UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

Commission File Number 1-13783

Integrated Electrical Services, Inc.

(Exact name of registrant as specified in its charter)

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

4801 Woodway Drive, Suite 200-E, 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 þ No o

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 o No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company 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 þ

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

The number of shares outstanding as of May 13, 2011 of the issuer’s common stock was 14,905,597.

 

 

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2011 and September 30, 2010			5
Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2011 and 2010			6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2011 and 2010			8
Notes to Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities			36
Item 4. Submission of Matters to a Vote of Security Holders			36
Item 5. Other Information			36
Item 6. Exhibits			37
Signatures			38
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

DEFINITIONS

In this quarterly report on Form 10-Q, 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 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 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 our actual results to differ materially from those set forth in such statements. Such risks and uncertainties include, but are not limited to:

•

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

•

competition in the construction industry, 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 contracts;

•

a general reduction in the demand for our services;

•

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

•

our ability to successfully manage construction projects;

•

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

•

inaccurate estimates used when entering into fixed-priced contracts;

•

challenges integrating new types of work or new processes into our divisions;

•

the cost and availability of qualified labor, especially electricians and construction supervisors;

•

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

•

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

•

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

•

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

•

loss of key personnel and effective transition of new management;

•

warranty losses or other latent defect claims in excess of our existing reserves and accruals;

•

warranty losses or other unexpected liabilities stemming from former divisions which we have sold or closed;

•

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

•

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

•

difficulty in fulfilling the covenant terms of our credit facilities;

•

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;

•

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

•

changes in the assumptions made regarding future events used to value our stock options and performance-based stock awards;

•

the recognition of potential goodwill, fixed asset and other investment impairments;

•

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

•

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

•

the recognition of tax benefits related to uncertain tax positions;

•

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

•

the financial impact of new or proposed accounting regulations;

•

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

•

the possibility that certain of our net operating losses may be restricted or reduced in a change in ownership;

•

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; and

•

the sale or disposition of the shares of our common stock held by our majority shareholder, which, under certain circumstances, would trigger change of control provisions in contracts such as employment agreements, supply agreements, and financing and surety arrangements.

You should understand that the foregoing, as well as other risk factors discussed in our annual report on Form 10-K for the year ended September 30, 2010, could cause future outcomes to differ materially from those experienced previously or from those expressed in this quarterly report and our aforementioned annual report on Form 10-K. We undertake no obligation to publicly update or revise information concerning our restructuring efforts, borrowing availability, 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.

General information about us can be found at www.ies-co.com under “Investor Relations.” 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 to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission. You may also contact our Investor Relations department at 713-860-1500, and they will provide you with copies of our public reports.

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

		March 31,				September 30,
		2011				2010
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	36,707			$	32,924
Accounts receivable:
Trade, net of allowance of $2,389 and $3,360, respectively			82,915				88,252
Retainage			18,397				17,083
Inventories			9,454				12,682
Costs and estimated earnings in excess of billings on uncompleted contracts			15,115				12,566
Prepaid expenses and other current assets			5,031				5,449
Total current assets			167,619				168,956
LONG-TERM RECEIVABLES, net of allowance of $77 and $4,069, respectively			315				440
PROPERTY AND EQUIPMENT, net			11,642				19,846
GOODWILL			3,981				3,981
OTHER NON-CURRENT ASSETS, net			8,942				11,882
Total assets		$	192,499			$	205,105
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	447			$	808
Accounts payable and accrued expenses			71,049				67,799
Billings in excess of costs and estimated earnings on uncompleted contracts			14,212				17,109
Total current liabilities			85,708				85,716
LONG-TERM DEBT, net of current maturities			10,418				10,448
LONG-TERM DEFERRED TAX LIABILITY			1,046				1,046
OTHER NON-CURRENT LIABILITIES			6,177				6,314
Total liabilities			103,349				103,524
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; 15,407,802 and 15,407,802 shares issued and 14,905,597 and 14,773,904 outstanding, respectively			154				154
Treasury stock, at cost, 502,205 and 633,898 shares, respectively			(6,861	)			(13,677	)
Additional paid-in capital			165,065				171,510
Accumulated other comprehensive income			—				(88	)
Retained deficit			(69,208	)			(56,318	)
Total stockholders’ equity			89,150				101,581
Total liabilities and stockholders’ equity		$	192,499			$	205,105

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

		Three Months Ended				Three Months Ended
		March 31, 2011				March 31, 2010
		(Unaudited)				(Unaudited)
Revenues		$	118,326			$	107,619
Cost of services			112,969				94,031
Gross profit			5,357				13,588
Selling, general and administrative expenses			13,333				25,709
(Gain) loss on sale of assets			(87	)			13
Restructuring charges			—				65
Loss from operations			(7,889	)			(12,199	)
Interest and other:
Interest expense			576				1,017
Interest income			(24	)			(59	)
Other income, net			(8	)			(107	)
Interest and other expense, net			544				851
Loss from operations before income taxes			(8,433	)			(13,050	)
Provision for income taxes			804				180
Net loss		$	(9,237	)		$	(13,230	)
Loss per share
Basic		$	(0.64	)		$	(0.92	)
Diluted		$	(0.64	)		$	(0.92	)
Shares used in the computation of loss per share (Note 5):
Basic			14,481,005				14,390,580
Diluted			14,481,005				14,390,580

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

		Six Months Ended				Six Months Ended
		March 31, 2011				March 31, 2010
		(Unaudited)				(Unaudited)
Revenues		$	231,975			$	227,867
Cost of services			215,447				194,347
Gross profit			16,528				33,520
Selling, general and administrative expenses			31,354				44,976
Gain on sale of assets			(6,816	)			(52	)
Asset Impairment			3,551				—
Restructuring charges			—				763
Loss from operations			(11,561	)			(12,167	)
Interest and other:
Interest expense			1,175				2,085
Interest income			(49	)			(116	)
Other income, net			(24	)			(226	)
Interest and other expense, net			1,102				1,743
Loss from operations before income taxes			(12,663	)			(13,910	)
Provision for income taxes			227				126
Net loss		$	(12,890	)		$	(14,036	)
Loss per share
Basic		$	(0.89	)		$	(0.98	)
Diluted		$	(0.89	)		$	(0.98	)
Shares used in the computation of loss per share (Note 5):
Basic			14,463,996				14,393,328
Diluted			14,463,996				14,393,328

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES

		Six Months Ended				Six Months Ended
		March 31, 2011				March 31, 2010
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(12,890	)		$	(14,036	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Bad debt expense			(466	)			4,984
Deferred financing cost amortization			169				148
Depreciation and amortization			1,980				2,795
Gain on sale of assets			(6,816	)			(52	)
Asset Impairment			3,551				—
Non-cash compensation expense			436				964
Equity in (gains) losses of investment			96				—
Changes in operating assets and liabilities
Accounts receivable			389				21,951
Inventories			(1,640	)			699
Costs and estimated earnings in excess of billings			(2,930	)			669
Prepaid expenses and other current assets			57				641
Other non-current assets			2,820				229
Accounts payable and accrued expenses			6,782				(19,821	)
Billings in excess of costs and estimated earnings			(2,842	)			(7,541	)
Other non-current liabilities			(140	)			(574	)
Net cash provided by (used in) operating activities			(11,444	)			(8,944	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(755	)			(502	)
Proceeds from sales of property and equipment			207				159
Proceeds from sales of facilities			16,287				—
Distribution from unconsolidated affiliates			(57	)			98
Net cash provided by (used in) investing activities			15,682				(245	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt			—				744
Repayments of debt			(390	)			(1,449	)
Purchase of treasury stock			(65	)			(98	)
Net cash used in financing activities			(455	)			(803	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			3,783				(9,992	)
CASH AND CASH EQUIVALENTS, beginning of period			32,924				64,174
CASH AND CASH EQUIVALENTS, end of period		$	36,707			$	54,182
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	1,009			$	2,637
Cash paid for income taxes		$	106			$	33

The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements.

