10-Q
Table of Contents

 

 

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, 2017

OR

 

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

For the transition period from                  to                 

Commission File Number 1-13783

 

 

 

 

LOGO

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 3, 2017, there were 21,434,344 shares of common stock outstanding.

 

 

 


Table of Contents

IES HOLDINGS, INC. AND SUBSIDIARIES

INDEX

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets as of June  30, 2017 and September 30, 2016

     6  

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2017 and 2016

     7  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2017 and 2016

     9  

Notes to Condensed Consolidated Financial Statements

     10  

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

     25  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     38  

Item 4. Controls and Procedures

     38  

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     39  

Item 1A. Risk Factors

     39  

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

     39  

Item 3. Defaults Upon Senior Securities

     39  

Item 4. Mine Safety Disclosures

     39  

Item 5. Other Information

     39  

Item 6. Exhibits

     39  

Signatures

     42  


Table of Contents

PART I

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

 

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

 

    the potential recognition of valuation allowances on deferred tax assets;

 

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

 

    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 credit facilities;

 

    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;

 

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

 

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

 

    a general reduction in the demand for our services;

 

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

 

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

 

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    our ability to successfully manage projects;

 

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

 

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

 

    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;

 

    inaccurate estimates used when entering into fixed-priced contracts;

 

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

 

    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;

 

    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;

 

    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;

 

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

 

    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;

 

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

 

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

 

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

 

    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;

 

    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;

 

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

 

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    liabilities under laws and regulations protecting the environment.

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, 2016, could cause future outcomes to differ materially from those experienced previously or those expressed in such forward-looking statements. We undertake no obligation to publicly update or revise any information, including information concerning our controlling shareholder, net operating losses, borrowing availability or cash position, or any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Forward-looking statements are provided in this Quarterly Report 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.

 

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IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Information)

 

     June 30,
2017
    September 30,
2016
 
     (Unaudited)        

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 23,905     $ 32,961  

Restricted cash

     —         260  

Accounts receivable:

    

Trade, net of allowance of $729 and $736, respectively

     132,878       124,368  

Retainage

     24,587       20,135  

Inventories

     18,986       13,236  

Costs and estimated earnings in excess of billings

     18,705       15,554  

Prepaid expenses and other current assets

     4,709       3,214  
  

 

 

   

 

 

 

Total current assets

     223,770       209,728  
  

 

 

   

 

 

 

Property and equipment, net

     24,642       15,694  

Goodwill

     45,033       39,936  

Intangible assets, net

     31,500       31,723  

Deferred tax assets

     88,867       93,549  

Other non-current assets

     3,345       3,710  
  

 

 

   

 

 

 

Total assets

   $ 417,157     $ 394,340  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable and accrued expenses

     116,249       108,822  

Billings in excess of costs and estimated earnings

     30,667       24,229  
  

 

 

   

 

 

 

Total current liabilities

     146,916       133,051  
  

 

 

   

 

 

 

Long-term debt

     29,407       29,257  

Other non-current liabilities

     4,433       6,832  
  

 

 

   

 

 

 

Total liabilities

     180,756       169,140  
  

 

 

   

 

 

 

Noncontrolling interest

     1,713       1,795  

STOCKHOLDERS’ EQUITY:

    

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued and outstanding

     —         —    

Common stock, $0.01 par value, 100,000,000 shares authorized; 22,049,529 issued and 21,434,086 and 21,456,539 outstanding, respectively

     220       220  

Treasury stock, at cost, 615,443 and 592,990 shares, respectively

     (5,399     (4,781

Additional paid-in capital

     196,542       195,221  

Retained earnings

     43,325       32,745  
  

 

 

   

 

 

 

Total stockholders’ equity

     234,688       223,405  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 417,157     $ 394,340  
  

 

 

   

 

 

 

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

 

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IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Share Information)

(Unaudited)

 

     Three Months Ended June 30,  
     2017     2016  

Revenues

   $ 208,323     $ 179,599  

Cost of services

     172,925       145,602  
  

 

 

   

 

 

 

Gross profit

     35,398       33,997  

Selling, general and administrative expenses

     30,771       25,716  

Contingent consideration expense

     (33     66  

Loss (gain) on sale of assets

     (55     34  
  

 

 

   

 

 

 

Income from operations

     4,715       8,181  
  

 

 

   

 

 

 

Interest and other (income) expense:

    

Interest expense

     407       299  

Other income, net

     (46     (17
  

 

 

   

 

 

 

Income from operations before income taxes

     4,354       7,899  

Benefit from income taxes

     (1,519     (2,937
  

 

 

   

 

 

 

Net income

     5,873       10,836  
  

 

 

   

 

 

 

Net income attributable to noncontrolling interest

     (5     (31
  

 

 

   

 

 

 

Comprehensive income attributable to IES Holdings, Inc.

   $ 5,868     $ 10,805  
  

 

 

   

 

 

 

Earnings per share attributable to IES Holdings, Inc.:

    

Basic

   $ 0.27     $ 0.50  

Diluted

   $ 0.27     $ 0.50  

Shares used in the computation of earnings per share:

    

Basic

     21,300,716       21,297,898  

Diluted

     21,556,118       21,456,634  

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

 

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IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Share Information)

(Unaudited)

 

     Nine Months Ended June 30,  
     2017     2016  

Revenues

   $ 604,163     $ 490,347  

Cost of services

     501,769       400,905  
  

 

 

   

 

 

 

Gross profit

     102,394       89,442  

Selling, general and administrative expenses

     89,085       72,494  

Contingent consideration expense

     50       332  

Loss (gain) on sale of assets

     (68     811  
  

 

 

   

 

 

 

Income from operations

     13,327       15,805  
  

 

 

   

 

 

 

Interest and other (income) expense:

    

Interest expense

     1,281       895  

Other income, net

     (94     (49
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     12,140       14,959  

Provision (benefit) for income taxes

     1,792       (3,870
  

 

 

   

 

 

 

Net income

     10,348       18,829  
  

 

 

   

 

 

 

Net income attributable to noncontrolling interest

     (72     (31
  

 

 

   

 

 

 

Comprehensive income attributable to IES Holdings, Inc.

