cash balances and short-term investments is netted against interest expense in our consolidated statement of operations.

        Interest and other expense (net) as a percent of revenue decreased during the seven month period ended April 30, 2006 compared to the year ended September 30, 2005. The decrease in net interest and other expense was the result of having interest expense on the senior subordinated notes only through February 14, 2006, the date we filed for Chapter 11 bankruptcy versus interest expense for the full year ended September 30, 2005. There was also $0.7 million in non-cash mark-to-market interest associated with the embedded conversion option within our senior convertible notes; however no such event occurred for the seven month period ended April 30, 2006. This was partially offset by deferred financing costs of $3.8 million associated with the pre-petition credit facility written off in the seven month period ended April 30, 2006 as a result of entering the debtor-in-possession credit facility. In addition, there was $0.3 million in amortization of deferred issuance costs associated with the debtor-in-possession credit facility and $0.6 million written off in April 2006 as a result of exiting the debtor-in-possession credit facility. Our average debt balance was $199.5 million and $133.5 million for the seven month period ended April 30, 2006 and for the year ended September 30, 2005.

Provision for Income Taxes

        On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. As such, our net operating loss utilization after the change date will be subject to Section 382 limitations for federal income taxes and some state income taxes. We have provided valuation allowances on all net operating losses where it is determined it is more likely than not that they will expire without being utilized.

        Our tax expense for continuing operations decreased to $0.8 million for the seven month period ended April 30, 2006 from $10.5 million for the year ended September 30, 2005. The change in the tax expense for the 7 month period ended April 30, 2006 is primarily attributable to a decrease federal income tax expense largely due to the impairment of non-deductible goodwill in year ended September 30, 2005.

Cost Drivers

        As a service business, our cost structure is highly variable. Our primary costs include labor, materials and insurance. Costs derived from labor and related expenses currently account for 41% of our total costs. Our labor-related expenses totaled $305.5 million, $142.1 million, $173.0 million and $301.2 million for the year ended September 30, 2007, the five month period ended September 30,

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2006, the seven month period ended April 30, 2006 and the year ended September 30, 2005, respectively. As of September 30, 2007, we had 5,746 full-time employees, 4,546 employees were field electricians, the number of which fluctuates depending upon the number and size of the projects undertaken by us at any particular time. The remaining 1,200 employees were project managers, job superintendents and administrative and management personnel, including executive officers, estimators or engineers, office staff and clerical personnel. We provide a health, welfare and benefit plan for all employees subject to eligibility requirements. We have a 401(k) plan pursuant to which eligible employees may contribute through a payroll deduction. We make matching cash contributions of 50% of each employee's contribution up to 6% of that employee's salary.

        Costs incurred for materials installed on projects currently account for 54% of our total costs. This component of our expense structure is variable based on the demand for our services. We generally incur costs for materials once we begin work on a project. We generally order materials when needed, ship them directly to the jobsite, and install them within 30 days. Materials consist of commodity-based items such as conduit, wire and fuses as well as specialty items such as fixtures, switchgear and control panels. Our materials expenses totaled $399.0 million, $202.2 million, $218.6 million and $361.8 million for the year ended September 30, 2007, the five month period ended September 30, 2006, the seven month period ended April 30, 2006 and the year ended September 30, 2005, respectively.

        We are insured for workers' compensation, employer's liability, auto liability, general liability and health insurance, subject to large deductibles. Losses up to the deductible amounts are accrued based upon actuarial studies and our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. The accruals are based upon known facts and historical trends and management believes such accruals to be adequate. Expenses for claims administration, claims funding and reserves funding totaled $27.2 million, $13.7 million, $17.1 million and $40.5 million for the year ended September 30, 2007, the five month period ended September 30, 2006, the seven month period ended April 30, 2006 and the year ended September 30, 2005, respectively.

Impact of Fresh-Start Accounting on Depreciation and Amortization

        Upon adopting fresh-start accounting in accordance with SOP 90-7, we recorded adjustments to our balance sheet to adjust the book value of our assets and liabilities to their estimated fair value. As a result, we increased the book value of our property and equipment, including land, by $8.5 million. Since that time, this adjustment has resulted in $2.9 million and $1.2 million of additional depreciation expense for the year ended September 30, 2007 and the five month period ended September 30, 2006.

        Additionally, we established a contract loss reserve liability to record the fair value of expected losses related to existing contracts. This reserve will be amortized as a reduction of cost of services over the remaining terms of the contracts. We recognized income of approximately $1.9 million and $2.3 million related to the amortization of this contract loss reserve liability for the year ended September 30, 2007 and the five month period ended September 30, 2006.