INTEGRATED ELECTRICAL SERVICES, INC.

1. BUSINESS

Integrated Electrical Services, Inc., a Delaware corporation, was founded in June 1997 to establish a leading national provider of electrical and communication services, focusing primarily on the commercial, industrial, residential, low voltage and service and maintenance markets. 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. The words “IES”, the “Company”, “we”, “our”, and “us” refer to Integrated Electrical Services, Inc. and, except as otherwise specified herein, to our wholly-owned subsidiaries.

Our electrical contracting services include design of electrical 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 focus on projects that require special expertise, such as design-and-build projects that utilize the capabilities of our in-house experts, or projects which require specific market expertise, such as hospitals or power generation facilities. We also focus on service, maintenance and certain renovation and upgrade work, which tends to be either recurring or have lower sensitivity to economic cycles, or both. We provide services for a variety of projects, including: high-rise residential and office buildings, power plants, manufacturing facilities, data centers, chemical plants, refineries, wind farms, solar facilities, municipal infrastructure and health care facilities and residential developments, including both single-family housing and multi-family apartment complexes. We also offer low voltage contracting services as a complement to our electrical contracting business. Our low voltage services include design and installation of structured cabling 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.

CONTROLLING SHAREHOLDER

At March 31, 2011, Tontine Capital Partners, L.P. together with its affiliates (“Tontine”), was the controlling shareholder of the Company’s common stock. Accordingly, Tontine has the ability to exercise significant control of our affairs, including the election of directors and any action requiring the approval of shareholders, including the approval of any potential merger or sale of all or substantially all assets or divisions of the Company, or the Company itself. In its most recent Schedule 13D, Tontine stated that it has no current plans to make any material change in the Company’s business or corporate structure. For a more complete discussion on our relationship with Tontine, please refer to Note 2, “Controlling Shareholder” to these Condensed Consolidated Financial Statements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position as of, and the results of operations for, the periods presented. All adjustments are considered to be normal and recurring unless otherwise described herein. Interim period results are not necessarily indicative of results of operations or cash flows for the full year. During interim periods, we follow the same accounting policies disclosed in our annual report on Form 10-K for the year ended September 30, 2010. Please refer to the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended September 30, 2010, when reviewing our interim financial results set forth herein.

RECLASSIFICATIONS

In connection with a change in reportable segments, certain prior period amounts have been reclassified to conform to the current year presentation of our segments with no effect on net income (loss) or retained deficit. Specifically, our Communications segment has been separated from our Commercial & Industrial segment. For additional information, please refer to Note 6, “Operating Segments” to these Condensed Consolidated Financial Statements.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

SALES OF FACILITIES

Sale of Non-Strategic Manufacturing Facility

On November 30, 2010, a subsidiary of the Company (“Seller”) and Siemens Energy, Inc., a Delaware corporation, (“Buyer”), executed an Asset Purchase Agreement (the “Agreement”) providing for the sale of substantially all the assets and assumption of certain liabilities of a non-strategic manufacturing facility engaged in manufacturing and selling fabricated metal buildings housing electrical equipment such as switchgears, motor starters and control systems. In addition, another subsidiary of the Company which is also a party to the Agreement, sold certain real property where the fabrication facilities are located.

Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited to, cash and cash equivalents, rights to names which include “IES”, business records relating to pre-closing matters, which are required by law to be retained by Seller, performed contracts and fulfilled purchase orders, insurance policies, non-assignable permits, licenses and software and tax refunds relating to periods ending prior to the closing. Buyer also assumed liabilities and obligations of Seller relating to certain customer contracts, vendor contracts and financing leases as well as accounts and trade payables arising in the ordinary course of business other than inter-company accounts payable.

The purchase price of $10,690 was adjusted to reflect variances between Historical Working Capital and Closing Working Capital (each as defined in the Agreement). Finally, the Agreement contains representations and warranties by Seller and Buyer as well as covenants by Seller, termination provisions and indemnifications by Seller and Buyer. The transaction was completed on December 10, 2010 at which time we recognized a gain of $6,763.

Sale of Non-Core Electrical Distribution Facility

On February 28, 2011, Key Electrical Supply, Inc, a wholly owned subsidiary of the Company (“Seller”) and Elliot Electric Supply, Inc, a Texas corporation, (“Buyer”), executed an Asset Purchase Agreement (the “Agreement”) providing for the sale of substantially all the assets and assumption of certain liabilities of a non-core electrical distribution facility engaged in distributing wiring, lighting, electrical distribution, power control and generators for residential and commercial applications.

Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited to, cash and cash equivalents, certain receivables, rights to the Key Electrical Supply, Inc name, business records relating to pre-closing matters, which are required by law to be retained by Seller, insurance policies, licenses and software and tax refunds relating to periods ending prior to the closing. Buyer also assumed liabilities and obligations of Seller relating to certain vendor contracts and financing notes and leases as well as accounts and trade payables arising in the ordinary course of business other than inter-company accounts payable.

The purchase price of $6,200 was adjusted to reflect variances between Historical Working Capital and Closing Working Capital (each as defined in the Agreement). Buyer and Seller are currently in the process of negotiating other elements of Historical Working Capital. Finally, the Agreement contains representations and warranties by Seller and Buyer as well as covenants by Seller, termination provisions and indemnifications by Seller and Buyer. As of March 31, 2011, we recognized a gain of $50.

LONG-TERM RECEIVABLES

In March 2009, in connection with a construction project entering bankruptcy, we transferred $3,992 of trade accounts receivable to long-term receivables and initiated breach of contract and mechanics’ lien foreclosure actions against the project’s general contractor and owner, respectively. At the same time, we reserved the costs in excess of billings of $278 associated with this receivable. In March 2010, we reserved the remaining balance. In February 2011, we entered into a $2,850 settlement in connection with the breach of contract and mechanics’ lien foreclosure actions. The $2,850 recovery was recorded in the accompanying consolidated statements of operations as a component of selling, general and administrative expenses. For additional information, please refer to Note 11, “Commitments and Contingencies — Legal Matters” to these Condensed Consolidated Financial Statements.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, investments, accounts payable, a line of credit, notes payable issued to finance insurance policies, and a $10,000 senior subordinated loan agreement (the “Tontine Term Loan”). We believe that the carrying value of financial instruments, with the exception of the Tontine Term Loan and our cost method investment in EnerTech Capital Partners II L.P. (“EnerTech”), in the accompanying consolidated balance sheets, approximates their fair value due to their short-term nature.

We estimate that the fair value of the Tontine Term Loan is $10,835 based on comparable debt instruments at March 31, 2011. For additional information, please refer to Note 4, “Debt and Liquidity — The Tontine Capital Partners Term Loan” to these Condensed Consolidated Financial Statements.

We estimate that the fair value of our investment in EnerTech is $1,661 at March 31, 2011. For additional information, please refer to Note 8, “Securities and Equity Investments — Investment in EnerTech Capital Partners II L.P.” to these Condensed Consolidated Financial Statements.