   $ 10,276     $ 18,798  
  

 

 

   

 

 

 

Earnings per share attributable to IES Holdings, Inc.:

    

Basic

   $ 0.48     $ 0.88  

Diluted

   $ 0.48     $ 0.87  

Shares used in the computation of earnings per share:

    

Basic

     21,295,254       21,280,469  

Diluted

     21,550,804       21,412,343  

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

 

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IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

     Nine Months Ended June 30,  
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 10,348     $ 18,829  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Bad debt expense

     31       274  

Amortization of deferred financing cost

     229       263  

Depreciation and amortization

     6,884       3,503  

Loss (gain) on sale of assets

     (68     832  

Deferred income taxes

     494       —    

Non-cash compensation

     1,329       645  

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

    

Accounts receivable

     (1,593     (8,039

Inventories

     (3,919     (208

Costs and estimated earnings in excess of billings

     (3,151     2,964  

Prepaid expenses and other current assets

     (9,082     (3,098

Other non-current assets

     350       (1,314

Accounts payable and accrued expenses

     600       1,611  

Billings in excess of costs and estimated earnings

     6,438       2,482  

Other non-current liabilities

     1,312       (4,840
  

 

 

   

 

 

 

Net cash provided by operating activities

     10,202       13,904  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (3,796     (2,156

Proceeds from sale of property and equipment

     237       2,200  

Cash paid for acquisitions, net of cash acquired

     (14,659     (59,698
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,218     (59,654
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings of debt

     5,313       20,026  

Repayments of debt

     (5,328     (112

Contingent consideration payment

     (448     —    

Distribution to noncontrolling interest

     (153     —    

Options exercised

     207       133  

Purchase of treasury stock

     (891     (590

Changes in restricted cash

     260       (260
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (1,040     19,197  
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (9,056     (26,553

CASH AND CASH EQUIVALENTS, beginning of period

     32,961       49,360  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 23,905     $ 22,807  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid for interest

   $ 1,108     $ 651  

Cash paid for income taxes

   $ 2,285     $ 1,288  

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

 

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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 services:

 

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

 

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

 

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

 

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

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

Seasonality and Quarterly Fluctuations

Results of operations from our Residential construction segment are seasonal, depending on weather trends, with typically higher revenues generated during spring and summer and lower revenues generated during fall and winter, with an impact from precipitation in the warmer months. The Communications, Commercial & Industrial, and Infrastructure Solutions segments of our business are less subject to seasonal trends, as work in these segments generally is performed inside structures protected from the weather, although weather can still impact these businesses, especially in the early stages of projects. Our service and maintenance business is generally not affected by seasonality. Our volume of business may be adversely affected by declines in construction projects resulting from adverse regional or national economic conditions. 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, 2016. In the opinion of management, the unaudited condensed consolidated financial statements contained in this report include all known accruals and adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods reported herein. Any such adjustments are of a normal recurring nature.

Noncontrolling Interest

In conjunction with our purchase of STR Mechanical, LLC (“STR”) during the third quarter of fiscal 2016, we acquired a controlling interest of 80 percent of the membership interests of STR. The remaining 20 percent interest, which was retained by the third party sellers, is identified in our financials as noncontrolling interest and is classified outside of permanent equity on our consolidated balance sheet. See Note 13 – Business Combinations for further discussion.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Use of Estimates

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

Tax Rate

For the nine months ended June 30, 2017, our effective tax rate differed from the statutory tax rate directly resulting from a $3,689 benefit associated with the reversal of a reserve previously established for an uncertain tax position. For the nine months ended June 30, 2016, our effective tax rate differed from the statutory tax rate directly resulting from benefits of $5,002 related to the release of a valuation allowance in connection with the acquisition of deferred tax liabilities of Technibus, Inc. (“Technibus”), Shanahan Mechanical and Electrical, Inc. (“Shanahan”), and Calumet Armature & Electric, LLC (“Calumet”).

Revenue Recognition

Revenue is generally recognized once the following four criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or services have been rendered, (iii) the price of the product or service is fixed and determinable, and (iv) collectability is reasonably assured. Costs associated with these services are recognized within the period they are incurred.

We recognize revenue on project contracts using the percentage of completion method. Project contracts generally provide that customers accept completion of progress to date and compensate us for services rendered measured in terms of units installed, hours expended or some other measure of progress. We recognize revenue on both signed contracts and change orders. A discussion of our treatment of claims and unapproved change orders is described later in this section. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total cost for each contract at completion. We generally consider contracts to be substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material, labor and insurance costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income and the effects of these revisions are recognized in the period in which the revisions are determined. During the three and nine months ended June 30, 2017, we recorded expense of $2,476 and $3,685, respectively, related to changes in estimates on two jobs in our Commercial & Industrial segment. The change in estimate relates to labor cost overruns primarily caused by the customer’s schedule acceleration. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined. The balances billed but not paid by customers pursuant to retainage provisions in project contracts will be due upon completion of the contracts and acceptance by the customer. Based on our experience, the retention balance at each balance sheet date will generally be collected within the subsequent fiscal year.

Certain divisions in the Residential and Infrastructure Solutions segments use the completed contract method of accounting because the duration of their contracts are short in nature. We recognize revenue on completed contracts when the project is complete and billable to the customer. Provisions for estimated losses on these contracts are recorded in the period such losses are determined.

The current asset “Costs and estimated earnings in excess of billings” represents revenues recognized in excess of amounts billed which management believes will generally be billed and collected within the next twelve months. Also included in this asset, from time to time, are claims and unapproved change orders which are amounts we are in the process of collecting from our customers or agencies for changes in contract specifications or design, contract change orders in dispute or unapproved as to scope and price, or other related causes of unanticipated additional contract costs. Claims are limited to costs incurred and are recorded at estimated realizable value when collection is probable and can be reasonably estimated. We do not recognize profits on project costs incurred in

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

connection with claims. Claims made by us involve negotiation and, in certain cases, litigation. Such litigation costs are expensed as incurred. The current liability “Billings in excess of costs and estimated earnings” represents billings in excess of revenues recognized. Costs and estimated earnings in excess of billings are amounts considered recoverable from customers based on different measures of performance, including achievement of specific milestones, completion of specified units or at the completion of the contract.

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 currently plan to use the modified retrospective basis on the adoption date. We are continuing to evaluate the impact of the adoption of this standard on our consolidated financial statements. In particular, we continue to analyze areas including contract termination provisions, customer furnished materials, and accounting for change orders. However, we expect that we will continue to recognize revenues for most of our fixed-price contracts over time, as services are performed. We are also continuing to assess the necessary changes in processes and controls to meet the disclosure requirements of the new standard.

In February 2016, the FASB issued 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. ASU 2016-02 becomes effective for the fiscal year ended September 30, 2020. We are currently evaluating whether to early adopt the standard and what impact it will have on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, to standardize the classification of restricted cash and cash equivalents transactions on the statement of cash flows. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. We expect we will adopt this guidance at September 30, 2017.

In January 2017, the FASB issued ASU 2017-01, Business Combinations. This standard clarifies the definition of a business to assist entities with evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. The prospective transition method will be required for this new guidance.

Also in January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other. This update is intended to simplify the subsequent measurement of goodwill by eliminating the second step in the current two-step goodwill impairment test. This update is effective for public entities for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The prospective transition method will be required for this new guidance.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation, to reduce the diversity in practice and the cost and complexity when changing the terms or conditions of a share-based payment award. This update is effective for interim and annual financial reporting periods beginning after December 15, 2017, although early adoption is permitted. The prospective transition method will be required for this new guidance.

We do not expect ASUs 2016-18, 2017-01, 2017-04 or 2017-09 to have a material effect on our consolidated financial statements.

