IES Holdings, Inc. - Quarter Report: 2018 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2018

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-13783

 

 

 

IES Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		76-0542208
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5433 Westheimer Road, Suite 500, Houston, Texas 77056

(Address of principal executive offices and ZIP code)

Registrant’s telephone number, including area code: (713) 860-1500

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐  (Do not check if a smaller reporting company)		Smaller reporting company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

On August 1, 2018, there were 21,205,536 shares of common stock outstanding.

 

 

 

IES HOLDINGS, INC. AND SUBSIDIARIES

INDEX

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June  30, 2018 and September 30, 2017			6
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2018 and 2017			7
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2018 and 2017			9
Notes to Condensed Consolidated Financial Statements			10
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Mine Safety Disclosures			37
Item 5. Other Information			37
Item 6. Exhibits			37
Signatures			39

PART I. FINANCIAL INFORMATION

DEFINITIONS

In this Quarterly Report on Form 10-Q, the words “IES”, the “Company”, the “Registrant”, “we”, “our”, “ours” and “us” refer to IES Holdings, Inc. and, except as otherwise specified herein, to our subsidiaries.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes certain statements that may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, all of which are based upon various estimates and assumptions that the Company believes to be reasonable as of the date hereof. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “seek,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology. These statements involve risks and uncertainties that could cause the Company’s actual future outcomes to differ materially from those set forth in such statements. Such risks and uncertainties include, but are not limited to:

 

•

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

 

•

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

 

•

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

 

•

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

 

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

 

•

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

 

•

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

 

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

 

•

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

 

•

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

 

•

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

 

•

a general reduction in the demand for our services;

 

•

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

 

•

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

 

•

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

 

•

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

 

3

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

our ability to successfully manage projects;

 

•

inaccurate estimates used when entering into fixed-priced contracts;

 

•

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

 

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

 

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

the recognition of tax benefits related to uncertain tax positions;

 

•

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

 

•

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

 

•

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

 

•

liabilities under laws and regulations protecting the environment; and

 

4

•

loss of key personnel and effective transition of new management.

You should understand that the foregoing, as well as other risk factors discussed in this document and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, could cause future outcomes to differ materially from those experienced previously or those expressed in such forward-looking statements. We undertake no obligation to publicly update or revise any information, including information concerning our controlling shareholder, net operating losses, borrowing availability or cash position, or any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Forward-looking statements are provided in this Quarterly Report on Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of the estimates, assumptions, uncertainties and risks described herein.

 

5

Item 1.

Financial Statements

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Information)

 

		June 30,				September 30,
		2018				2017
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	21,692			$	28,290
Accounts receivable:
Trade, net of allowance of $738 and $650, respectively			139,182				142,946
Retainage			23,019				21,360
Inventories			18,717				16,923
Costs and estimated earnings in excess of billings			22,595				13,438
Prepaid expenses and other current assets			8,824				8,795
Total current assets			234,029				231,752
Property and equipment, net			25,217				24,643
Goodwill			49,299				46,693
Intangible assets, net			31,736				31,413
Deferred tax assets			49,597				86,211
Other non-current assets			6,085				3,782
Total assets		$	395,963			$	424,494
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses			117,385				120,710
Billings in excess of costs and estimated earnings			25,812				29,918
Total current liabilities			143,197				150,628
Long-term debt			29,634				29,434
Other non-current liabilities			4,412				4,457
Total liabilities			177,243				184,519
Noncontrolling interest			3,247				3,271
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued and outstanding			—				—
Common stock, $0.01 par value, 100,000,000 shares authorized; 22,049,529 issued and 21,205,536 and 21,336,975 outstanding, respectively			220				220
Treasury stock, at cost, 843,993 and 712,554 shares, respectively			(8,937	)			(6,898	)
Additional paid-in capital			196,551				196,955
Retained earnings			27,639				46,427
Total stockholders’ equity			215,473				236,704
Total liabilities and stockholders’ equity		$	395,963			$	424,494

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

 

6

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Share Information)

(Unaudited)

 

		Three Months Ended June 30,
		2018				2017
Revenues		$	232,576			$	208,323
Cost of services			190,039				172,925
Gross profit			42,537				35,398
Selling, general and administrative expenses			32,372				30,771
Contingent consideration			81				(33	)
Gain on sale of assets			(5	)			(55	)
Operating income			10,089				4,715
Interest and other (income) expense:
Interest expense			513				407
Other income, net			(111	)			(46	)
Income from operations before income taxes			9,687				4,354
Provision (Benefit) for income taxes			1,038				(1,519	)
Net income			8,649				5,873
Net income attributable to noncontrolling interest			(133	)			(5	)
Comprehensive income attributable to IES Holdings, Inc.		$	8,516			$	5,868
Earnings per share attributable to IES Holdings, Inc.:
Basic		$	0.40			$	0.27
Diluted		$	0.40			$	0.27
Shares used in the computation of earnings per share:
Basic			21,200,635				21,300,716
Diluted			21,331,883				21,556,118

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

 

7

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Share Information)

(Unaudited)

 

		Nine Months Ended June 30,
		2018				2017
Revenues		$	636,553			$	604,163
Cost of services			527,112				501,769
Gross profit			109,441				102,394
Selling, general and administrative expenses			92,108				89,085
Contingent consideration			152				50
Gain on sale of assets			(39	)			(68	)
Operating income			17,220				13,327
Interest and other (income) expense:
Interest expense			1,427				1,281
Other income, net			(252	)			(94	)
Income from operations before income taxes			16,045				12,140
Provision for income taxes			34,622				1,792
Net income (loss)			(18,577	)			10,348
Net income attributable to noncontrolling interest			(255	)			(72	)
Comprehensive income (loss) attributable to IES Holdings, Inc.		$	(18,832	)		$	10,276
Earnings (loss) per share attributable to IES Holdings, Inc.:
Basic		$	(0.89	)		$	0.48
Diluted		$	(0.89	)		$	0.48
Shares used in the computation of earnings per share:
Basic			21,193,306				21,295,254
Diluted			21,193,306				21,550,804

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

 