ASSET IMPAIRMENT

During the first quarter of our 2011 fiscal year, the Company recorded a pretax non-cash asset impairment charge of $3,551 related to internally-developed capitalized software. The Company ceased use of the software in December, 2010. As a result, the software has a fair value of zero. The charge of $3,551 was recorded separately in the accompanying consolidated statements of operations as a component of loss from operations.

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 analyzing goodwill, investments, intangible assets and long-lived asset impairments and adjustments, allowance for doubtful accounts receivable, stock-based compensation, reserves for legal matters, assumptions regarding estimated costs to exit certain divisions, realizability of deferred tax assets, and self-insured claims liabilities and related reserves.

SEASONALITY AND QUARTERLY FLUCTUATIONS

Results of operations from our Residential construction segment are more seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues during fall and winter. The Communications and Commercial & Industrial segments of our business are less subject to seasonal trends, as work in these segments generally is performed inside structures protected from the weather. Our service and maintenance business is generally not affected by seasonality. In addition, the construction industry has historically been highly cyclical. 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. Accordingly, operating results for any fiscal period are not necessarily indicative of results that may be achieved for any subsequent fiscal period.

SUBSEQUENT EVENTS

We have reviewed subsequent events through the date of filing.

2. CONTROLLING SHAREHOLDER

On April 30, 2010, we prepaid $15,000 of the original $25,000 principal outstanding on the Tontine Term Loan; accordingly $10,000 remains outstanding under the Tontine Term Loan.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

On February 11, 2011, Tontine, filed an amended Schedule 13D. Although Tontine has not indicated any plans to alter its ownership level, should Tontine reconsider its investment plans and sell its controlling interest in the Company, a change in ownership would occur. A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability of net operating losses for federal and state income tax purposes. Furthermore, a change in control would trigger the change of control provisions in a number of our material agreements, including our Revolving Credit Facility (as defined below), bonding agreements with our sureties and employment contracts with certain officers and employees of the Company.

3. STRATEGIC ACTIONS

2011 Restructuring Plan

During the second quarter of our 2011 fiscal year, the Company has determined that certain geographic areas of our Commercial & Industrial operations will be either sold or closed during the next six to twelve months (the “2011 Restructuring Plan”). This is one part of management’s overall plan to return the Company to profitability. The operations directly affected by this decision are in several locations throughout the country, including Iowa, Florida and Nevada. These locations were selected due to current business prospects and the extended time frame needed to return these operations to a profitable position. Currently we are in the initial stages of the plan, and we expect that costs could range from $4,500 to $5,500 in aggregate. Costs associated with this action would include equipment and facility lease termination expenses, consulting expenses and severance costs for employees. Should the Company be successful in the sale of these facilities, these costs could be reduced. For the three and six months ended March 31, 2011; these facilities had combined revenues and net losses as follows:

		Three Months Ended				Three Months Ended
		March 31, 2011				March 31, 2010
Revenues		$	10,807			$	8,840
Net operating losses		$	(2,173	)		$	(4,276	)
		Six Months Ended				Six Months Ended
		March 31, 2011				March 31, 2010
Revenues		$	21,618			$	22,009
Net operating losses		$	(3,305	)		$	(5,204	)

2009 Restructuring Plan

In the first three months of our 2009 fiscal year, we began a restructuring program (the “2009 Restructuring Plan”) that was designed to consolidate operations within our three segments at that time. Our plan was to streamline local project and support operations, which were managed through regional operating centers, and to capitalize on the investments we had made in the previous year to further leverage our resources. In addition, as a result of the continuing significant effects of the recession, during the third quarter of fiscal year 2009, we implemented a more expansive cost reduction program, by further reducing administrative personnel, primarily in the corporate office, and consolidating our Commercial and Industrial administrative functions into one shared service center. The 2009 Restructuring Plan was completed in our 2010 fiscal year.

During the three months ended March 31, 2011 and 2010, respectively, we incurred pre-tax restructuring charges, including severance benefits and facility consolidations and closings, of $0 and $65 associated with the 2009 Restructuring Plan. Costs incurred related to our Communications segment were $0 and $0 for the three months ended March 31, 2011 and 2010, respectively. Costs incurred related to our Residential segment were $0 and $0 for the three months ended March 31, 2011 and 2010, respectively. Costs incurred related to our Commercial & Industrial segment were $0 a reduction of $2 for the three months ended March 31, 2011 and 2010, respectively. Costs related to our Corporate office were $0 and $67 for the three months ended March 31, 2011 and 2010, respectively.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

During the six months ended March 31, 2011 and 2010, respectively, we incurred pre-tax restructuring charges, including severance benefits and facility consolidations and closings, of $0 and $763 associated with the 2009 Restructuring Plan. Costs incurred related to our Communications segment were $0 and $16 for the six months ended March 31, 2011 and 2010, respectively. Costs incurred related to our Residential segment were $0 and $0 for the six months ended March 31, 2011 and 2010, respectively. Costs incurred related to our Commercial & Industrial segment were $0 and $698 for the six months ended March 31, 2011 and 2010, respectively. Costs related to our Corporate office were $0 and $49 for the six months ended March 31, 2011 and 2010, respectively.

4. DEBT AND LIQUIDITY

Debt consists of the following:

		March 31,				September 30,
		2011				2010
Tontine Term Loan, due May 15, 2013, bearing interest at 11.00%		$	10,000			$	10,000
Insurance Financing Agreements			263				653
Capital leases			602				603
Total debt			10,865				11,256
Less — Short-term debt and current maturities of long-term debt			(447	)			(808	)
Total long-term debt		$	10,418			$	10,448

Future payments on debt at March 31, 2011 are as follows:

		Capital Leases				Term Debt				Total
2011		$	184			$	263			$	447
2012			318				—				318
2013			318				10,000				10,318
2014			26				—				26
2015			—				—				—
Thereafter			—				—				—
Less: Imputed Interest			(244	)			—				(244	)
Total		$	602			$	10,263			$	10,865

For the three months ended March 31, 2011 and 2010, we incurred interest expense of $576 and $1,017, respectively. For the six months ended March 31, 2011 and 2010, we incurred interest expense of $1,176 and $2,085, respectively.

The Revolving Credit Facility

On May 12, 2006, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”), for a revolving credit facility (the “Revolving Credit Facility”) with Bank of America, N.A. and certain other lenders. On April 30, 2010, we renegotiated the terms of, and entered into an amendment to, the Loan and Security Agreement without incurring termination charges. Under the terms of the amended Revolving Credit Facility, the size of the facility remains at $60,000 and the maturity date has been extended to May 12, 2012. In connection with the amendment, we incurred an amendment fee of $225 and legal fees of $53, which are being amortized over 24 months.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The Revolving Credit Facility is guaranteed by our subsidiaries and secured by first priority liens on substantially all of our subsidiaries’ existing and future acquired assets, exclusive of collateral provided to our surety providers. The Revolving Credit Facility contains customary affirmative, negative and financial covenants. The Revolving Credit Facility also restricts us from paying cash dividends and places limitations on our ability to repurchase our common stock.

Borrowings under the Revolving Credit Facility may not exceed a “borrowing base” that is determined monthly by our lenders based on available collateral, primarily certain accounts receivables and inventories. Under the terms of the Revolving Credit Facility, in effect as of March 31, 2011, interest for loans and letter of credit fees is based on our Total Liquidity, which is calculated for any given period as the sum of the average daily availability for such period plus the average daily unrestricted cash on hand for such period as follows:

				Annual Interest Rate for
Total Liquidity		Annual Interest Rate for Loans		Letters of Credit
Greater than or equal to $60,000		LIBOR plus 3.00% or Base Rate plus 1.00%		3.00% plus 0.25% fronting fee
Greater than $40,000 and less than $60,000		LIBOR plus 3.25% or Base Rate plus 1.25%		3.25% plus 0.25% fronting fee
Less than or equal to $40,000		LIBOR plus 3.50% or Base Rate plus 1.50%		3.50% plus 0.25% fronting fee

At March 31, 2011, we had $10,075 available to us under the Revolving Credit Facility, based on a borrowing base of $23,325, $13,250 in outstanding letters of credit, and no outstanding borrowings.