Adoption of New Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (“ASU 2016-09”). ASU 2016-09 eliminates additional paid in capital pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. The accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and the accounting for forfeitures is also changing. ASU 2016-09 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

We elected to early adopt ASU 2016-09 in the quarter ended December 31, 2016, which required us to reflect any adjustments as of October 1, 2016. We elected to account for forfeitures as they occur to determine the amount of compensation cost to be recognized, resulting in a cumulative effect adjustment of $58 to reduce retained earnings for the increase to stock compensation expense. We recorded a cumulative effect adjustment of $362 to increase retained earnings to recognize a deferred tax asset related to tax benefits which were not previously recognized, as the tax deduction related to stock compensation expense resulted in an increase to a net operating loss rather than a reduction to income tax payable. Amendments to the accounting for minimum statutory withholding tax requirements had no impact to retained earnings as of October 1, 2016.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, to standardize the classification of certain transactions on the statement of cash flows. These transactions include contingent consideration payments made after a business combination. We implemented the standard for the quarter ended March 31, 2017. The adoption had no impact on our statement of cash flows.

2. CONTROLLING SHAREHOLDER

At June 30, 2017, Tontine Capital Partners, L.P. together with its affiliates (collectively, “Tontine”) was the Company’s controlling shareholder, owning approximately 58% of the Company’s outstanding common stock according to a Schedule 13D/A filed with the SEC by Tontine on October 5, 2016. Accordingly, Tontine has the ability to exercise significant control over our affairs, including the election of directors and most actions requiring the approval of shareholders.

While Tontine is subject to restrictions under federal securities laws on sales of its shares as an affiliate, 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, 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 Board of Directors since February 2012, as non-executive Vice Chairman of the Board since November 2016 and as non-executive Chairman of the Board from January 2015 to November 2016. David B. Gendell is also an employee of Tontine.

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, 2017 and September 30, 2016, our long-term debt of $29,407 and $29,257, respectively, primarily relates to amounts drawn on our revolving credit facility. Our weighted-average annual interest rate on these borrowings was 3.04% at June 30, 2017, and 2.76% at September 30, 2016. At June 30, 2017, we also had $6,493 in outstanding letters of credit and total availability of $43,821 under this facility without violating our financial covenants.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

On April 10, 2017, we entered into an amendment and restatement to our revolving credit facility (the “Amended Credit Agreement”). Pursuant to the Amended Credit Agreement, our maximum revolver amount increased from $70,000 to $100,000, and the maturity date of the revolving credit facility was extended from August 9, 2019 to August 9, 2021. The Amended Credit Agreement also modified our financial covenants by, among other items: implementing a new covenant that requires the Company to maintain a minimum EBITDA (as defined in the Amended Credit Agreement) that will be tested quarterly on a trailing twelve month basis; increasing the minimum liquidity requirement applicable to the Company from 12.5% to 30% of the maximum revolver amount; raising the Company’s required fixed charge coverage ratio (the “FCCR”) to 1.1:1.0 from 1.0:1.0; and requiring that the FCCR be tested quarterly regardless of the Company’s liquidity levels.

The amendment and restatement did not include any changes to interest rates and continues to contain other customary affirmative, negative and financial covenants as well as events of default.

On July 14, 2017, and August 2, 2017, we entered into amendments to the Amended Credit Agreement that, respectively, permitted certain transactions related to our acquisition of NEXT Electric, LLC (“NEXT”) and modified our minimum EBITDA requirement under the facility, among other things. See Note 14 – Subsequent Events for further discussion of these amendments. The Company was in compliance with all covenants under the Amended Credit Agreement at June 30, 2017.

At June 30, 2017, the carrying value of amounts outstanding under the Amended Credit Agreement 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, 2017 and 2016:

 

     Three Months Ended June 30,  
     2017      2016  

Numerator:

     

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

   $ 5,824      $ 10,747  

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

     44        58  
  

 

 

    

 

 

 

Net income attributable to IES Holdings, Inc.

   $ 5,868      $ 10,805  
  

 

 

    

 

 

 

Denominator:

     

Weighted average common shares outstanding — basic

     21,300,716        21,297,898  

Effect of dilutive stock options and non-vested restricted stock

     255,402        158,736  
  

 

 

    

 

 

 

Weighted average common and common equivalent shares outstanding — diluted

     21,556,118        21,456,634  
  

 

 

    

 

 

 

Earnings per share attributable to IES Holdings, Inc.:

     

Basic

   $ 0.27      $ 0.50  

Diluted

   $ 0.27      $ 0.50  

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

     Nine Months Ended June 30,  
     2017      2016  

Numerator:

     

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

   $ 10,195      $ 18,641  

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

     81        157  
  

 

 

    

 

 

 

Net income attributable to IES Holdings, Inc.

   $ 10,276      $ 18,798  
  

 

 

    

 

 

 

Denominator:

     

Weighted average common shares outstanding — basic

     21,295,254        21,280,469  

Effect of dilutive stock options and non-vested restricted stock

     255,550        131,874  
  

 

 

    

 

 

 

Weighted average common and common equivalent shares outstanding — diluted

     21,550,804        21,412,343  
  

 

 

    

 

 

 

Earnings per share attributable to IES Holdings, Inc.:

     

Basic

   $ 0.48      $ 0.88  

Diluted

   $ 0.48      $ 0.87  

For the three and nine months ended June 30, 2017 and 2016, the average price of our common shares exceeded the exercise price of all of our outstanding options; therefore, all of our outstanding stock options were included in the computation of fully diluted earnings per share.

5. OPERATING SEGMENTS

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

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

Segment information for the three and nine months ended June 30, 2017 and 2016 is as follows:

 

     Three Months Ended June 30, 2017  
     Communications      Residential      Commercial &
Industrial
    Infrastructure
Solutions
    Corporate     Total  

Revenues

   $ 57,081      $ 70,162      $ 58,778     $ 22,302     $ —       $ 208,323  

Cost of services

     46,958        54,307        54,174       17,486       —         172,925  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     10,123        15,855        4,604       4,816       —         35,398  

Selling, general and administrative

     6,252        11,003        4,849       4,958       3,709       30,771  

Contingent consideration

     —          —          —         (33     —         (33

(Gain) loss on sale of assets

     —          37        (4     (88     —         (55
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 3,871      $ 4,815      $ (241   $ (21   $ (3,709   $ 4,715  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

              

Depreciation and amortization expense

   $ 187      $ 135      $ 329     $ 1,785     $ 70     $ 2,506  

Capital expenditures

   $ 328      $ 170      $ 283     $ 124     $ —       $ 905  

Total assets

   $ 70,427      $ 51,995      $ 66,190     $ 103,323     $ 125,222     $ 417,157  

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

     Three Months Ended June 30, 2016  
     Communications     Residential      Commercial &
Industrial
    Infrastructure
Solutions
    Corporate     Total  

Revenues

   $ 48,702     $ 56,867      $ 59,512     $ 14,518     $ —       $ 179,599  

Cost of services

     40,487       43,388        51,882       9,845       —         145,602  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     8,215       13,479        7,630       4,673       —         33,997  