8

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

		Nine Months Ended June 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(18,577	)		$	10,348
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Bad debt expense			250				31
Deferred financing cost amortization			214				229
Depreciation and amortization			6,706				6,884
Gain on sale of assets			(39	)			(68	)
Deferred income taxes			34,622				494
Non-cash compensation			(395	)			1,329
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable			4,992				(1,593	)
Inventories			(1,721	)			(3,919	)
Costs and estimated earnings in excess of billings			(8,990	)			(3,151	)
Prepaid expenses and other current assets			(1,645	)			(9,082	)
Other non-current assets			270				350
Accounts payable and accrued expenses			(6,862	)			600
Billings in excess of costs and estimated earnings			(4,019	)			6,438
Other non-current liabilities			172				1,312
Net cash provided by operating activities			4,978				10,202
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(3,383	)			(3,796	)
Proceeds from sale of property and equipment			107				237
Cash paid for acquisitions			(5,981	)			(14,659	)
Net cash used in investing activities			(9,257	)			(18,218	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt			99				5,313
Repayments of debt			(136	)			(5,328	)
Contingent consideration payment			—				(448	)
Distribution to noncontrolling interest			(235	)			(153	)
Options exercised			11				207
Purchase of treasury stock			(2,058	)			(891	)
Net cash used in financing activities			(2,319	)			(1,300	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(6,598	)			(9,316	)
CASH, CASH EQUIVALENTS and RESTRICTED CASH, beginning of period			28,290				33,221
CASH, CASH EQUIVALENTS and RESTRICTED CASH, end of period		$	21,692			$	23,905
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	1,227			$	1,108
Cash paid for income taxes		$	2,313			$	2,285

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

 

9

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

1. BUSINESS AND ACCOUNTING POLICIES

Description of the Business

IES Holdings, Inc. is a holding company that owns and manages operating subsidiaries in business activities across a variety of end markets. Our operations are currently organized into four principal business segments, based upon the nature of our current services:

 

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Commercial & Industrial – Provider of electrical and mechanical design, construction, and maintenance services to the commercial and industrial markets in various regional markets and nationwide in certain areas of expertise, such as the power infrastructure market.

 

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

 

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Infrastructure Solutions – Provider of electro-mechanical solutions for industrial operations.

 

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

The words “IES”, the “Company”, “we”, “our”, and “us” refer to IES Holdings, Inc. and, except as otherwise specified herein, to our wholly-owned subsidiaries.

Seasonality and Quarterly Fluctuations

Results of operations from our Residential construction segment are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues generated during fall and winter, with an impact from precipitation in the warmer months. The Commercial & Industrial, Communications and Infrastructure Solutions segments of our business are less subject to seasonal trends, as work in these segments generally is performed inside structures protected from the weather, although weather can still impact these businesses, especially in the early stages of projects. Our service and maintenance business is generally not affected by seasonality. Our volume of business may be adversely affected by declines in construction projects resulting from adverse regional or national economic conditions. Quarterly results may also be materially affected by the timing of new construction projects. Results for our Infrastructure Solutions segment may be affected by the timing of outages at our customers’ facilities. Accordingly, operating results for any fiscal period are not necessarily indicative of results that may be achieved for any subsequent fiscal period.

Basis of Financial Statement Preparation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of IES, its wholly-owned subsidiaries, and entities that we control due to ownership of a majority of voting interest and have been prepared in accordance with the instructions to interim financial reporting as prescribed by the Securities and Exchange Commission (the “SEC”). The results for the interim periods are not necessarily indicative of results for the entire year. These interim financial statements do not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”), and should be read in conjunction with the consolidated financial statements and notes thereto filed with the SEC in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. In the opinion of management, the unaudited Condensed Consolidated Financial Statements contained in this report include all known accruals and adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods reported herein. Any such adjustments are of a normal recurring nature.

Noncontrolling Interest

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

 

10

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

a multiple of earnings as defined in the operating agreements. Therefore, this noncontrolling interest is carried at the greater of the balance determined under ASC 810 and the redemption amounts assuming the noncontrolling interests were redeemable at the balance sheet date. If all of these interests had been redeemable at June 30, 2018, the redemption amount would have been $2,995. See Note 13, “Business Combinations” for further discussion. For the nine months ended June 30, 2018, we recorded an increase to retained earnings of $44 to decrease the carrying amount of the noncontrolling interest in STR to the balance determined under ASC 810, as if it had been redeemable at June 30, 2018, as the redemption amount would have been less than the carrying amount.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are primarily used in our revenue recognition of construction in progress, fair value assumptions in accounting for business combinations and analyzing goodwill, investments, intangible assets and long-lived asset impairments and adjustments, allowance for doubtful accounts receivable, stock-based compensation, reserves for legal matters, realizability of deferred tax assets, unrecognized tax benefits and self-insured claims liabilities and related reserves.

Income Taxes

In December 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted, which, among other changes, reduced the federal statutory corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of this change, the Company’s statutory tax rate for fiscal 2018 will be a blended rate of 24.53% and will decrease to 21% thereafter. For the nine months ended June 30, 2018, our effective tax rate differed from the statutory tax rate as a result of a preliminary charge of $31,506 to re-measure our deferred tax assets and liabilities to reflect the estimated impact of the new statutory tax rate, slightly offset by a benefit of $1,840 related to the reversal of an uncertain tax position. This benefit differs from the expected recognition of $3,284 as disclosed in our Form 10-K for the year ended September 30, 2017 as a result of the decrease in the statutory tax rate. The preliminary charge to re-measure our deferred tax assets is subject to completion of our analysis of the impact of the Act, including as it relates to future deductions for executive compensation expense, as well as the effect of changes in the utilization of net deferred tax assets that reverse in fiscal 2018 as compared to subsequent years.

Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The standard also requires expanded disclosures surrounding revenue recognition. The effective date will be the first quarter of our fiscal year ended September 30, 2019. The standard allows for either full retrospective or modified retrospective adoption, and we plan to use the modified retrospective basis on the adoption date. We are continuing to evaluate the impact of the adoption of this standard on our Condensed Consolidated Financial Statements. In particular, we believe the most significant areas where we expect some impact to our current accounting will be contract termination provisions, identification of performance obligations, and accounting for commissions paid. We expect that we will continue to recognize revenues for most of our fixed-price contracts over time, as services are performed, although we have identified a limited number of arrangements where we currently recognize revenue over time, but will no longer do so under the new standard. The impact of this standard on our Consolidated Financial Statements will be determined by the specific terms of contracts in progress at the adoption date and our progress on those projects. We are also continuing to assess the necessary changes in processes and controls to meet the disclosure requirements of the new standard.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (“ASU 2016-01”). This standard is associated with the recognition and measurement of financial assets and liabilities with further clarifications made in February 2018 with the issuance of ASU 2018-03. The amended guidance requires certain equity investments that are not consolidated and not accounted for under the equity method to be measured at fair value with changes in fair value recognized in net income rather than as a component of accumulated other comprehensive income (loss). It further states that an entity may choose to measure equity investments that do not have readily determinable fair values using a quantitative approach, or measurement alternative, which is equal to its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This update is effective for annual financial reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, although early adoption is permitted.