As of March 31, 2011, we were subject to the financial covenant under the Revolving Credit Facility requiring that we maintain a fixed charge coverage ratio of not less than 1.0:1.0 at any time that our aggregate amount of unrestricted cash on hand plus availability is less than $25,000 and, thereafter, until such time as our aggregate amount of unrestricted cash on hand plus availability has been at least $25,000 for a period of 60 consecutive days. As of March 31, 2011, our Total Liquidity was in excess of $25,000 for the previous 60 days. Had our Total Liquidity been less than $25,000 for the previous 60 days at March 31, 2011, we would not have met the 1.0:1.0 fixed charge coverage ratio test.

At March 31, 2011, our Total Liquidity was $46,782. For the six months ended March 31, 2011, we paid no interest for loans under the Revolving Credit Facility and a weighted average interest rate, including fronting fees, of 3.50% for letters of credit. In addition, we are charged monthly in arrears (1) an unused commitment fee of 0.50%, and (2) certain other fees and charges as specified in the Loan and Security Agreement, as amended. Finally, the Revolving Credit Facility would have been subject to termination charges of 0.25% of the total borrowing capacity if such termination occurred on or before May 12, 2011 and $50 anytime thereafter.

In the event that we are not able to meet the financial covenant of our amended Revolving Credit Facility in the future and are unsuccessful in obtaining a waiver from our lenders, the Company expects to have adequate cash on hand to fully collateralize our outstanding letters of credit and to provide sufficient cash for ongoing operations.

The Tontine Term Loan

On December 12, 2007, we entered into the Tontine Term Loan, a $25,000 senior subordinated loan agreement, with Tontine. The Tontine Term Loan bears interest at 11.0% per annum and is due on May 15, 2013. Interest is payable quarterly in cash or in-kind at our option. Any interest paid in-kind will bear interest at 11.0% in addition to the loan principal. On April 30, 2010, we prepaid $15,000 of principal on the Tontine Term Loan. On May 1, 2010, Tontine assigned the Tontine Term Loan to TCP Overseas Master Fund II, L.P. (“TCP 2”), an affiliate of Tontine. Although the Tontine Term Loan may be repaid at any time prior to the maturity date at par, plus accrued interest without penalty, our Revolving Credit Facility currently prohibits any further repayments. The Tontine Term Loan is subordinated to our existing Revolving Credit Facility with Bank of America, N.A. The Tontine Term Loan is an unsecured obligation of the Company and its subsidiary borrowers. The Tontine Term Loan contains no financial covenants or restrictions on dividends or distributions to stockholders.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

5. EARNINGS PER SHARE

Our restricted shares granted under the 2006 Equity Incentive Plan participate in any dividends declared on our common stock. Accordingly, the restricted shares are considered participating securities under the two-class method, which is an earnings allocation formula that determines earnings for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. Under the two-class method, net income is reduced by the amount of dividends declared in the current period for each class of stock and by the contractual amounts of dividends that must be paid for the current period. The remaining earnings are then allocated to common stock and participating securities to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. Diluted earnings per share is calculated using the treasury stock and “if converted” methods for potential common stock. Basic earnings per share is calculated as income (loss) available to common stockholders, divided by the weighted average number of common shares outstanding during the period. If the effect is dilutive, participating securities are included in the computation of basic earnings per share. Our participating securities do not have a contractual obligation to share in the losses in any given period. As a result, these participating securities will not be allocated any losses in the periods of net losses, but will be allocated income in the periods of net income using the two-class method.

The tables that follow reconcile the components of the basic and diluted earnings per share for the three and six months ended March 31, 2011 and 2010:

		Three Months Ended
		March 31,
		2011				2010
Numerator:
Net loss attributable to common shareholders		$	(9,237	)		$	(13,230	)
Net income attributable to restricted shareholders			—				—
Net loss		$	(9,237	)		$	(13,230	)
Denominator:
Weighted average common shares outstanding — basic			14,481,005				14,390,580
Effect of dilutive stock options and non-vested restricted stock			—				—
Weighted average common and common equivalent shares outstanding — diluted			14,481,005				14,390,580
Loss per share
Basic		$	(0.64	)		$	(0.92	)
Diluted		$	(0.64	)		$	(0.92	)

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

		Six Months Ended
		March 31,
		2011				2010
Numerator:
Net loss attributable to common shareholders		$	(12,890	)		$	(14,036	)
Net income attributable to restricted shareholders			—				—
Net loss		$	(12,890	)		$	(14,036	)
Denominator:
Weighted average common shares outstanding — basic			14,463,996				14,393,328
Effect of dilutive stock options and non-vested restricted stock			—				—
Weighted average common and common equivalent shares outstanding — diluted			14,463,996				14,393,328
Loss per share
Basic		$	(0.89	)		$	(0.98	)
Diluted		$	(0.89	)		$	(0.98	)

6. OPERATING SEGMENTS

In 2010, our Communications segment was separated from our Commercial & Industrial segment to form a new operating segment. The decision to report Communications as a separate segment was made as the Company changed its internal reporting structure and the communications business gained greater significance as a percentage of consolidated revenues, gross profit and operating income. Moreover, the Communications segment is a separate and specific part of future strategic growth plans of the Company. We now manage and measure performance of our business in three distinct operating segments: Communications, Residential and Commercial & Industrial. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company’s CODM is its Chief Executive Officer. Prior period disclosures have been adjusted to reflect the change in reportable segments.

The Communications segment consists of low voltage installation, design, planning and maintenance for commercial and industrial industries.

The Residential segment consists of electrical installation, replacement and renovation services in single-family, condominium, townhouse and low-rise multifamily housing units.

The Commercial & Industrial segment provides electrical design, installation, renovation, engineering and maintenance and replacement services in facilities such as office buildings, high-rise apartments and condominiums, theaters, restaurants, hotels, hospitals and critical-care facilities, school districts, light manufacturing and processing facilities, military installations, airports, outside plants, network enterprises, switch network customers, manufacturing and distribution centers, water treatment facilities, refineries, petrochemical and power plants, and alternative energy facilities.

We also have a Corporate office that provides general and administrative as well as support services to our three operating segments.