Selling, general and administrative

     5,185       9,237        4,771       3,248       3,275       25,716  

Contingent Consideration

     —         —          —         66       —         66  

Loss on sale of assets

     —         —          (17     51       —         34  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 3,030     $ 4,242      $ 2,876     $ 1,308     $ (3,275   $ 8,181  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

             

Depreciation and amortization expense

   $ 153     $ 122      $ 410     $ 897     $ 74     $ 1,656  

Capital expenditures

   $ 122     $ 393      $ 377     $ 109     $ 71     $ 1,072  

Total assets

   $ 53,711     $ 40,008      $ 58,559     $ 92,559     $ 32,686     $ 277,523  
     Nine Months Ended June 30, 2017  
     Communications     Residential      Commercial &
Industrial
    Infrastructure
Solutions
    Corporate     Total  

Revenues

   $ 172,058     $ 204,527      $ 168,006     $ 59,572     $ —       $ 604,163  

Cost of services

     144,668       157,370        154,628       45,103       —         501,769  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     27,390       47,157        13,378       14,469       —         102,394  

Selling, general and administrative

     18,086       32,488        14,434       13,280       10,797       89,085  

Contingent consideration

     —         —          —         50       —         50  

Gain on sale of assets

     (1     34        (11     (90     —         (68
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 9,305     $ 14,635      $ (1,045   $ 1,229     $ (10,797   $ 13,327  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

             

Depreciation and amortization expense

   $ 532     $ 436      $ 983     $ 4,730     $ 203     $ 6,884  

Capital expenditures

   $ 1,888     $ 517      $ 927     $ 261     $ 203     $ 3,796  

Total assets

   $ 70,427     $ 51,995      $ 66,190     $ 103,323     $ 125,222     $ 417,157  
     Nine Months Ended June 30, 2016  
     Communications     Residential      Commercial &
Industrial
    Infrastructure
Solutions
    Corporate     Total  

Revenues

   $ 128,813     $ 162,381      $ 158,923     $ 40,230     $ —       $ 490,347  

Cost of services

     105,855       124,459        141,237       29,354       —         400,905  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     22,958       37,922        17,686       10,876       —         89,442  

Selling, general and administrative

     14,877       26,856        13,014       9,062       8,685       72,494  

Contingent Consideration

     —         —          —         332       —         332  

Loss on sale of assets

     —         —          (17     828       —         811  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 8,081     $ 11,066      $ 4,689     $ 654     $ (8,685   $ 15,805  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

             

Depreciation and amortization expense

   $ 410     $ 364      $ 845     $ 1,674     $ 210     $ 3,503  

Capital expenditures

   $ 685     $ 537      $ 563     $ 300     $ 71     $ 2,156  

Total assets

   $ 53,711     $ 40,008      $ 58,559     $ 92,559     $ 32,686     $ 277,523  

 

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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, which was amended and restated effective February 9, 2016, (as amended and restated, the “2006 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 2006 Equity Incentive Plan, of which approximately 1,055,391 shares were available for issuance at June 30, 2017.

Stock Repurchase Program

Our Board of Directors has authorized a stock repurchase program for the purchase from time to time of up to 1.5 million shares of the Company’s common stock. Share purchases are made for cash in open market transactions at prevailing market prices or in privately negotiated transactions or otherwise. The timing and amount of purchases under the program are determined based upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. All or part of the repurchases may be implemented under a 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 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, 2017, we repurchased 4,575 shares of common stock from our employees to satisfy their minimum tax withholding requirements upon the vesting of restricted stock issued under the 2006 Equity Incentive Plan and 51,673 shares of common stock on the open market pursuant to the 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 of common stock to satisfy the exercise of outstanding options for employees and directors.

During the nine months ended June 30, 2016, we repurchased 6,084 shares of common stock from our employees to satisfy their minimum tax withholding requirements upon the vesting of restricted stock issued under the 2006 Equity Incentive Plan, 46,929 shares of common stock on the open market pursuant to our share repurchase program, and 7,500 shares of common stock were forfeited by former employees and returned to treasury stock. The Company had 6,859 shares returned to treasury stock during the same period related to the satisfaction of an obligation in connection with a reconciliation of our shares of common stock offered in exchange for shares of MISCOR Group, Ltd. during our 2013 acquisition of that company. During the nine months ended June 30, 2016, we issued 4,714 unrestricted shares of common stock from treasury stock to members of our Board of Directors as part of their overall compensation, and 27,500 unrestricted shares to satisfy the exercise of outstanding options for employees and directors.

Restricted Stock

During the three months ended June 30, 2017 and 2016, we recognized $133 and $130, respectively, in compensation expense related to our restricted stock awards. During the nine months ended June 30, 2017 and 2016, we recognized $406 and $392, respectively, in compensation expense related to our restricted stock awards. At June 30, 2017, the unamortized compensation cost related to outstanding unvested restricted stock was $408.

Performance Cash Units

Performance based phantom cash units (“PPCUs”) are a contractual right to cash payment of $20 dollars per PPCU. At June 30, 2017, the Company had outstanding an aggregate of 30,000 PPCUs, which will generally become vested, if at all, upon achievement of certain specified performance objectives and continued performance of services through mid-December 2018, each of which as of June 30, 2017 are deemed probable. During the three months ended June 30, 2017, and 2016, we recognized compensation expense of $59 and zero, respectively, related to these units. During the nine months ended June 30, 2017, and 2016, we recognized compensation expense of $252 and zero, respectively, related to these units.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Phantom Stock Units

Phantom stock units (“PSUs”) are primarily granted to the members of the Board of Directors as part of their overall compensation. These PSUs are paid via unrestricted stock grants to each director upon their departure from the Board of Directors. We record compensation expense for the full value of the grant on the date of grant. For the three months ended June 30, 2017 and 2016, we recognized $41 and $34, respectively, in compensation expense related to these grants. During the nine months ended June 30, 2017 and 2016, we recognized $125 and $102, 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. The PPSUs will generally become vested, if at all, upon the achievement of certain specified performance objectives and continued performance of services through mid-December 2018, each of which as of June 30, 2017 are deemed probable. At June 30, 2017, the Company has outstanding an aggregate of 408,000 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. During the three months ended June 30, 2017 and 2016, we recognized compensation expense of $225 and $22, respectively, related to these grants. For the nine months ended June 30, 2017 and 2016, we recognized compensation expense of $753 and $65, respectively, related to these grants.

Stock Options

During the three months ended June 30, 2017 and 2016, we recognized compensation expense of zero and $17, respectively, related to our stock option awards. During the nine months ended June 30, 2017 and 2016, we recognized compensation expense of $23 and $50, respectively, related to our stock option awards. At June 30, 2017, the unamortized compensation cost related to outstanding unvested stock options was zero.