        We also identified certain intangible assets as a result of adopting fresh-start accounting (see Note 2). These assets will be amortized over their expected useful lives. As a result, we have recorded $1.8 million and $0.9 million of amortization expense for the year ended September 30, 2007 and the five month period ended September 30, 2006.

Discontinued Operations

Exit or Disposal Activities

        As previously described, on March 28, 2006, based on the recommendation of the Board of Directors, we committed to an exit plan with respect to certain underperforming subsidiaries in our commercial and industrial segment. The exit plan committed to a shut-down or consolidation of the

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operations of these subsidiaries or the sale or other disposition of the subsidiaries, whichever came sooner. In June 2007, we determined that our Mid-States Electric operating company, located in Jackson, Tennessee, would also be shut down. Mid-States' operating equipment was either transferred to other IES companies or will be sold to third parties. All project work was completed prior to the subsidiary being closed. Mid-States' assets, liabilities and operating results for both the current and prior periods have been reclassified as discontinued operations. The exit plan is complete for these subsidiaries. We have included the results of operations related to these subsidiaries in discontinued operations for both the current period and all prior periods. Accordingly, previously reported results of these operations have been reclassified. Revenue for these subsidiaries totaled $9.1 million, $20.9 million, $74.8 million and $360.2 million for the year ended September 30, 2007, the five month period ended September 30, 2006, the seven month period ended April 30, 2006, and the year ended September 30, 2005 respectively.

Divestitures

        During October 2004, we announced plans to begin a strategic realignment including the planned divestiture of certain subsidiaries within our commercial and industrial segment. As of December 31, 2005, the planned divestitures had been completed.

        During the year ended September 30, 2005, we completed the sale of all the net assets of thirteen of our operating subsidiaries for $54.1 million in total consideration. During the twelve month period ended September 30, 2006, we completed the sale of one additional operating subsidiary for $7.3 million in total consideration.

Summary of Discontinued Operations

        The discontinued operations disclosures include only those identified subsidiaries qualifying for discontinued operations treatment for the periods presented. Depreciation expense associated with discontinued operations for the year ended September 30, 2005 was $3.5 million.

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        Summarized financial data for all discontinued operations are outlined below:

        In connection with the divestitures discussed above, the pre-tax gain (loss) on the sale of the businesses was determined as follows for the seven months ended April 2006 (Predecessor) and the year ended September 30, 2005 (Predecessor) (in thousands):

Goodwill Impairment Associated with Discontinued Operations

        During the year ended September 30, 2005, we recorded a goodwill impairment charge of $12.8 million related to certain subsidiaries which were held for disposal by sale. This impairment charge is included in the net loss from discontinued operations caption in the statement of operations. The impairment charge was calculated based on the assessed fair value ascribed to the subsidiaries identified for disposal less the net book value of the assets related to those subsidiaries. In determining the fair value for the subsidiaries, we evaluated past performance, expected future performance,

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management issues, bonding requirements, market forecasts and the carrying value of such assets and liabilities and received a fairness opinion from an independent consulting and investment banking firm in support of this determination for certain of the subsidiaries included in the assessment. Where the fair value did not exceed the net book value of a subsidiary including goodwill, the goodwill balance was impaired as appropriate. This impairment of goodwill was determined prior to the disclosed calculation of any additional impairment of the identified subsidiary disposal group as required pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We utilized estimated gross proceeds to calculate the fair values associated with the goodwill impairment charge. There have not been any significant differences between those estimates and the actual proceeds received upon the sale of the subsidiaries. There was no goodwill impairment charge related to the subsidiary sold during the year ended September 30, 2006.

Impairment Associated with Discontinued Operations

        In accordance with the Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, during the years ended September 30, 2007 and September 30, 2005, we recorded impairment charges of $0.2 million and $1.5 million, respectively, related to the identification of certain subsidiaries for disposal by sale. There were no impairment charges related to the subsidiaries sold or shutdown during the five months ended September 30, 2006 or the seven months ended April 30, 2006. Impairment was calculated as the difference between the fair values, less costs to sell, assessed at the date the companies individually were selected for sale and their respective net book values after all other adjustments had been recorded. In determining the fair value for the disposed assets and liabilities, we evaluated past performance, expected future performance, management issues, bonding requirements, market forecasts and the carrying value of such assets and liabilities and received a fairness opinion from an independent consulting and investment banking firm in support of this determination for certain of the subsidiaries included in the assessment. The impairment charge was related to subsidiaries included in the commercial and industrial segment of our operations (see Note 12).