The significant accounting policies of the segments are the same as those described in the summary of significant accounting policies, set forth in Note 2 to our Consolidated Financial Statements included in our annual report on Form 10-K for the year ended September 30, 2010. We allocate certain corporate selling, general and administrative costs across our segments to more accurately reflect the costs associated with operating each segment. Transactions between segments are eliminated in consolidation.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Segment information for continuing operations for the three and six months ended March 31, 2011 and 2010 is as follows:

		Three Months Ended March 31, 2011
										Commercial &
		Communications				Residential				Industrial				Corporate				Total
Revenues		$	23,368			$	26,366			$	68,592			$	—			$	118,326
Cost of services			20,920				22,788				69,261				—				112,969
Gross profit			2,448				3,578				(669	)			—				5,357
Selling, general and administrative			2,293				4,509				3,832				2,699				13,333
Loss (gain) on sale of assets			—				(48	)			(7	)			(32	)			(87	)
Asset Impairment			—				—				—				—				—
Restructuring charge			—				—				—				—				—
Income (loss) from operations		$	155			$	(883	)		$	(4,494	)		$	(2,667	)		$	(7,889	)
Other data:
Depreciation and amortization expense		$	22			$	84			$	158			$	579			$	843
Capital expenditures		$	—			$	47			$	164			$	153			$	364
Total assets		$	25,368			$	21,878			$	81,443			$	63,810			$	192,499

		Three Months Ended March 31, 2010
										Commercial &
		Communications				Residential				Industrial				Corporate				Total
Revenues		$	16,402			$	28,068			$	63,149			$	—			$	107,619
Cost of services			13,011				21,814				59,206				—				94,031
Gross profit			3,391				6,254				3,943				—				13,588
Selling, general and administrative			1,819				6,526				12,863				4,501				25,709
Loss (gain) on sale of assets			—				(2	)			15				—				13
Restructuring charge			—				—				(2	)			67				65
Income (loss) from operations		$	1,572			$	(270	)		$	(8,933	)		$	(4,568	)		$	(12,199	)
Other data:
Depreciation and amortization expense		$	65			$	255			$	430			$	668			$	1,418
Capital expenditures		$	31			$	64			$	142			$	189			$	426
Total assets		$	15,794			$	32,886			$	85,518			$	92,406			$	226,604

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

		Six Months Ended March 31, 2011
										Commercial &
		Communications				Residential				Industrial				Corporate				Total
Revenues		$	43,290			$	52,410			$	136,275			$	—			$	231,975
Cost of services			37,630				44,249				133,568				—				215,447
Gross profit			5,660				8,161				2,707				—				16,528
Selling, general and administrative			4,614				9,286				11,404				6,050				31,354
Loss (gain) on sale of assets			—				(70	)			(6,833	)			87				(6,816	)
Asset Impairment			—				—				—				3,551				3,551
Restructuring charge			—				—				—				—				—
Income (loss) from operations		$	1,046			$	(1,055	)		$	(1,864	)		$	(9,688	)		$	(11,561	)
Other data:
Depreciation and amortization expense		$	48			$	183			$	393			$	1,356			$	1,980
Capital expenditures		$	—			$	74			$	390			$	291			$	755

		Six Months Ended March 31, 2010
										Commercial &
		Communications				Residential				Industrial				Corporate				Total
Revenues		$	35,054			$	57,060			$	135,753			$	—			$	227,867
Cost of services			28,306				43,957				122,084				—				194,347
Gross profit			6,748				13,103				13,669				—				33,520
Selling, general and administrative			3,705				12,549				20,820				7,902				44,976
Loss (gain) on sale of assets			—				(3	)			(49	)			—				(52	)
Restructuring charge			16				—				698				49				763
Income (loss) from operations		$	3,027			$	557			$	(7,800	)		$	(7,951	)		$	(12,167	)
Other data:
Depreciation and amortization expense		$	117			$	397			$	737			$	1,544			$	2,795
Capital expenditures		$	31			$	76			$	174			$	221			$	502

We have no operations or long-lived assets outside of the United States.

7. STOCKHOLDERS’ EQUITY

The 2006 Equity Incentive Plan (as amended, the “2006 Plan”) became effective on May 12, 2006. The 2006 Plan provides for grants of both stock options and common stock, including restricted stock and performance-based restricted stock. We have approximately 1.3 million shares of common stock authorized for issuance under the 2006 Plan.

Treasury Stock

On December 12, 2007, our Board of Directors authorized the repurchase of up to one million shares of our common stock. This share repurchase program was authorized through December 2009. As of the program’s termination on December 31, 2009, we repurchased 886,360 shares of common stock at an average cost of $16.24 per share.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

During the six months ended March 31, 2011, we repurchased 18,846 shares of common stock from our employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock issued under the 2006 Plan, 204,000 shares of restricted stock were issued from treasury stock to employees and 63,077 unvested shares of restricted stock were forfeited by former employees and returned to treasury stock. Additionally, 9,616 phantom stock units granted to members of the Board of Directors vested, triggering an issuance of 9,616 unrestricted shares from treasury.

During the six months ended March 31, 2010, we repurchased 14,492 shares of common stock from our employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock issued under the 2006 Plan, and 17,300 unvested shares of restricted stock were forfeited by former employees and returned to treasury stock.

Restricted Stock

We granted 204,000 shares of restricted stock to employees during the six months ended March 31, 2011, of which 1,098 have vested and 21,902 have been forfeited as of March 31, 2011. These restricted shares, which were granted at a prices ranging from $3.49 to $3.51 per share, will vest on September 28, 2012 and December 16, 2012.

During the six months ended March 31, 2011 and 2010, we recognized $421 and $885, respectively, in compensation expense related to all restricted stock awards. As of March 31, 2011, the unamortized compensation cost related to outstanding unvested restricted stock was $1,032. We expect to recognize $323 related to these awards during the remaining six months of our 2011 fiscal year, and $709 thereafter.

All the restricted shares granted under the 2006 Plan participate in dividends, if any, issued to common shareholders.

Stock Options

Our determination of the fair value of share-based payment awards on the date of grant using a binomial option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, the risk-free rate of return, and actual and projected employee stock option exercise behaviors.

During the six months ended March 31, 2011 and 2010, we granted no stock options.

During the six months ended March 31, 2011 and 2010, we recognized $17 and $80, respectively, in compensation expense related to previously granted stock options.

The following table summarizes activity regarding our stock option and incentive compensation plans:

						Weighted Average
		Shares				Exercise Price
Outstanding, September 30, 2010			158,500			$	18.66
Options granted			—				—
Exercised			—				—
Expired			—				—
Forfeited			—				—
Outstanding, March 31, 2011			158,500			$	18.66
Exercisable, March 31, 2011			156,833			$	18.64

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The following table summarizes all options outstanding and exercisable at March 31, 2011:

						Remaining
		Outstanding as of				Contractual Life				Weighted-Average				Exercisable as of				Weighted-Average
Range of Exercise Prices		March 31, 2011				in Years				Exercise Price				March 31, 2011				Exercise Price
$12.31 – $18.79			123,500				5.62			$	17.02				123,500			$	17.02
$20.75 – $25.08			35,000				6.23				24.46				33,333				24.65
			158,500				5.75			$	18.66				156,833			$	18.64

Upon exercise of stock options, it is our policy to first issue shares from treasury stock, then to issue new shares. Unexercised options expire between July 2016 and January 2018.

8. SECURITIES AND EQUITY INVESTMENTS

Investment in EnerTech Capital Partners II L.P.

Our investment in EnerTech was approximately 2% of the overall ownership in EnerTech at March 31, 2011 and September 30, 2010. As such, we accounted for this investment using the cost method of accounting.

EnerTech’s investment portfolio periodically results in unrealized losses reflecting a possible, other-than temporary impairment of our investment. If facts arise that lead us to determine that any unrealized losses are not temporary, we would write-down our investment in EnerTech through a charge to other expense in the period of such determination. The carrying value of our investment in EnerTech at March 31, 2011 and September 30, 2010 was $1,985 and $2,005, respectively, and is currently recorded as a component of Other Non-Current Assets in our Consolidated Balance Sheets. The following table presents the reconciliation of the carrying value and unrealized gains (losses) to the fair value of the investment in EnerTech as of March 31, 2011 and September 30, 2010:

		March 31,				September 30,
		2011				2010
Carrying value		$	1,985			$	2,005
Unrealized gains (losses)			(324	)			(179	)
Fair value		$	1,661			$	1,826

On December 31, 2010, EnerTech’s general partner, with the consent of the fund’s investors, extended the fund for an additional year through December 31, 2011. The fund will terminate on this date unless extended by the fund’s valuation committee. The fund may be extended for another one-year period through December 31, 2012 with the consent of the fund’s valuation committee.