7. SECURITIES AND EQUITY INVESTMENTS

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

Investment in EnerTech

During the nine months ended June 30, 2017, we collected a distribution of $361, reducing our carrying value. The following table presents the reconciliation of the carrying value and unrealized gains to the fair value of the investment in EnerTech as of June 30, 2017 and September 30, 2016:

 

     June 30,
2017
     September 30,
2016
 

Carrying value

   $ 558      $ 919  

Unrealized gains

     171        159  
  

 

 

    

 

 

 

Fair value

   $ 729      $ 1,078  
  

 

 

    

 

 

 

At each reporting date, the Company performs evaluations of impairment for this investment to determine if any unrealized losses are other-than-temporary. There was no impairment as of June 30, 2017 or September 30, 2016.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

8. EMPLOYEE BENEFIT PLANS

401(k) Plan

The Company offers employees the opportunity to participate in its 401(k) savings plans. During the three months ended June 30, 2017 and 2016, we recognized $312 and $247, respectively, in matching expense. During the nine months ended June 30, 2017 and 2016, we recognized $771 and $525, 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 $815 recorded as of June 30, 2017, and $875 as of September 30, 2016, related to such plans.

9. FAIR VALUE MEASUREMENTS

Fair Value Measurement Accounting

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

At June 30, 2017, financial assets and liabilities measured at fair value on a recurring basis were limited to our Executive Deferred Compensation Plan, under which certain employees are permitted to defer a portion of their base salary and/or bonus for a Plan Year (as defined in the plan), and contingent consideration liabilities related to our acquisitions of Calumet in October 2015, Freeman Enclosure Systems, LLC and its affiliate Strategic Edge LLC (together, “Freeman”) in March 2017, and Technical Services II, LLC (“Technical Services”) in June 2017.

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

 

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

Executive savings plan assets

   $ 649      $ 649      $ —    

Executive savings plan liabilities

     (537      (537      —    

Contingent consideration

     (1,347      —          (1,347
  

 

 

    

 

 

    

 

 

 

Total

   $ (1,235    $ 112      $ (1,347
  

 

 

    

 

 

    

 

 

 

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016, are summarized in the following table by the type of inputs applicable to the fair value measurements:

 

     September 30, 2016  
     Total Fair
Value
     Quoted Prices
(Level 1)
     Significant
Unobservable
Inputs (Level 3)
 

Executive savings plan assets

   $ 599      $ 599      $ —    

Executive savings plan liabilities

     (486      (486      —    

Contingent consideration

     (1,100      —          (1,100
  

 

 

    

 

 

    

 

 

 

Total

   $ (987    $ 113      $ (1,100
  

 

 

    

 

 

    

 

 

 

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, 2017, we estimated the fair value of these contingent consideration liabilities at $1,347. The table below presents a reconciliation of the fair value of these obligations, which used significant unobservable inputs (Level 3).

 

     Contingent
Consideration
Agreements
 

Fair Value at September 30, 2016

   $ 1,100  

Issuances

     732  

Settlements

     (535

Net Adjustments to Fair Value

     50  
  

 

 

 

Fair Value at June 30, 2017

   $ 1,347  
  

 

 

 

10. INVENTORY

Inventories consist of the following components:

 

     June 30,
2017
     September 30,
2016
 

Raw materials

   $ 3,354      $ 2,538  

Work in process

     5,031        4,158  

Finished goods

     1,590        1,558  

Parts and supplies

     9,011        4,982  
  

 

 

    

 

 

 

Total inventories

   $ 18,986      $ 13,236  
  

 

 

    

 

 

 

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

11. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following is a progression of goodwill by segment for the nine months ended June 30, 2017:

 

     Residential      Commercial &
Industrial
     Infrastructure
Solutions
     Total  

Goodwill at September 30, 2016

   $ 8,631      $ 3,806      $ 27,499      $ 39,936  

Acquisitions (See Note 13)

     —          1,640        3,820        5,460  

Divestitures

     —          —          (51      (51

Adjustments

     —          (41      (271      (312
  

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill at June 30, 2017

   $ 8,631      $ 5,405      $ 30,997      $ 45,033  
  

 

 

    

 

 

    

 

 

    

 

 

 

The adjustment to goodwill in the nine months ended June 30, 2017, relates primarily to finalizing the deferred tax balances acquired in connection with our acquisitions of Technibus and STR. Please see Note 13 – Business Combinations for further discussion.

Intangible Assets

Intangible assets consist of the following:

 

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

Trademarks/trade names

     5-20      $ 4,374      $ 350      $ 4,024  

Technical library

     20        400        76        324  

Customer relationships

     6-15        30,284        4,015        26,269  

Developed technology

     4        400        400        —    

Backlog

     1        2,151        1,614        537  

Construction contracts

     1        2,191        1,845        346  
     

 

 

    

 

 

    

 

 

 

Total

      $ 39,800      $ 8,300      $ 31,500  
     

 

 

    

 

 

    

 

 

 

 

            September 30, 2016  
     Estimated
Useful Lives
(in Years)
     Gross Carrying
Amount
     Accumulated
Amortization
     Net  

Trademarks/trade names

     5-20      $ 3,845      $ 139      $ 3,706  

Technical library

     20        400        61        339  

Customer relationships

     6-15        27,414        2,003        25,411  

Developed technology

     4        400        358        42  

Backlog

     1        1,621        545        1,076  

Construction contracts

     1        2,191        1,042        1,149  
     

 

 

    

 

 

    

 

 

 

Total

      $ 35,871      $ 4,148      $ 31,723  
     

 

 

    

 

 

    

 

 

 

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

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

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.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

The following is a discussion of our significant legal matters:

Capstone Construction Claims

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

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

Based on the settlement reached in the 2005 arbitration, we moved for, and the District Court granted us, summary judgment, dismissing all of Capstone’s claims in the 2013 lawsuit. Capstone appealed, and in April, 2016, the 10th Court of Appeals, Waco, Texas Division, reversed the ruling with respect to the indemnity claims and remanded the case back to the District Court. The Texas Supreme Court subsequently denied our petition to review this decision and our motion for rehearing. As a result, we filed a new motion for summary judgment at the District Court level in April 2017. The court denied the motion, and we were consolidated back into the main case. The Company attended mediation on June 23, 2017. Settlement was not reached, and the Company did not commit to any offer at mediation. The Company will defend the claims and expects ultimately to prevail on the merits, but there can be no assurance that the Company will prevail or that it will not incur costs and liability for indemnity in connection with resolution of the claims. To date, the Company has not established a reserve with respect to this matter, as we believe the likelihood of our responsibility for damages is not probable and a potential range of exposure is not reasonably estimable.

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, 2017 and September 30, 2016, we had $5,870 and $5,464, respectively, accrued for self-insurance liabilities. We are also subject to construction defect liabilities, primarily within our Residential segment. As of June 30, 2017 and September 30, 2016, we had $208 and $235, respectively, reserved for these claims. Because the reserves are based on judgment and estimates, and involve variables that are inherently uncertain, such as the outcome of litigation and an assessment of insurance coverage, there can be no assurance that the ultimate liability will not be higher or lower than such estimates or that the timing of payments will not create liquidity issues for the Company.

Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral. This is common in the insurance industry. To date, we have not had a situation where an underwriter has had reasonable cause to effect payment under a letter of credit. At June 30, 2017 and September 30, 2016, $6,035 and $6,126, respectively, of our outstanding letters of credit was utilized to collateralize our insurance program.