 

11

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, lessees will need to recognize a right-of-use asset and a lease liability for all of their leases, other than those that meet the definition of a short-term lease. For income statement purposes, leases must be classified as either operating or finance. Operating leases will result in straight-line expense, similar to current operating leases, while finance leases will result in a front-loaded pattern, similar to current capital leases. ASU 2016-02 becomes effective for the fiscal year ended September 30, 2020. We are currently evaluating the impact it will have on our Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (“ASU 2017-01”). This standard clarifies the definition of a business to assist entities with evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. The prospective transition method will be required for this new guidance.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (“ASU 2017-09”), to reduce the diversity in practice and the cost and complexity when changing the terms or conditions of a share-based payment award. This update is effective for annual financial reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, although early adoption is permitted. The prospective transition method will be required for this new guidance.

We do not expect ASU 2016-01, ASU 2017-01 or ASU 2017-09 to have a material effect on our Condensed Consolidated Financial Statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation, to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments for employees, with certain exceptions. Under the new guidance, the cost for nonemployee awards may be lower and less volatile than under current US GAAP because the measurement generally will occur earlier and will be fixed at the grant date. This update is effective for annual financial reporting periods, and interim periods within those annual periods, beginning after December 15, 2018, although early adoption is permitted. We are currently evaluating the impact it will have on our Condensed Consolidated Financial Statements.

2. CONTROLLING SHAREHOLDER

At June 30, 2018, Tontine Capital Partners, L.P., together with its affiliates (collectively, “Tontine”), was the Company’s controlling shareholder, owning approximately 59% of the Company’s outstanding common stock according to a Form 4 filed with the SEC by Tontine on July 2, 2018. Accordingly, Tontine has the ability to exercise significant control over our affairs, including the election of directors and most actions requiring the approval of shareholders.

While Tontine is subject to restrictions under federal securities laws on sales of its shares as an affiliate, the Company has filed a shelf registration statement to register all of the shares of IES common stock owned by Tontine at the time of registration. As long as the shelf registration statement remains effective and the Company remains eligible to use it, Tontine has the ability to resell any or all of its registered shares from time to time in one or more offerings, as described in the shelf registration statement and in any prospectus supplement filed in connection with an offering pursuant to the shelf registration statement.

Should Tontine sell or otherwise dispose of all or a portion of its position in IES, a change in ownership of IES could occur. A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability of the Company’s net operating losses (“NOLs”) for federal and state income tax purposes. On November 8, 2016, the Company implemented a new tax benefit protection plan (the “NOL Rights Plan”). The NOL Rights Plan was designed to deter an acquisition of the Company’s stock in excess of a threshold amount that could trigger a change of control within the meaning of Internal Revenue Code Section 382. There can be no assurance that the NOL Rights Plan will be effective in deterring a change of ownership or protecting the NOLs. Furthermore, a change in control would trigger the change of control provisions in a number of our material agreements, including our credit facility, bonding agreements with our sureties and our severance arrangements.

Jeffrey L. Gendell was appointed as a member of the Board of Directors and as non-executive Chairman of the Board in November 2016. He is the managing member and founder of Tontine, and the brother of David B. Gendell, who has served as a member of the

 

12

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Board of Directors since February 2012 and as Interim Director of Operations of the Company since November 2017, and who

previously served as non-executive Vice Chairman of the Board from November 2016 to November 2017 and as non-executive Chairman of the Board from January 2015 to November 2016. David B. Gendell was an employee of Tontine from 2004 until December 31, 2017.

The Company is party to a sublease agreement with Tontine Associates, LLC, an affiliate of Tontine, for corporate office space in Greenwich, Connecticut. The lease was renewed for a three-year term in April 2016 with an increase in the monthly rent to $8, reflecting the increase paid by Tontine Associates, LLC to its landlord and the Company’s increased use of the corporate office space. The lease has terms at market rates and payments by the Company are at a rate consistent with that paid by Tontine Associates, LLC to its landlord.

3. DEBT

At June 30, 2018, and September 30, 2017, our long-term debt of $29,634 and $29,434, respectively, primarily related to amounts drawn on our revolving credit facility. Our weighted-average annual interest rate on these borrowings was 3.74% at June 30, 2018, and 3.04% at September 30, 2017. At June 30, 2018, we also had $6,928 in outstanding letters of credit and total availability of $47,231 under this facility without violating our financial covenants.

On July 23, 2018, we entered into the Third Amendment (the “Amendment”) to our Second Amended and Restated Credit and Security Agreement (as amended, the “Credit Agreement”).

Pursuant to the Amendment, we will be required to comply with the minimum EBITDA financial covenant of the Credit Agreement in a given quarter only if our Excess Availability (as defined in the Credit Agreement) in the immediately following quarter, as tested monthly during that quarter, falls below $30,000. If, in a subsequent quarter, Excess Availability levels return to or exceed the contractual threshold, then the Company will no longer be required to comply with the minimum EBITDA financial covenant, so long as Excess Availability remains above the threshold.

There have been no other changes to the financial or other covenants disclosed in Item 7 of our Annual Report on Form 10-K for the year ended September 30, 2017. The Company was in compliance with the financial covenants as of June 30, 2018.

At June 30, 2018, the carrying value of amounts outstanding on our revolving credit facility approximated fair value, as debt incurs interest at a variable rate. The fair value of the debt is classified as a Level 2 measurement.