Arbinet Corporation

On May 15, 2006, we received a distribution from our investment in EnerTech of 32,967 shares in Arbinet Corporation (“Arbinet”), formerly Arbinet-thexchange Inc. The investment is an available-for-sale marketable security and is currently recorded as a component of Other Non-Current Assets in our Consolidated Balance Sheets. Unrealized gains and losses are recorded to other comprehensive income. On June 11, 2010, Arbinet consummated a 1-for-4 reverse common stock split. As a result of this transaction, we held 8,241 shares of Arbinet common stock.

On November 22, 2010, we sold our shares of Arbinet common stock for $57, net of commissions and other fees. As a result of this sale, we recognized a $96 loss in Other Expense in our Consolidated Statements of Operation, which was previously recorded as an unrealized loss included in other comprehensive income.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

The amount of unrealized holding losses included in other comprehensive income at March 31, 2011 and September 30, 2010 is $0 and $88, respectively. Both the carrying and market value of the investment at March 31, 2011 and September 30, 2010 were $0 and $60, respectively.

9. EMPLOYEE BENEFIT PLANS

Executive Savings Plan

Under the Executive Deferred Compensation Plan adopted on July 1, 2004 (the “Executive Savings Plan”), certain employees are permitted to defer a portion (up to 75%) of their base salary and/or bonus for a Plan Year. The Compensation Committee of the Board of Directors may, in its sole discretion, credit one or more participants with an employer deferral (contribution) in such amount as the Committee may choose (“Employer Contribution”). The Employer Contribution, if any, may be a fixed dollar amount, a fixed percentage of the participant’s compensation, base salary, or bonus, or a “matching” amount with respect to all or part of the participant’s elective deferrals for such plan year, and/or any combination of the foregoing as the Committee may choose.

On February 13, 2009, we suspended Company matching cash contributions to employee’s contributions due to the significant impact the economic recession has had on the Company’s financial performance. As such, there have been no contributions by us to the Executive Savings Plan for the three and six months ended March 31, 2011 and 2010.

10. FAIR VALUE MEASUREMENTS

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.

Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011, are summarized in the following table by the type of inputs applicable to the fair value measurements:

										Significant				Significant
										Other Observable				Unobservable
		Total				Quoted Prices				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
Money market accounts		$	17,877			$	17,877			$	—			$	—
Executive Savings Plan assets			634				634				—				—
Executive Savings Plan liabilities			(715	)			(715	)			—				—
Total		$	17,796			$	17,796			$	—			$	—

Below is a description of the inputs used to value the assets summarized in the preceding table:

Level 1 — Inputs represent unadjusted quoted prices for identical assets exchanged in active markets.

Level 2 — Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets exchanged in active or inactive markets; quoted prices for identical assets exchanged in inactive markets; and other inputs that are considered in fair value determinations of the assets.

Level 3 — Inputs include unobservable inputs used in the measurement of assets. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or related observable inputs that can be corroborated at the measurement date.

INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)

11. COMMITMENTS AND CONTINGENCIES

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 the 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 certain of our significant legal matters:

Centerpoint Project

We were a co-plaintiff in a breach of contract and mechanics’ lien foreclosure action in Maricopa County, Arizona superior court. The defendants were Centerpoint Construction, LLC and Tempe Land Company, LLC, the general contractor and owner, respectively, of a condominium and retail development project in Tempe, Arizona. In December 2008, Tempe Land Company, LLC filed for Chapter 11 bankruptcy reorganization in the U.S. Bankruptcy Court in Phoenix, Arizona. The principal amount of our claim was approximately $3,992, exclusive of interest, attorneys’ fees and costs. In March 2009, we transferred $3,992 of trade accounts receivable to long-term receivable. At the same time, we reserved the costs in excess of billings of $278 associated with this receivable.

In April 2010, the project property was sold at foreclosure to the project lender. In the sale, the project lender acquired the project property subject only to superior encumbrances. The priority of the mechanics’ lien claims over the project lender’s deeds of trust was to be determined at trial, which was anticipated to occur in April 2011.

As a result of the April 2010 foreclosure sale and the uncertainties associated with the outcome of the lawsuit, we determined that there was a reasonable possibility, but not a probability, of collection of our claim. As a result, we wrote-off the remaining $3,714 long-term receivable.

In February 2011, we entered into a $2,850 settlement in connection with the breach of contract and mechanics’ lien foreclosure actions. The $2,850 recovery was recorded in the accompanying consolidated statements of operations as a component of loss from operations.

Ward Transformer Site

One of our subsidiaries has been identified as one of more than 200 potentially responsible parties (PRPs) with respect to the clean-up of an electric transformer resale and reconditioning facility, known as the Ward Transformer Site, located in Raleigh, North Carolina. The facility built, repaired, reconditioned and sold electric transformers from approximately 1964 to 2005. We did not own or operate the facility but a subsidiary that we acquired in July 1999 is believed to have sent transformers to the facility during the 1990’s. During the course of its operation, the facility was contaminated by Polychlorinated Biphenyls (PCBs), which also have been found to have migrated off the site.

Four PRPs have commenced clean-up of on-site contaminated soils under an Emergency Removal Action pursuant to a settlement agreement and Administrative Order on Consent entered into between the four PRPs and the U.S. Environmental Protection Agency (EPA) in September 2005. We are not a party to that settlement agreement or Order on Consent. In April 2009, two of these PRPs, Carolina Power and Light Company and Consolidation Coal Company, filed suit against us and most of the other PRPs in the U.S. District Court for the Eastern District of North Carolina (Western Division) to contribute to the cost of the clean-up. In addition to the on-site clean-up, the EPA has selected approximately 50 PRPs to which it sent a Special Notice Letter in late 2008 to organize the clean-up of soils off site and address contamination of groundwater and other miscellaneous off-site issues. We were not a recipient of that letter.

Based on our investigation to date, there is evidence to support our defense that our subsidiary contributed no PCB contamination to the site. In addition, we have tendered a demand for indemnification to the former owner of our subsidiary that may have transacted business with the facility and are exploring the existence and applicability of insurance policies that could mitigate potential exposure. As of March 31, 2011 and September 30, 2010, we have not recorded a reserve for this matter, as we believe the likelihood of our responsibility for damages is not probable and a potential range of exposure is not estimable.

Risk Management

We are subject to large deductibles on our property and casualty insurance policies. As a result, many of our claims are effectively self-insured. Many claims against our insurance are in the form of litigation. At March 31, 2011, we had $6,117 accrued for self-insurance liabilities, including $1,144 for general liability coverage losses. We are also subject to construction defect liabilities, primarily within our Residential segment. We believe the likely range of our potential liability for construction defects is from $250 to $750. As of March 31, 2011, we had reserved $350 for these claims.

Some of our insurance carriers require us to post letters of credit as a means of guaranteeing performance under our policies. If an insurance carrier has reasonable cause to effect payment under a letter of credit, we would be required to reimburse the lenders under our Revolving Credit Facility for such letter of credit. At March 31, 2011, $12,620 of our outstanding letters of credit were used to collateralize our high deductible insurance programs.

Surety

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a surety. Those bonds provide a guarantee to the customer that we will perform under the terms of our contract and that we will pay our subcontractors and vendors. If we fail to perform under the terms of our contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they incur on our behalf. To date, we have not been required to make any reimbursements to our sureties for bond-related costs.