Surety

As of June 30, 2017, the estimated cost to complete our bonded projects was approximately $44,008. 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 June 30, 2017 and September 30, 2016, $458 and $818, respectively, 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, 2017, we had no such purchase orders.

13. BUSINESS COMBINATIONS

2017

The Company completed two acquisitions in the nine months ended June 30, 2017:

 

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

 

    Technical Services II, LLC – STR, our 80% owned subsidiary which is consolidated, acquired all of the membership interests of Technical Services, a Chesapeake, Virginia-based provider of mechanical maintenance services, including commercial heating, ventilation and air conditioning, food service equipment, electrical and plumbing services, on June 15, 2017. Technical Services will operate as a subsidiary of STR 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.

The total aggregate consideration of $15,871 for these two acquisitions includes aggregate cash consideration of $15,139 and $732 of contingent consideration. Of the cash consideration paid upon closing, $14,739 was paid on the dates of closing and the remaining $400 is payable within 18 months of the transaction date, after deducting certain seller liabilities. The fair value of the contingent consideration liability was estimated at $732 at June 30, 2017, and is included in 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 the valuations of deferred taxes, fixed assets, contingent consideration liability, and certain intangible assets. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different values being assigned to individual assets acquired and liabilities assumed. This may result in adjustments to the preliminary amounts recorded. The preliminary valuation of the assets acquired and liabilities assumed as of the dates of the acquisitions is as follows:

 

Current assets

   $ 6,059  

Property and equipment

     7,980  

Intangible assets (primarily customer relationships)

     3,929  

Goodwill

     5,460  

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Current liabilities

     (6,147

Long term liabilities

     (249

Deferred tax liability

     (1,161
  

 

 

 

Net assets acquired

   $ 15,871  
  

 

 

 

The $5,460 of goodwill acquired in the nine months ended June 30, 2017, is attributable to the workforces of the acquired businesses and other intangibles that do not qualify for separate recognition. Of this goodwill, $1,640 is tax deductible.

These two acquisitions contributed $5,649 in additional revenue and $104 in operating loss during the three months ended June 30, 2017. These two acquisitions contributed $7,047 in additional revenue and $150 in operating loss during the nine months ended June 30, 2017.

2016

The Company completed four acquisitions in the fiscal year ended September 30, 2016 for total aggregate consideration of $59,592. See Note 18 – Business Combinations and Divestitures in our Form 10-K for the year ended September 30, 2016 for further information:

 

    Technibus, Inc., a Canton, Ohio based provider of custom engineered, metal enclosed bus duct solutions, on June 15, 2016. Technibus is included in our Infrastructure Solutions segment.

 

    STR Mechanical, LLC – We acquired 80% of the membership interests in STR, a Charlotte, North Carolina-based provider of commercial and industrial mechanical services, on April 27, 2016. STR is included in our Commercial & Industrial segment.

 

    Shanahan Mechanical and Electrical, Inc., a Nebraska-based provider of mechanical and electrical contracting services, on November 20, 2015. Shanahan is included in our Commercial & Industrial segment.

 

    Calumet Armature & Electric, LLC, an Illinois-based provider of design, manufacturing, assembly, and repair services of electric motors for the industrial and mass transit markets, on October 30, 2015. Calumet is included in our Infrastructure Solutions segment.

The total purchase consideration for the Calumet acquisition included contingent consideration payments based on the acquired company’s earnings, as defined in the purchase and sale agreement, through October 31, 2018. The fair value of the contingent consideration liability was estimated at $614 and $1,100 at June 30, 2017 and September 30, 2016, respectively. We made the first payment of $535 during the nine months ended June 30, 2017. The remaining contingent consideration will be payable if earned, during fiscal years 2018 and 2019, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets.

The Company accounted for these four transactions under the acquisition method of accounting, which requires recording assets and liabilities at fair value (Level 3). The valuations related to Calumet and Shanahan were finalized as of December 31, 2016. The valuations of STR and Technibus were finalized as of June 30, 2017.

These four acquisitions contributed $10,649 in additional revenue and $1,193 in additional operating income during the three months ended June 30, 2016. These four acquisitions contributed $19,613 in additional revenue and $1,841 in additional operating income during the nine months ended June 30, 2016.

 

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IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

 

Unaudited Pro Forma Information

The supplemental pro forma results of operations, calculated as if each acquisition occurred as of October 1 of the fiscal year prior to consummation, for the three and nine months ended June 30, 2017 and 2016, are as follows:

 

     Unaudited  
     Three Months Ended      Three Months Ended  
     June 30, 2017      June 30, 2016  

Revenues

   $ 208,563      $ 230,315  

Net Income

   $ 5,838      $ 98,610  
     Unaudited  
     Nine Months Ended      Nine Months Ended  
     June 30, 2017      June 30, 2016  

Revenues

   $ 626,235      $ 549,683  

Net Income

   $ 10,759      $ 107,752  

14. SUBSEQUENT EVENTS

Acquisition of NEXT Electric

On July 14, 2017, the Company acquired 80% of the membership interests of NEXT, 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 will operate within the Company’s Commercial & Industrial segment.

Wind –Down of Commercial & Industrial branches

In July 2017, we made the decision to wind-down operations at two branches of our Commercial & Industrial segment. This decision is the result of underperformance at these two locations in recent years. We do not expect to incur significant costs related to the termination of leases, employee severance or other arrangements.

Credit facility amendment

On July 14, 2017, we entered into an amendment and joinder to our Amended Credit Agreement permitting certain transactions related to our acquisition of NEXT. On August 2, 2017, we entered into an amendment to our Amended Credit Agreement, which modifies the definition of EBITDA used in calculating our financial covenants to exclude the results from the Denver and Roanoke branches, up to a maximum exclusion of $5 million for a given measurement period. The amendment also reduces the minimum EBITDA requirement for the quarters ended December 31, 2017 and March 31, 2018 from $32,500 to $30,000 and $35,000 to $32,500, respectively. Minimum EBITDA requirements for all other quarters are unchanged.

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, 2016 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, 2016, for a discussion of the Company’s services and corporate strategy. IES Holdings, Inc., a Delaware corporation, is a holding company that owns and manages

 

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diverse operating subsidiaries, comprised of providers of industrial products and infrastructure services to a variety of end markets. Our operations are currently organized into four principal business segments: Communications, Residential, Commercial & Industrial and Infrastructure Solutions.

Recent Events

Over the past two quarters, we completed a detailed review of the operations of our Commercial & Industrial segment, and in July 2017 made the decision to wind-down operations at our Denver, Colorado and Roanoke, Virginia branches of our Commercial & Industrial segment. These branches have consistently underperformed over the last several years and have ranked at the bottom of our group of branches based on key operational and financial metrics. While these branches did experience revenue growth for fiscal 2017 as compared with 2016, these two branches did not perform efficiently on the larger projects undertaken in 2017. In particular, these two branches were responsible for four particular projects that underperformed in the quarter ended March 31, 2017, which continued to impact our margins through the quarter ended June 30, 2017. Revenue in backlog at these two branches at June 30, 2017 and 2016 was $16.5 million and $31.5 million, respectively, reflecting our decision not to book additional work at these branches. Backlog related to the four underperforming jobs discussed above was $1.9 million at June 30, 2017, as these jobs are approaching completion. Based on their historical performance, as well as outlook for the future, we determined these two branches no longer meet the criteria to remain in our portfolio of businesses. We do not expect to incur significant costs related to the termination of leases, employee severance or other arrangements related to the wind-down of these two branches.