4. PER SHARE INFORMATION

The following tables reconcile the components of basic and diluted earnings per share for the three and nine months ended June 30, 2018, and 2017:

 

		Three Months Ended June 30,
		2018				2017
Numerator:
Net income attributable to common shareholders of IES Holdings, Inc.		$	8,513			$	5,824
Net income attributable to restricted shareholders of IES Holdings, Inc.			3				44
Net income attributable to IES Holdings, Inc.		$	8,516			$	5,868
Denominator:
Weighted average common shares outstanding — basic			21,200,635				21,300,716
Effect of dilutive stock options and non-vested restricted stock			131,248				255,402
Weighted average common and common equivalent shares outstanding — diluted			21,331,883				21,556,118
Earnings per share attributable to IES Holdings, Inc.:
Basic		$	0.40			$	0.27
Diluted		$	0.40			$	0.27

 

13

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

		Nine Months Ended June 30,
		2018				2017
Numerator:
Net income (loss) attributable to common shareholders of IES Holdings, Inc.		$	(18,788	)		$	10,195
Decrease in noncontrolling interest			(44	)			—
Net income attributable to restricted shareholders of IES Holdings, Inc.			—				81
Net income (loss) attributable to IES Holdings, Inc.		$	(18,832	)		$	10,276
Denominator:
Weighted average common shares outstanding — basic			21,193,306				21,295,254
Effect of dilutive stock options and non-vested restricted stock			—				255,550
Weighted average common and common equivalent shares outstanding — diluted			21,193,306				21,550,804
Earnings (loss) per share attributable to IES Holdings, Inc.:
Basic		$	(0.89	)		$	0.48
Diluted		$	(0.89	)		$	0.48

When an entity has a net loss, it is prohibited from including potential common shares in the computation of diluted per share amounts. Accordingly, we have utilized basic shares outstanding to calculate both basic and diluted loss per share for the nine months ended June 30, 2018. The number of potential anti-dilutive shares excluded from the calculation was 211,669 shares. For the three months ended June 30, 2018, and the three and nine months ended June 30, 2017, the average price of our common shares exceeded the exercise price of all of our outstanding options; therefore, all of our outstanding stock options were included in the computation of fully diluted earnings per share.

5. OPERATING SEGMENTS

We manage and measure performance of our business in four distinct operating segments: Commercial & Industrial, Communications, Infrastructure Solutions and Residential.

Transactions between segments, if any, are eliminated in consolidation. Our corporate office provides general and administrative, as well as support services, to our four operating segments. Management allocates certain shared costs between segments for selling, general and administrative expenses and depreciation expense.

Segment information for the three and nine months ended June 30, 2018, and 2017 is as follows:

 

		Three Months Ended June 30, 2018
		Commercial &								Infrastructure
		Industrial				Communications				Solutions				Residential				Corporate				Total
Revenues		$	78,156			$	54,368			$	24,856			$	75,196			$	—			$	232,576
Cost of services			67,839				43,436				18,701				60,063				—				190,039
Gross profit			10,317				10,932				6,155				15,133				—				42,537
Selling, general and administrative			6,980				7,193				4,568				10,941				2,690				32,372
Contingent consideration			—				—				81				—				—				81
Loss (gain) on sale of assets			(6	)			—				1				—				—				(5	)
Operating income (loss)		$	3,343			$	3,739			$	1,505			$	4,192			$	(2,690	)		$	10,089
Other data:
Depreciation and amortization expense		$	548			$	595			$	1,120			$	156			$	18			$	2,437
Capital expenditures		$	715			$	119			$	112			$	110			$	—			$	1,056
Total assets		$	86,012			$	67,270			$	102,233			$	52,500			$	87,948			$	395,963

 

14

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

		Three Months Ended June 30, 2017
		Commercial &								Infrastructure
		Industrial				Communications				Solutions				Residential				Corporate				Total
Revenues		$	58,778			$	57,081			$	22,302			$	70,162			$	—			$	208,323
Cost of services			54,174				46,958				17,486				54,307				—				172,925
Gross profit			4,604				10,123				4,816				15,855				—				35,398
Selling, general and administrative			4,849				6,252				4,958				11,003				3,709				30,771
Contingent consideration			—				—				(33	)			—				—				(33	)
Loss (gain) on sale of assets			(4	)			—				(88	)			37				—				(55	)
Operating income (loss)		$	(241	)		$	3,871			$	(21	)		$	4,815			$	(3,709	)		$	4,715
Other data:
Depreciation and amortization expense		$	329			$	187			$	1,785			$	135			$	70			$	2,506
Capital expenditures		$	283			$	328			$	124			$	170			$	—			$	905
Total assets		$	66,190			$	70,427			$	103,323			$	51,995			$	125,222			$	417,157

 

		Nine Months Ended June 30, 2018
		Commercial &								Infrastructure
		Industrial				Communications				Solutions				Residential				Corporate				Total
Revenues		$	196,747			$	159,071			$	70,407			$	210,328			$	—			$	636,553
Cost of services			175,066				129,667				54,543				167,836				—				527,112
Gross profit			21,681				29,404				15,864				42,492				—				109,441
Selling, general and administrative			19,624				19,478				13,762				30,995				8,249				92,108
Contingent consideration			—				—				152				—				—				152
Loss (gain) on sale of assets			(35	)			(9	)			6				(1	)			—				(39	)
Operating income (loss)		$	2,092			$	9,935			$	1,944			$	11,498			$	(8,249	)		$	17,220
Other data:
Depreciation and amortization expense		$	1,632			$	1,030			$	3,503			$	452			$	89			$	6,706
Capital expenditures		$	1,638			$	592			$	457			$	696			$	—			$	3,383
Total assets		$	86,012			$	67,270			$	102,233			$	52,500			$	87,948			$	395,963

 

		Nine Months Ended June 30, 2017
		Commercial &								Infrastructure
		Industrial				Communications				Solutions				Residential				Corporate				Total
Revenues		$	168,006			$	172,058			$	59,572			$	204,527			$	—			$	604,163
Cost of services			154,628				144,668				45,103				157,370				—				501,769
Gross profit			13,378				27,390				14,469				47,157				—				102,394
Selling, general and administrative			14,434				18,086				13,280				32,488				10,797				89,085
Contingent consideration			—				—				50				—				—				50
Gain on sale of assets			(11	)			(1	)			(90	)			34				—				(68	)
Operating income (loss)		$	(1,045	)		$	9,305			$	1,229			$	14,635			$	(10,797	)		$	13,327
Other data:
Depreciation and amortization expense		$	983			$	532			$	4,730			$	436			$	203			$	6,884
Capital expenditures		$	927			$	1,888			$	261			$	517			$	203			$	3,796
Total assets		$	66,190			$	70,427			$	103,323			$	51,995			$	125,222			$	417,157

 