As is common in the surety industry, sureties issue bonds on a project-by-project basis and can decline to issue bonds at any time. We believe that our relationships with our sureties will allow us to provide surety bonds as they are required. However, current market conditions, as well as changes in our sureties’ assessment of our operating and financial risk, could cause our sureties to decline to issue bonds for our work. If our sureties decline to issue bonds for our work, our alternatives would include posting other forms of collateral for project performance, such as letters of credit or cash, seeking bonding capacity from other sureties, or engaging in more projects that do not require surety bonds. In addition, if we are awarded a project for which a surety bond is required but we are unable to obtain a surety bond, the result can be a claim for damages by the customer for the costs of replacing us with another contractor.

As of March 31, 2011, we utilized cash and accumulated interest thereon (as included in Other Non-Current Assets in our Consolidated Balance Sheet) of $3,985 to collateralize our obligations to our former sureties. On March 14, 2011, a former surety released $2,600 of cash back to the Company. As of March 31, 2011, the estimated cost to complete our bonded projects was approximately $122,221. We evaluate our bonding requirements on a regular basis, including the terms offered by our sureties. On May 7, 2010, we entered into agreements with two primary sureties. We do not have any cash or letters of credit held as collateral by these sureties. We believe the bonding capacity presently provided by these sureties are adequate for our current operations and will be adequate for our operations for the foreseeable future.

Other Commitments and Contingencies

Between October 2004 and September 2005, we sold all or substantially all of the assets of certain of our wholly-owned subsidiaries. These sales were made to facilitate the business needs and purposes of the organization as a whole. Since we were a consolidator of electrical contracting businesses, often the best candidate to purchase these assets was a previous owner of the assets who usually was still associated with the subsidiary, often as an officer of that subsidiary, or otherwise. To facilitate the desired timing, the sales were made with more than ordinary reliance on the representations of the purchaser who was, in those cases, often the person most familiar with the business sold. As these sales were assets sales, rather than stock sales, we may be required to fulfill obligations that were assigned or sold to others, if the purchaser is unwilling or unable to perform the transferred liabilities. If this were to occur, we would seek reimbursement from the purchasers. These potential liabilities will continue to diminish over time. As of March 31, 2011, all projects transferred have been completed. To date, we have not been required to perform on any projects sold under this divestiture program.

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 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 March 31, 2011, we had no such open purchase commitments.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements, the related Notes, and management’s discussion and analysis included in our annual report on Form 10-K for the year ended September 30, 2010. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to the risk factors discussed in the “Risk Factors” section of our annual report on Form 10-K for the year ended September 30, 2010, and in the “Disclosures Regarding Forward-Looking Statements,” and elsewhere in this quarterly report on Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operation are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

We have identified the accounting principles that we believe are most critical to our reported financial status by considering accounting policies that involve the most complex or subjective decisions or assessments. These accounting policies are those related to revenue recognition, the assessment of goodwill impairment, our allowance for doubtful accounts receivable, the recording of our self-insurance liabilities and our estimation of the valuation allowance for deferred tax assets. These accounting policies, as well as others, are described in Part 2. Item 8. Financial Statements and Supplementary Data — Note 2, “Summary of Significant Accounting Policies” in our annual report on Form 10-K for the year ended September 30, 2010.

In 2010, our Communications segment was separated from our Commercial & Industrial segment to form a new operating segment. The decision to report Communications as a separate segment was made as the Company changed its internal reporting structure and the communications business gained greater significance as a percentage of consolidated revenues, gross profit and operating income. Moreover, the Communications segment is a separate and specific part of future strategic growth plans of the Company. We now manage and measure performance of our business in three distinct operating segments: Communications, Residential and Commercial & Industrial.

SALES OF FACILITIES

Sale of Non-Strategic Manufacturing Facility

On November 30, 2010, a subsidiary of the Company (“Seller”) and Siemens Energy, Inc., a Delaware corporation, (“Buyer”), executed an Asset Purchase Agreement (the “Agreement”) providing for the sale of substantially all the assets and assumption of certain liabilities of a non-strategic manufacturing facility engaged in manufacturing and selling fabricated metal buildings housing electrical equipment such as switchgears, motor starters and control systems. In addition, another subsidiary of the Company which is also a party to the Agreement, sold certain real property where the fabrication facilities are located.

Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited to, cash and cash equivalents, rights to names which include “IES”, business records relating to pre-closing matters, which are required by law to be retained by Seller, performed contracts and fulfilled purchase orders, insurance policies, non-assignable permits, licenses and software and tax refunds relating to periods ending prior to the closing. Buyer also assumed liabilities and obligations of Seller relating to certain customer contracts, vendor contracts and financing leases as well as accounts and trade payables arising in the ordinary course of business other than inter-company accounts payable.

The purchase price of $10.7 million was adjusted to reflect variances between Historical Working Capital and Closing Working Capital (each as defined in the Agreement). Finally, the Agreement contains representations and warranties by Seller and Buyer as well as covenants by Seller, termination provisions and indemnifications by Seller and Buyer. The transaction was completed on December 10, 2010 at which time we recognized a gain of $6.8 million.

Sale of Non-Core Electrical Distribution Business

On February 28, 2011, Key Electrical Supply, Inc, a wholly owned subsidiary of the Company (“Seller”) and Elliot Electric Supply, Inc, a Texas corporation, (“Buyer”), executed an Asset Purchase Agreement (the “Agreement”) providing for the sale of substantially all the assets and assumption of certain liabilities of a non-core electrical distribution business engaged in distributing wiring, lighting, electrical distribution, power control and generators for residential and commercial applications.

Pursuant to the terms of the Agreement assets excluded from the sale include, but are not limited to, cash and cash equivalents, certain receivables, rights to the Key Electrical Supply, Inc name, business records relating to pre-closing matters, which are required by law to be retained by Seller, insurance policies, licenses and software and tax refunds relating to periods ending prior to the closing. Buyer also assumed liabilities and obligations of Seller relating to certain vendor contracts and financing notes and leases as well as accounts and trade payables arising in the ordinary course of business other than inter-company accounts payable.

The purchase price of $6.2 million was adjusted to reflect variances between Historical Working Capital and Closing Working Capital (each as defined in the Agreement). Buyer and Seller are currently in the process of negotiating other elements of Historical Working Capital. Finally, the Agreement contains representations and warranties by Seller and Buyer as well as covenants by Seller, termination provisions and indemnifications by Seller and Buyer. As of March 31, 2011, we recognized a gain of $0.1 million.

ASSET IMPAIRMENT

During the first quarter of our 2011 fiscal year, the Company recorded a pretax non-cash asset impairment charge of $3.5 million related to internally-developed capitalized software. The Company ceased use of the software in December, 2010. As a result, the software has a fair value of zero. The charge of $3.5 million was recorded separately in the accompanying consolidated statements of operations as a component of loss from operations.

SEASONALITY AND QUARTERLY FLUCTUATIONS

Results of operations from our Residential construction segment are more seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues during fall and winter. The Communications and Commercial & Industrial segments of our business are less subject to seasonal trends, as work in these segments generally is performed inside structures protected from the weather. Our service and maintenance business is generally not affected by seasonality. In addition, the construction industry has historically been highly cyclical. 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. Accordingly, operating results for any fiscal period are not necessarily indicative of results that may be achieved for any subsequent fiscal period.