The following table presents selected historical financial results of the Denver and Roanoke wind-down branches:

 

     Three Months
Ended
December 31, 2015
    Three Months
Ended
March 31, 2016
    Three Months
Ended
June 30, 2016
    Three Months
Ended
September 30, 2016
 

Revenues

   $ 5,956     $ 4,714     $ 7,574     $ 8,941  

Cost of Service

     5,741       5,204       6,886       8,471  

Selling, general and administrative expenses

     703       824       748       582  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

   $ (488   $ (1,314 )(1)    $ (60   $ (112
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes a $0.5 million charge upon settlement of a dispute related to a project completed in a prior year.

 

     Three Months
Ended
December 31, 2016
     Three Months
Ended
March 31, 2017
     Three Months
Ended
June 30, 2017
 

Revenues

   $ 10,398      $ 9,403      $ 7,575  

Cost of Service

     10,149        11,936        9,548  

Selling, general and administrative expenses

     648        815        635  
  

 

 

    

 

 

    

 

 

 

Loss from continuing operations

   $ (399    $ (3,348    $ (2,608
  

 

 

    

 

 

    

 

 

 

Although we are winding down operations at these branches, the Commercial & Industrial segment remains an important part of our strategic growth plan, as demonstrated by the addition of two new acquisitions in this segment during fiscal 2017. These include the acquisition in July 2017 of an 80% interest in NEXT Electric, LLC (“NEXT”), 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, and the acquisition in June 2017 of Technical Services II, LLC (“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. See Note 13 – Business Combinations and Note 14 – Subsequent Events in the Notes to our Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

 

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Table of Contents

RESULTS OF OPERATIONS

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

 

     Three Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenues

   $ 208,323        100.0   $ 179,599        100.0

Cost of services

     172,925        83.0     145,602        81.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     35,398        17.0     33,997        18.9

Selling, general and administrative expenses

     30,771        14.8     25,716        14.3

Contingent consideration

     (33      0.0     66        0.0

Loss (gain) on sale of assets

     (55      0.0     34        0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income from operations

     4,715        2.2     8,181        4.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest and other (income) expense, net

     361        0.1     282        0.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations before income taxes

     4,354        2.1     7,899        4.4

Benefit for income taxes

     (1,519      (0.7 )%      (2,937      (1.6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     5,873        2.8     10,836        6.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to noncontrolling interest

     (5      0.0     (31      0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to IES Holdings, Inc.

   $ 5,868        2.8   $ 10,805        6.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated revenues for the three months ended June 30, 2017, were $28.7 million higher than for the three months ended June 30, 2016, an increase of 16.0%, with increases at three of our four operating segments, with a slight decrease of our Commercial & Industrial segment. Our six businesses acquired in fiscal 2016 and 2017 through June 30, 2017, contributed $15.7 million of the increase for the three months ended June 30, 2017.

Consolidated gross profit for the three months ended June 30, 2017, increased $1.4 million compared with the three months ended June 30, 2016. Our overall gross profit percentage decreased to 17.0% during the three months ended June 30, 2017, as compared to 18.9% during the three months ended June 30, 2016. Gross profit as a percentage of revenue increased at our Communications segment, but decreased at each of our other segments. Our six businesses acquired in fiscal 2016 and 2017 through June 30, 2017, contributed $2.1 million of the increase in consolidated gross profit.

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

During the three months ended June 30, 2017, our selling, general and administrative expenses were $30.8 million, an increase of $5.1 million, or 19.7%, over the three months ended June 30, 2016. Selling, general and administrative expense as a percent of revenue increased from 14.3% for the three months ended June 30, 2016, to 14.8% for the three months ended June 30, 2017. This increase was primarily attributable to expense incurred at businesses acquired during fiscal 2016 and 2017 through June 30, 2017, which contributed $3.2 million of the increase for the three months ended June 30, 2017. We also incurred additional expense as a result of increased activity levels across our business, as increased volume levels required additional personnel to support our growth.

 

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     Nine Months Ended June 30,  
     2017     2016  
     $     %     $     %  
     (Dollars in thousands, Percentage of revenues)  

Revenues

   $ 604,163       100.0   $ 490,347       100.0

Cost of services

     501,769       83.1     400,905       81.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     102,394       16.9     89,442       18.2

Selling, general and administrative expenses

     89,085       14.7     72,494       14.8

Contingent consideration

     50       0.0     332       0.1

Loss (gain) on sale of assets

     (68     0.0     811       0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from operations

     13,327       2.2     15,805       3.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and other (income) expense, net

     1,187       0.2     846       0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     12,140       2.0     14,959       2.9

Provision (benefit) for income taxes

     1,792       0.3     (3,870     (0.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     10,348       1.7     18,829       3.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interest

     (72     0.0     (31     0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to IES Holdings, Inc.

   $ 10,276       1.7   $ 18,798       3.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated revenues for the nine months ended June 30, 2017 were $113.8 million higher than for the nine months ended June 30, 2016, an increase of 23.2%, with increases at each of our operating segments. Our six businesses acquired in fiscal 2016 and 2017 through June 30, 2017, contributed $32.8 million of the revenue increase for the nine months ended June 30, 2017.

Our overall gross profit percentage decreased to 16.9% during the nine months ended June 30, 2017 as compared to 18.2% during the nine months ended June 30, 2016. Total gross profit increased at all of our segments with the exception of Commercial & Industrial. Gross profit as a percentage of revenue decreased at all of our segments. Our six businesses acquired in fiscal 2016 and 2017 through June 30, 2017, contributed $5.7 million of the increase in consolidated gross profit.

During the nine months ended June 30, 2017, our selling, general and administrative expenses were $89.1 million, an increase of $16.6 million, or 22.9%, over the nine months ended June 30, 2016. This increase was primarily attributable to increased activity levels across our business, as increased volume levels required additional personnel to support our growth. Additionally, we recorded higher incentive compensation for division and branch management at our Communications and Residential segments, where profitability increased. General and administrative expense as a percent of revenue remained flat year over year. Selling, general and administrative expense incurred at our six businesses acquired in fiscal 2016 and 2017 through June 30, 2017, contributed $5.9 million of the increase for the nine months ended June 30, 2017.    