15

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

6. STOCKHOLDERS’ EQUITY

Equity Incentive Plan

The Company’s 2006 Equity Incentive Plan, as amended and restated (the “Equity Incentive Plan”), provides for grants of stock options as well as grants of stock, including restricted stock. Approximately 3.0 million shares of common stock are authorized for issuance under the Equity Incentive Plan, of which approximately 1,092,503 shares were available for issuance at June 30, 2018.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program for the purchase from time to time of up to 1.5 million shares of the Company’s common stock. Share purchases are made for cash in open market transactions at prevailing market prices or in privately negotiated transactions or otherwise. The timing and amount of purchases under the program are determined based upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. All or part of the repurchases may be implemented under a Rule 10b5-1 trading plan, which allows repurchases under pre-set terms at times when the Company might otherwise be prevented from purchasing under insider trading laws or because of self-imposed blackout periods. The program does not require the Company to purchase any specific number of shares and may be modified, suspended or reinstated at any time at the Company’s discretion and without notice. We repurchased 20,810 and 100,627 shares, respectively, of our common stock during the three and nine months ended June 30, 2018, in open market transactions at an average price of $15.45 and $15.41, respectively, per share. We repurchased 51,673 shares of our common stock during the three and nine months ended June 30, 2017, in open market transactions at an average price of $15.68 per share.

Treasury Stock

During the nine months ended June 30, 2018, we repurchased 32,832 shares of common stock from our employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock under the Equity Incentive Plan and repurchased 100,627 shares of common stock on the open market pursuant to our stock repurchase program. During the nine months ended June 30, 2018, we issued 520 unrestricted shares of common stock from treasury stock to members of our Board of Directors as part of their overall compensation and 1,500 unrestricted shares to satisfy the exercise of outstanding options.

During the nine months ended June 30, 2017, we repurchased 4,575 shares of common stock from our employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock issued under the Equity Incentive Plan and repurchased 51,673 shares of common stock on the open market pursuant to our stock repurchase program. During the nine months ended June 30, 2017, we issued 1,545 unrestricted shares of common stock from treasury stock to members of our Board of Directors as part of their overall compensation and 32,250 unrestricted shares to satisfy the exercise of outstanding options.

Restricted Stock

During the three months ended June 30, 2018, and 2017, we recognized $11 and $133, respectively, in compensation expense related to our restricted stock awards. During the nine months ended June 30, 2018, and 2017, we recognized $256 and $406, respectively, in compensation expense related to our restricted stock awards. At June 30, 2018, the unamortized compensation cost related to outstanding unvested restricted stock was zero.

Performance Based Phantom Cash Units

Performance based phantom cash units (“PPCUs”) are a contractual right to a cash payment of $20 per PPCU. The PPCUs will generally become vested, if at all, upon achievement of certain specified performance objectives. During the three months ended June 30, 2018, and 2017, we recognized compensation expense of zero and $59, respectively, related to these units. During the nine months ended June 30, 2018, and 2017, we recognized compensation expense of zero and $252, respectively, related to these units.

 

16

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Phantom Stock Units

Phantom stock units (“PSUs”) are primarily granted to the members of the Board of Directors as part of their overall compensation. These PSUs are paid via unrestricted stock grants to each director upon their departure from the Board of Directors. We record compensation expense for the full value of the grant on the date of grant. During the three months ended June 30, 2018, and 2017, we recognized $49 and $41, respectively, in compensation expense related to these grants. During the nine months ended June 30, 2018, and 2017, we recognized $140 and $125, respectively, in compensation expense related to these grants.

Performance Based Phantom Stock Units

A performance based phantom stock unit (a “PPSU”) is a contractual right to receive one share of the Company’s common stock upon the achievement of certain specified performance objectives and continued performance of services. At June 30, 2018, the Company had outstanding an aggregate of 399,027 three-year PPSUs. The vesting of these awards is subject to the achievement of specified levels of cumulative net income before taxes or specified stock price levels and continued performance of services through mid-December 2018. At June 30, 2018, redemption of a portion of the awards is deemed probable. During the three and nine months ended June 30, 2018, we recognized a benefit to compensation expense of $343 and $792, respectively, related to these grants. This benefit is a result of a reduction in the estimated number of units deemed probable of vesting, based on the projected achievement of specified performance objectives. During the three and nine months ended June 30, 2017, we recognized compensation expense of $225 and $753, respectively, related to these grants.

7. SECURITIES AND EQUITY INVESTMENTS

Our financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, investments, accounts payable and a loan agreement. We believe that the carrying value of these financial instruments in the accompanying Condensed Consolidated Balance Sheets approximates their fair value due to their short-term nature. Additionally, we have a cost method investment in EnerTech Capital Partners II L.P. (“EnerTech”). We estimate the fair value of our investment in EnerTech (Level 3) using cash flow projections and market multiples of the underlying non-public companies.

Investment in EnerTech

The following table presents the reconciliation of the carrying value to the fair value of the investment in EnerTech as of June 30, 2018, and September 30, 2017:

 

		June 30, 2018				September 30, 2017
Carrying value		$	558			$	558
Unrealized gains			170				171
Fair value		$	728			$	729

At each reporting date, the Company performs an evaluation of impairment for securities to determine if any unrealized losses are other-than temporary. Based on the results of this evaluation, we believe the unrealized gain at June 30, 2018, and September 30, 2017, indicated our investment was not impaired.

8. EMPLOYEE BENEFIT PLANS

401(k) Plan

The Company offers employees the opportunity to participate in its 401(k) savings plans. During the three months ended June 30, 2018 and 2017, we recognized $466 and $312, respectively, in matching expense. During the nine months ended June 30, 2018 and 2017, we recognized $1,380 and $771, respectively, in matching expense.

Post Retirement Benefit Plans

Certain individuals at one of the Company’s locations are entitled to receive fixed annual payments pursuant to post retirement benefit plans. We had an unfunded benefit liability of $755 recorded as of June 30, 2018, and $815 as of September 30, 2017, related to such plans.

 

17

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

9. FAIR VALUE MEASUREMENTS

Fair Value Measurement Accounting

Fair value is considered the price to sell an asset, or transfer a liability, between market participants on the measurement date. Fair value measurements assume that the asset or liability is (1) exchanged in an orderly manner, (2) the exchange is in the principal market for that asset or liability, and (3) the market participants are independent, knowledgeable, able and willing to transact an exchange. Fair value accounting and reporting establishes a framework for measuring fair value by creating a hierarchy for observable independent market inputs and unobservable market assumptions and expands disclosures about fair value measurements. Considerable judgment is required to interpret the market data used to develop fair value estimates. As such, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current exchange. The use of different market assumptions and/or estimation methods could have a material effect on the estimated fair value.