RESTRUCTURING PROGRAMS

2011 Restructuring Plan

During the second quarter of our 2011 fiscal year, the Company has determined that certain geographic areas of our Commercial & Industrial operations will be either sold or closed during the next six to twelve months (the “2011 Restructuring Plan”). This is one part of management’s overall plan to return the Company to profitability. The operations directly affected by this decision are in several locations throughout the country, including Iowa, Florida and Nevada. These locations were selected due to current business prospects and the extended time frame needed to return these operations to a profitable position. Currently we are in the initial stages of the plan, and we expect that costs could range from $4.5 million to $5.5 million in aggregate. Costs associated with this action would include equipment and facility lease termination expenses, consulting expenses and severance costs for employees. Should the Company be successful in the sale of these facilities, these costs could be reduced.

2009 Restructuring Plan

In the first quarter of our 2009 fiscal year, we began a restructuring program (the “2009 Restructuring Plan”) that was designed to consolidate operations within our three segments. The 2009 Restructuring Plan was completed in our fiscal year 2010.

Details regarding the components of the restructuring charges are described in Part 1. Item 1. Condensed Consolidated Financial Statements — Note 3, “Strategic Actions” of this report, which is incorporated herein by reference.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2010

The following tables present selected historical results of operations of IES and its subsidiaries, with dollar amounts in millions and percentages expressed as a percent of revenues:

		Three Months Ended								Three Months Ended
		March 31, 2011								March 31, 2010
		$				%				$				%
		(Dollars in millions, Percentage of revenues)
Revenues		$	118.3				100.0	%		$	107.6				100.0	%
Cost of services			113.0				95.5	%			94.0				87.4	%
Gross profit			5.3				4.5	%			13.6				12.6	%
Selling, general and administrative expenses			13.3				11.3	%			25.7				23.9	%
Gain on sale of assets			(0.1	)			(0.1	)%			0.0				0.0	%
Asset Impairment			0.0				0.0	%			0.0				0.0	%
Restructuring charges			0.0				0.0	%			0.1				0.1	%
Income (loss) from operations			(7.9	)			(6.7	)%			(12.2	)			(11.3	)%
Interest and other expense, net			0.5				0.5	%			0.8				0.7	%
Loss before income taxes			(8.4	)			(7.1	)%			(13.0	)			(12.1	)%
Provision for income taxes			0.8				0.7	%			0.2				0.2	%
Net loss		$	(9.2	)			(7.8	)%		$	(13.2	)			(12.3	)%

Revenues

		Three Months Ended								Three Months Ended
		March 31, 2011								March 31, 2010
		$				%				$				%
		(Dollars in millions, Percentage of revenues)
Communications		$	23.4				19.7	%		$	16.4				15.2	%
Residential			26.3				22.3	%			28.0				26.1	%
Commercial & Industrial			68.6				58.0	%			63.2				58.6	%
Total Consolidated		$	118.3				100.0	%		$	107.6				100.0	%

Consolidated revenues for the three months ended March 31, 2011 were $10.7 million greater than the three months ended March 31, 2010, an increase of 9.9%. While our Communications and Commercial & Industrial segments revenues increased during the three months ended March 31, 2011, revenues for our Residential segment declined during the three months ended March 31, 2011, primarily due to a nationwide decline in single-family construction activity as a result of the challenging economic environment.

Revenues in our Communications segment increased $7.0 million, or 42.7%, during the three months ended March 31, 2011, compared to the three months ended March 31, 2010. This increase is due to an increase in data center projects and increased business from our national accounts.

Residential segment revenues decreased $1.7 million during the three months ended March 31, 2011, a decrease of 6.1%, compared to the three months ended March 31, 2010. This decrease is primarily attributable to declines in single-family housing construction resulting from the continued effect of high unemployment rates and uncertain economic conditions. Weather was also a factor throughout the quarter. The decline in single-family construction was offset by an increase in multi-family construction as compared to the prior year period. The increase in multi-family construction was driven by the current economic conditions which have adversely affected the sale of single family houses.

Revenues in our Commercial & Industrial segment increased $5.4 million, or 8.5%, during the three months ended March 31, 2011, compared to the three months ended March 31, 2010.

Gross Profit

		Three Months Ended								Three Months Ended
		March 31, 2011								March 31, 2010
		$				%				$				%
		(Dollars in millions, Percentage of revenues)
Communications		$	2.4				10.5	%		$	3.4				20.7	%
Residential			3.6				13.6	%			6.3				22.3	%
Commercial & Industrial			-0.7				-1.0	%			3.9				6.2	%
Total Consolidated		$	5.3				4.5	%		$	13.6				12.6	%

Our consolidated gross profit for the three months ended March 31, 2011 declined by $8.3 million, or 61.0% compared to consolidated gross profit for the three months ended March 31, 2010. Our overall gross profit as a percentage of revenue decreased to 4.5% during the three months ended March 31, 2011, compared to 12.6% during the three months ended March 31, 2010, primarily due to lower margin construction projects, difficulties in execution on certain projects, and increased costs of copper, steel and fuel. Additionally we are experiencing increased healthcare benefits and unemployment costs.

Our Communications segment’s gross profit decreased $1.0 million during the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The decrease in gross profit is attributed to lower margins on competitively bid projects.

During the quarter ended March 31, 2011, our Residential segment experienced a $2.7 million reduction in gross profit compared to the three months ended March 31, 2010. Gross margin percentage in the Residential segment declined to 13.6% during the three months ended March 31, 2011. We attribute much of the decline in Residential’s gross margin to increased competition resulting from the decline in both single-family and multi-family projects in the past year. This was especially noticeable in our multi-family projects. Additionally, increases in the cost of materials have negatively impacted gross margins.

Our Commercial & Industrial segment’s gross profit during the three months ended March 31, 2011 decreased $4.6 million compared to the three months ended March 31, 2010. During the three months ended March 31, 2011, the Commercial & Industrial segment experienced significant execution difficulties on five projects which resulted in a negative impact to gross margin of $2.7 million. The continued weak economy and competitive environment continues to adversely affect margins on competitively bid projects.

Selling, General and Administrative Expenses

		Three Months Ended								Three Months Ended
		March 31, 2011								March 31, 2010
		$				%				$				%
		(Dollars in millions, Percentage of revenues)
Communications		$	2.3				9.8	%		$	1.8				11.0	%
Residential			4.5				17.1	%			6.5				23.3	%
Commercial & Industrial			3.8				5.6	%			12.9				20.4	%
Corporate			2.7				—				4.5				—
Total Consolidated		$	13.3				11.3	%		$	25.7				23.9	%

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

During the three months ended March 31, 2011, our selling, general and administrative expenses were $13.3 million, a decrease of $12.4 million, or 48.2%, over the three months ended March 31, 2010. The reduction in 2011 expenses was primarily due to a reduction to bad debt expense of $8.0 million. In the three months ended March 31, 2010, we recorded $3.7 million in bad debt expense related to a long-term receivable. In the three months ended March 31, 2011, we recovered $2.9 million related to this long-term receivable. This accounted for 53.2% of the $12.4 million decrease. Further, bad debt was reduced $1.4 million. We also experienced decreases of $2.8 million in employment expenses and $0.4 million in occupancy expenses as a result of our ongoing cost reduction efforts.

Restructuring Charges

The 2009 Restructuring Plan was completed in our 2010 fiscal year. We recognized the following costs during the three months ended March 31, 2011 and 2010:

		Three Months Ended
		March 31,
		2011				2010
		(Dollars in thousands)
Severance compensation		$	—			$	0.1
Consulting and other charges			—				—
Non-cash asset amortization and write-offs			—				—
Total restructuring charges		$	—			$	0.1