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Working Capital

        Working capital, excluding cash, cash equivalents and restricted cash (collectively "Non-cash working capital") decreased $38.1 million, or 35.9% during the year ended September 30, 2007, principally due to our increased focus on cash collection and cash management.

        We experienced an increase in current assets of $8.9 million, or 3.1%, to $293.4 million as of September 30, 2007 from $284.5 million as of September 30, 2006. During 2007, we had a $41.5 million increase in cash and cash equivalents and a $20.0 million increase in restricted cash that was reclassified during the current year from other non-current assets. There was a $1.7 million decrease in retainage due to collections, and a decrease in inventory of $10.6 million. We also had an $18.9 million decrease in assets held for sale related to the sale of a business unit subsequent to September 30, 2006, pursuant to a divestiture plan previously disclosed. We reduced our trade accounts receivables, net by $17.9 million with an emphasis on lowering our days sales outstanding. Days sales outstanding improved by five days to 60 days at September 30, 2007 from 65 days at September 30, 2006. Further, as of September 30, 2007, costs in excess of billings increased $3.0 million over September 30, 2006, and prepaid expenses and other current assets decreased by $6.6 million.

        Our total current liabilities decreased $14.6 million, or 9.7%, to $135.7 million as of September 30, 2007 from $150.3 million as of September 30, 2006. This is a result of a $6.7 million decrease in liabilities held for sale related to the sale of a business unit subsequent to September 30, 2006 pursuant to a divestiture plan previously disclosed. In addition, there was a decrease of $10.1 million in accounts payable and accrued expenses due to the timing of payments made that was partially offset by an increase of $2.2 million in billings in excess of costs.

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        See "Liquidity and Capital Resources" below for further information.

Liquidity and Capital Resources

        As of September 30, 2007, we had cash and cash equivalents of $69.7 million, restricted cash of $20.0 million, non-cash working capital of $68.0 million, $45.6 million in outstanding borrowings under our Term Loan, $43.1 million of letters of credit outstanding and available capacity under our Revolving Credit Facility of $31.1 million. Out of the $31.1 million, we can only borrow up to $2.5 million and remain in compliance with our financial covenants. Our total cash and cash equivalents increased 147% to $69.7 million at September 30, 2007 from $28.2 million at September 30, 2006. The increase in cash and cash equivalents was primarily due to increased levels of working capital mainly related to the timing of and increased focus on collections of accounts receivable and return of collateral held by CHUBB.

        During the year ended September 30, 2007, we generated $58.9 million in cash from operating activities principally due to our cash collection and cash management efforts. The cash generated by operations for the year ended September 30, 2007 funded all of the $17.4 million in combined investing and financing activities. The $17.4 million used for investing and financing activities during the year ended September 30, 2007 included $15.0 million for prepayment on our Term Loan and $2.7 million in acquisitions of property, plant and equipment.

Bonding Capacity

        At September 30, 2007, we have adequate surety bonding capacity under our surety agreements with CHUBB, SureTec and Scarborough. Our ability to access this bonding capacity is at the sole discretion of our surety providers and is subject to certain other limitations such as limits on the size of any individual bond and, in the case of CHUBB, restrictions on the total amount of bonds that can be issued in a given month (as described in Note 18 "Subsequent Events" in our Consolidated Financial Statements, the limitations on the size of an individual bond were removed as of October 2007, and our bonding capacity has been raised to $150 million.). As of September 30, 2007, the expected costs to complete for projects covered by CHUBB, SureTec and Scarborough was 98.4 million. We also had $46.7 million in aggregate face value of bonds issued under Scarborough. We believe we have adequate remaining available bonding capacity to meet our current needs, subject to the sole discretion of our surety providers. In addition, to access the remaining available bonding capacity may require us to post additional collateral. For more information see Part II, Item 7. "Surety".

Repayment of Term Loan

        As described in Note 18 "Subsequent Events" to our Consolidated Financial Statements, on December 12, 2007, we terminated the Term Loan by prepaying in full all outstanding principal and accrued interest on the loan. On the same day, we entered into a $25 million senior subordinated loan agreement with a group led by Tontine Capital Partners, L.P., a related party.

Off-Balance Sheet Arrangements and Contractual Obligations

        As is common in our industry, we have entered into certain off balance sheet arrangements that expose us to increased risk. Our significant off balance sheet transactions include commitments associated with non-cancelable operating leases, letter of credit obligations, firm commitments for materials and surety guarantees.

        We enter into non-cancelable operating leases for many of our vehicle and equipment needs. These leases allow us to retain our cash when we do not own the vehicles or equipment and we pay a monthly lease rental fee. At the end of the lease, we have no further obligation to the lessor. We may