At June 30, 2018, financial assets and liabilities measured at fair value on a recurring basis were limited to our Executive Deferred Compensation Plan, under which certain employees are permitted to defer a portion of their base salary and/or bonus for a Plan Year (as defined in the plan), and contingent consideration liabilities related to certain of our acquisitions.

Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2018, and September 30, 2017, are summarized in the following tables by the type of inputs applicable to the fair value measurements:

 

		June 30, 2018
		Total Fair Value				Quoted Prices (Level 1)				Significant Unobservable Inputs (Level 3)
Executive savings plan assets		$	713			$	713			$	—
Executive savings plan liabilities			(599	)			(599	)			—
Contingent consideration			(795	)			—				(795	)
Total		$	(681	)		$	114			$	(795	)

 

		September 30, 2017
		Total Fair Value				Quoted Prices (Level 1)				Significant Unobservable Inputs (Level 3)
Executive savings plan assets		$	641			$	641			$	—
Executive savings plan liabilities			(529	)			(529	)			—
Contingent consideration			(786	)			—				(786	)
Total		$	(674	)		$	112			$	(786	)

In fiscal years 2016 and 2017, we entered into contingent consideration arrangements related to certain acquisitions. Please see Note 13, “Business Combinations” for further discussion. At June 30, 2018, we estimated the fair value of these contingent consideration liabilities at $795. The table below presents a reconciliation of the fair value of these obligations, which used significant unobservable inputs (Level 3).

 

18

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

		Contingent Consideration Agreements
Fair value at September 30, 2017		$	786
Issuances			248
Settlements			(391	)
Net adjustments to fair value			152
Fair value at June 30, 2018		$	795

10. INVENTORY

Inventories consist of the following components:

 

		June 30, 2018				September 30, 2017
Raw materials		$	4,175			$	4,104
Work in process			4,396				3,731
Finished goods			1,608				1,692
Parts and supplies			8,538				7,396
Total inventories		$	18,717			$	16,923

11. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following is a progression of goodwill by segment for the nine months ended June 30, 2018:

 

		Commercial & Industrial				Communications				Infrastructure Solutions				Residential				Total
Goodwill at September 30, 2017		$	7,176			$	—			$	30,886			$	8,631			$	46,693
Acquisitions (See Note 13)			—				2,561				—				—				2,561
Adjustments			—				—				45				—				45
Goodwill at June 30, 2018		$	7,176			$	2,561			$	30,931			$	8,631			$	49,299

Intangible Assets

Intangible assets consist of the following:

 

						June 30, 2018
		Estimated Useful Lives (in Years)				Gross Carrying Amount				Accumulated Amortization				Net
Trademarks/trade names			5 - 20			$	5,044			$	723			$	4,321
Technical library			20				400				96				304
Customer relationships			6 -15				33,469				7,027				26,442
Backlog			1				3,026				2,565				461
Construction contracts			1				2,583				2,375				208
Total intangible assets						$	44,522			$	12,786			$	31,736

 

19

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

						September 30, 2017
		Estimated Useful Lives (in Years)				Gross Carrying Amount				Accumulated Amortization				Net
Trademarks/trade names			5 - 20			$	4,643			$	440			$	4,203
Technical library			20				400				81				319
Customer relationships			6 - 15				31,115				4,741				26,374
Backlog			1				2,412				2,130				282
Construction contracts			1				2,399				2,164				235
Total intangible assets						$	40,969			$	9,556			$	31,413

12. COMMITMENTS AND CONTINGENCIES

Legal Matters

From time to time we are a party to various claims, lawsuits and other legal proceedings that arise in the ordinary course of business. We maintain various insurance coverages to minimize financial risk associated with these proceedings. None of these proceedings, separately or in the aggregate, are expected to have a material adverse effect on our financial position, results of operations or cash flows. With respect to all such proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We expense routine legal costs related to these proceedings as they are incurred.

The following is a discussion of our significant legal matters:

Capstone Construction Claims

From 2003 to 2005, two of our former subsidiaries performed HVAC and electrical work under contract with Capstone Building Corporation (“Capstone”) on a university student housing project in Texas. In 2005, our subsidiaries filed for arbitration against Capstone, seeking payment for work performed, change orders and other impacts. The parties settled those claims, and the release included a waiver of warranties associated with any of the HVAC work. Several years later, the subsidiaries discontinued operations, and the Company sold their assets.

On October 24, 2013, Capstone filed a petition in the 12th Judicial District Court of Walker County, Texas against these subsidiaries, among other subcontractors, seeking contribution, defense, indemnity and damages for breach of contract in connection with alleged construction defect claims brought against Capstone by the owner of the student housing project. The owner claimed $10,406 in damages, plus attorneys’ fees and costs against Capstone, which Capstone sought to recover from the subcontractors. The claims against the Company were based on alleged defects in the mechanical design, construction and installation of the HVAC and electrical systems performed by our former subsidiaries.

Following mediation in June and November 2017, the Company reached an agreement in late December 2017 to settle all claims brought against it. In the nine months ended June 30, 2018, a mutual settlement and release agreement was executed by the plaintiffs and the Company resulting in a charge and payment by the Company of $200.

USAMRIID Claim

On December 6, 2017, IES Commercial, Inc. filed suit in the United States District Court of Maryland in the matter USA for the use and benefit of IES Commercial, Inc. and IES Commercial, Inc. v. Manhattan Construction Co., Torcon, Inc., Manhattan Torcon A Joint Venture, Federal Ins. Co., Fidelity & Deposit Co. of Maryland, Zurich American Ins. Co., and Travelers Casualty & Surety Co. This suit relates to a large project which has been ongoing since 2009 and was scheduled for completion in early 2013. As the Company has previously disclosed, the Company entered into a subcontract in 2009 with Manhattan Torcon A Joint Venture to perform subcontracting services at the U.S. Army Medical Research Institute for Infectious Diseases (“USAMRIID”) replacement facility project for a contract value of approximately $61,146, subject to additions or deductions. Because of delays on the project and additional work the Company performed, the Company has sought approximately $21,000 for claims incurred as of August 31, 2017, and expects to seek an additional approximate $4,500 for claims the Company expects to incur from August 31, 2017, through completion of the project. On January 22, 2018, the defendants in this matter filed a motion to dismiss the suit, and on February 2, 2018, we filed our response. We are awaiting a decision on this matter.

 

20

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Given the uncertainty litigation poses, the Company has not recorded any recovery in connection with this claim. There can be no assurance that the Company will prevail in this litigation matter or that, if the Company does prevail, it will not receive a significantly lower award.

Risk-Management

We retain the risk for workers’ compensation, employer’s liability, automobile liability, construction defects, general liability and employee group health claims, as well as pollution coverage, resulting from uninsured deductibles per accident or occurrence which are generally subject to annual aggregate limits. Our general liability program provides coverage for bodily injury and property damage. In many cases, we insure third parties, including general contractors, as additional insureds under our insurance policies. Losses are accrued based upon our known claims incurred and an estimate of claims incurred but not reported. As a result, many of our claims are effectively self-insured. Many claims against our insurance are in the form of litigation. At June 30, 2018, and September 30, 2017, we had $6,856 and $6,204, respectively, accrued for self-insurance liabilities. We are also subject to construction defect liabilities, primarily within our Residential segment. As of June 30, 2018, and September 30, 2017, we had $179 and $218, respectively, reserved for these claims. Because the reserves are based on judgment and estimates and involve variables that are inherently uncertain, such as the outcome of litigation and an assessment of insurance coverage, there can be no assurance that the ultimate liability will not be higher or lower than such estimates or that the timing of payments will not create liquidity issues for the Company.

Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral. This is common in the insurance industry. To date, we have not had a situation where an underwriter has had reasonable cause to effect payment under a letter of credit. At June 30, 2018, and September 30, 2017, $6,420 and $5,985, respectively, of our outstanding letters of credit was utilized to collateralize our insurance program.

Surety

As of June 30, 2018, the estimated cost to complete our bonded projects was approximately $61,325. We evaluate our bonding requirements on a regular basis, including the terms offered by our sureties. We believe the bonding capacity presently provided by our current sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. Posting letters of credit in favor of our sureties reduces the borrowing availability under our credit facility.

Other Commitments and Contingencies

Some of our customers and vendors require us to post letters of credit, or provide intercompany guarantees, as a means of guaranteeing performance under our contracts and ensuring payment by us to subcontractors and vendors. If our customer has reasonable cause to effect payment under a letter of credit, we would be required to reimburse our creditor for the letter of credit. At both June 30, 2018, and September 30, 2017, $508 of our outstanding letters of credit were to collateralize our vendors.

From time to time, we may enter into firm purchase commitments for materials, such as copper or aluminum wire, which we expect to use in the ordinary course of business. These commitments are typically for terms of less than one year and require us to buy minimum quantities of materials at specific intervals at a fixed price over the term. As of June 30, 2018, we had no such commitments.

13. BUSINESS COMBINATIONS

2018

The Company completed one acquisition in the nine months ended June 30, 2018, for a total consideration of $6,179, which includes cash consideration paid at close of $5,806, cash consideration remaining to be paid of $125, and contingent consideration payable in July 2019 and 2020 with aggregate acquisition date fair value estimated at of $248.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

•

Azimuth Communications, Inc. (“Azimuth”) – On April 6, 2018, the Company acquired all of the outstanding capital stock of Azimuth, a Portland, Oregon-based provider of design and integration services for structured cabling, physical security, access control systems, distributed antenna systems, wireless access, and audio visual systems. Azimuth operates within the Company’s Communications segment. The acquisition of Azimuth has accelerated our expansion into the Pacific Northwest market, which the Company believes to be an attractive market.

2017

The Company completed three acquisitions in the year ended September 30, 2017, for a total aggregate consideration of $20,979. See Note 18, “Business Combinations and Divestitures” in our Annual Report on Form 10-K for the year ended September 30, 2017, for

further information.

 

•

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

 

•

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

 

•

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

The total purchase consideration for the Freeman, Technical Services and Azimuth acquisitions included contingent consideration payments based on the acquired company’s earnings, as defined in the applicable purchase and sale agreement. The fair value of the total contingent consideration liability for all acquisitions, including Freeman and Technical Services, was estimated at $795 at June 30, 2018, and is included in other current liabilities and other non-current liabilities on our Condensed Consolidated Balance Sheets.

The Company accounted for the transactions under the acquisition method of accounting, which requires recording assets and liabilities at fair value (Level 3). The valuations derived from estimated fair value assessments and assumptions used by management are preliminary pending finalization of certain tangible and intangible asset valuations and assessment of deferred taxes. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different values being assigned to individual assets acquired and liabilities assumed. This may result in adjustments to the preliminary amounts recorded. The preliminary estimates for Freeman, Technical Services and NEXT Electric were finalized during the nine months ended June 30, 2018. The preliminary valuation of the assets and liabilities assumed as of the acquisition of Azimuth is as follows:

 

Current assets		$	1,765
Property and equipment			355
Intangible assets (primarily customer relationships)			3,439
Goodwill			2,561
Current liabilities			(1,154	)
Long term liabilities			(14	)
Deferred tax liability			(773	)
Net assets acquired		$	6,179

With regard to goodwill, the balance is attributable to the workforce of the acquired business and other intangibles that do not qualify for separate recognition. In connection with the Azimuth acquisition, we acquired goodwill of $2,561, of which $59 is tax deductible.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

The Azimuth acquisition contributed $2,474 in additional revenue and $284 in operating loss during the three and nine months ended June 30, 2018.

Unaudited Pro Forma Information

The following unaudited supplemental pro forma results of operations, calculated as if each acquisition occurred as of October 1 of the fiscal year prior to consummation, for the three and nine months ended June 30, 2018, and 2017, are as follows:

 

		Unaudited
		Three Months Ended June 30,
		2018				2017
Revenues		$	232,576			$	220,088
Net income attributable to IES Holdings, Inc.		$	8,577			$	5,252

 

		Unaudited
		Nine Months Ended June 30,
		2018				2017
Revenues		$	642,167			$	654,251
Net income (loss) attributable to IES Holdings, Inc.		$	(19,452	)		$	8,498

14. SUBSEQUENT EVENTS

On July 23, 2018, we entered into the Third Amendment to our Second Amended and Restated Credit and Security Agreement (as amended, the “Credit Agreement”). See Note 3, “Debt” for further discussion.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, set forth in Item 8. “Financial Statements and Supplementary Data” as set forth in our Annual Report on Form 10-K for the year ended September 30, 2017, and the Condensed Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q. The following discussion may contain forward looking statements. For additional information, see “Disclosure Regarding Forward Looking Statements” in Part I of this Quarterly Report on Form 10-Q.

OVERVIEW

Executive Overview

Please refer to Item 1. “Business” of our Annual Report on Form 10-K for the year ended September 30, 2017, for a discussion of the Company’s services and corporate strategy. IES Holdings, Inc., a Delaware corporation, is a holding company that owns and manages operating subsidiaries, comprised of providers of industrial products and infrastructure services, to a variety of end markets. Our operations are currently organized into four principal business segments: Commercial & Industrial, Communications, Infrastructure Solutions and Residential.

RESULTS OF OPERATIONS

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

 

		Three Months Ended June 30,
		2018								2017
		$				%				$				%
		(Dollars in thousands, Percentage of revenues)
Revenues		$	232,576				100.0	%		$	208,323				100.0	%
Cost of services			190,039				81.7	%			172,925				83.0	%
Gross profit			42,537				18.3	%			35,398				17.0	%
Selling, general and administrative expenses			32,372				13.9	%			30,771				14.8	%
Contingent consideration			81				0.0	%			(33	)			0.0	%
Gain on sale of assets			(5	)			0.0	%			(55	)			0.0	%
Operating income			10,089				4.3	%			4,715				2.2	%
Interest and other (income) expense, net			402				0.2	%			361				0.1	%
Income from operations before income taxes			9,687				4.2	%			4,354				2.1	%
Provision for income taxes			1,038				0.4	%			(1,519	)			(0.7	)%
Net income			8,649				3.7	%			5,873				2.8	%
Net income attributable to noncontrolling interest			(133	)			(0.1	)%			(5	)			0.0	%
Comprehensive income attributable to IES Holdings, Inc.		$	8,516				3.7	%		$	5,868				2.8	%

Consolidated revenues for the three months ended June 30, 2018, were $24.3 million higher than for the three months ended June 30, 2017, an increase of 11.6%, with increases at our Commercial & Industrial, Infrastructure Solutions and Residential segments. Revenues at our businesses acquired in fiscal 2017 and 2018 contributed $17.3 million to the revenue increase, partly offset by a $6.3 million decrease at two underperforming branches within our Commercial & Industrial segment, which are in the process of winding down operations.

Consolidated gross profit for the three months ended June 30, 2018, increased $7.1 million compared with the three months ended June 30, 2017. Our overall gross profit percentage increased to 18.3% during the three months ended June 30, 2018, as compared to 17.0% during the three months ended June 30, 2017. Gross profit as a percentage of revenue increased at all of our segments, with the exception of our Residential segment.

 

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Selling, general and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and benefits related to corporate, segment and branch management (including incentive-based

compensation), occupancy and utilities, training, professional services, information technology costs, consulting fees, travel and certain types of depreciation and amortization. We allocate certain corporate selling, general and administrative costs across our segments as we believe this more accurately reflects the costs associated with operating each segment.

During the three months ended June 30, 2018, our selling, general and administrative expenses were $32.4 million, an increase of $1.6 million, or 5.2%, over the three months ended June 30, 2017. Selling, general and administrative expense as a percent of revenue decreased from 14.8% for the three months ended June 30, 2017, to 13.9% for the three months ended June 30, 2018. This decrease was primarily attributable to lower variable compensation and incentive costs. Businesses acquired during fiscal 2017 and 2018 contributed an additional $1.9 million for the three months June 30, 2018.

 

		Nine Months Ended June 30,
		2018								2017
		$				%				$				%
		(Dollars in thousands, Percentage of revenues)
Revenues		$	636,553				100.0	%		$	604,163				100.0	%
Cost of services			527,112				82.8	%			501,769				83.1	%
Gross profit			109,441				17.2	%			102,394				16.9	%
Selling, general and administrative expenses			92,108				14.5	%			89,085				14.7	%
Contingent consideration			152				0.0	%			50				0.0	%
Gain on sale of assets			(39	)			0.0	%			(68	)			0.0	%
Operating income			17,220				2.7	%			13,327				2.2	%
Interest and other (income) expense, net			1,175				0.2	%			1,187				0.2	%
Income from operations before income taxes			16,045				2.5	%			12,140				2.0	%
Provision for income taxes (1)			34,622				5.4	%			1,792				0.3	%
Net income (loss)			(18,577	)			(2.9	)%			10,348				1.7	%
Net income attributable to noncontrolling interest			(255	)			0.0	%			(72	)			0.0	%
Comprehensive income (loss) attributable to IES Holdings, Inc.		$	(18,832	)			(3.0	)%		$	10,276				1.7	%

 

(1)	2018 includes a charge of $31.5 million to re-measure our net deferred tax assets in connection with the Tax Cuts and Jobs Act.

Consolidated revenues for the nine months ended June 30, 2018 were $32.4 million higher than for the nine months ended June 30, 2017, an increase of 5.4%, with increases at all of our operating segments with the exception of our Communications segment. Revenues from our businesses acquired in fiscal 2017 and 2018 contributed $44.6 million of the revenue increase for the nine months ended June 30, 2018, largely offset by a $19.0 million decrease in revenue at the Denver and Roanoke branches of our Commercial & Industrial segment, which are in the process of winding down operations.

Our overall gross profit percentage increased to 17.2% during the nine months ended June 30, 2018, as compared to 16.9% during the nine months ended June 30, 2017. Businesses acquired in fiscal 2017 and 2018, contributed an additional $5.9 million of gross profit for the nine months ended June 30, 2018, as compared with the nine months ended June 30, 2017. However, this increase was largely offset by a decrease in margin associated with higher materials costs in our Residential segment.

During the nine months ended June 30, 2018, our selling, general and administrative expenses were $92.1 million, an increase of $3.0 million, or 3.4%, over the nine months ended June 30, 2017. This increase was primarily attributable to expense incurred at businesses acquired during fiscal 2017 and 2018, which contributed $4.9 million of the increase for the nine months ended June 30, 2018. This increase was partly offset by a reduction in variable compensation expense.

 

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