Communications

 

     Three Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 57,081        100.0   $ 48,702        100.0

Gross profit

     10,123        17.7     8,215        16.9

Selling, general and administrative expenses

     6,252        11.0     5,185        10.6

Revenue. Our Communications segment’s revenues increased by $8.4 million during the three months ended June 30, 2017, a 17.2% increase compared to the three months ended June 30, 2016. The increase is the result of both the expansion of our customer base and additional work with existing customers. We continue to expand our business in areas such as retail distribution centers, audio visual and security, and wireless access. Revenues from data center work increased by $1.2 million, and revenues from manufacturing and retail distribution centers increased by $4.1 million for the three months ended June 30, 2017, as compared with the same period in 2016. We also experienced strong growth in our audio visual and security business, with revenues increasing $3.0 million for the three months ended June 30, 2017, compared with the three months ended June 30, 2016.

 

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Gross Profit. Our Communications segment’s gross profit during the three months ended June 30, 2017 increased by $1.9 million compared to the three months ended June 30, 2016. Gross profit as a percentage of revenue increased 0.8% to 17.7% for the three months ended June 30, 2017. The increase is driven, in part, by efficiencies on certain projects during the quarter ended June 30, 2017.

Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased by $1.1 million, or 20.6%, during the three months ended June 30, 2017, compared to the three months ended June 30, 2016. Selling, general and administrative expenses as a percentage of revenues in the Communications segment increased 0.4% to 11.0% of segment revenue during the three months ended June 30, 2017, compared to the three months ended June 30, 2016. The increase is a result of higher personnel cost, particularly related to additional personnel in sales and estimating in support of our growing business, as well as higher incentive compensation expense in connection with improved profitability.

 

     Nine Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 172,058        100.0   $ 128,813        100.0

Gross profit

     27,390        15.9     22,958        17.8

Selling, general and administrative expenses

     18,086        10.5     14,877        11.5

Revenue. Our Communications segment revenues increased by $43.2 million during the nine months ended June 30, 2017, a 33.6% increase compared to the nine months ended June 30, 2016. The increase is the result of both the expansion of our customer base and additional work with existing customers. Revenues from data center work increased by $16.7 million for the nine months ended June 30, 2017, compared with the nine months ended June 30, 2016, and revenues from manufacturing and retail distribution centers increased by $9.5 million for the nine months ended June 30, 2017, as compared with the same period in 2016. Additionally, we continue to expand our business in areas such as audio visual and security, which provided additional revenue of $5.8 million for the nine months ended June 30, 2017, as compared with the nine months ended June 30, 2016. We also experienced strong growth in our core structured cabling business, with revenues increasing $5.5 million for the nine months ended June 30, 2017, compared with the nine months ended June 30, 2016.

Gross Profit. Our Communications segment’s gross profit during the nine months ended June 30, 2017, increased $4.4 million, or 19.3%, as compared to the nine months ended June 30, 2016. Gross profit as a percentage of revenue decreased 1.9% to 15.9% for the nine months ended June 30, 2017. The decline is driven, in part, by inefficiencies on certain projects during the nine months ended June 30, 2017. Additionally, margins have been affected by an increase in the volume of cost-plus work performed in the nine months ended June 30, 2017. This work is generally lower risk, and is typically performed at lower margins than the fixed price arrangements which comprise the majority of the work we perform. Finally, our lower margins reflect the impact of hiring and training a number of new employees needed to support the rapid growth of the business.

Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased $3.2 million, or 21.6%, during the nine months ended June 30, 2017, compared to the nine months ended June 30, 2016, as a result of higher personnel cost, including increased incentive compensation associated with higher earnings. Additionally, we have continued to invest in the necessary infrastructure to support the growing volume of business. Selling, general and administrative expenses as a percentage of revenues in the Communications segment decreased by 1.0% to 10.5% of segment revenue during the nine months ended June 30, 2017, compared to the nine months ended June 30, 2016, as we benefitted from the increased scale of our operations.

 

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Residential

 

     Three Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 70,162        100.0   $ 56,867        100.0

Gross profit

     15,855        22.6     13,479        23.7

Selling, general and administrative expenses

     11,003        15.7     9,237        16.2

Revenue. Our Residential segment’s revenues increased by $13.3 million during the three months ended June 30, 2017, an increase of 23.4% as compared to the three months ended June 30, 2016. The increase is driven by our multi-family business, where revenues increased by $9.1 million for the three months ended June 30, 2017, compared with the three months ended June 30, 2016. We entered the year with a historically high level of backlog, which is now resulting in increased revenues. Single-family construction revenues increased by $4.7 million, primarily driven by our Texas operations. Service revenues decreased by $0.5 million, and solar remained flat, during the three months ended June 30, 2017, as compared with the same period in 2016.

Gross Profit. During the three months ended June 30, 2017, our Residential segment experienced a $2.4 million, or 17.6%, increase in gross profit as compared to the three months ended June 30, 2016. The increase in gross profit was driven primarily by the increase in revenue. Gross margin as a percentage of revenue decreased 1.1% to 22.6% during the quarter ended June 30, 2017, as compared with the quarter ended June 30, 2016. For the three months ended June 30, 2017, multi-family projects, which generally have a lower gross margin than single-family projects, were a higher proportion of our total volume.

Selling, General and Administrative Expenses. Our Residential segment experienced a $1.8 million, or 19.1%, increase in selling, general and administrative expenses during the three months ended June 30, 2017, compared to the three months ended June 30, 2016, primarily as a result of higher variable compensation and a $1.3 million increase in incentive costs associated with increased profitability. Selling, general and administrative expenses as a percentage of revenues in the Residential segment decreased to 15.7% of segment revenue during the three months ended June 30, 2017, compared to 16.2% in the three months ended June 30, 2016, as we benefitted from the increased scale of our operations.

 

     Nine Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 204,527        100.0   $ 162,381        100.0

Gross profit

     47,157        23.1     37,922        23.4

Selling, general and administrative expenses

     32,488        15.9     26,856        16.5

Revenue. Our Residential segment revenues increased by $42.1 million during the nine months ended June 30, 2017, an increase of 26.0% as compared to the nine months ended June 30, 2016. The increase is driven by our multi-family business, where revenues increased by $30.3 million for the nine months ended June 30, 2017, compared with the nine months ended June 30, 2016. We entered the year with a historically high level of backlog, which is now resulting in increased revenues. Single-family construction revenues increased by $14.5 million, primarily driven by our Texas operations. Revenue from solar installations decreased by $1.8 million, and service revenues decreased by $0.8 million for nine months ended June 30, 2017, as compared with the same period in 2016.

Gross Profit. During the nine months ended June 30, 2017, our Residential segment experienced a $9.2 million, or 24.4%, increase in gross profit as compared to the nine months ended June 30, 2016. Gross profit increased primarily due to a higher volume of work. Gross margin as a percentage of revenue decreased by 0.3% to 23.1% during the nine months ended June 30, 2017, as compared with the nine months ended June 30, 2016. For the nine months ended June 30, 2017, multi-family projects, which generally have a lower gross margin than single-family projects, were a higher proportion of our total volume.

Selling, General and Administrative Expenses. Our Residential segment experienced a $5.6 million, or 21.0%, increase in selling, general and administrative expenses during the nine months ended June 30, 2017, compared to the nine months ended June 30, 2016, driven by increased compensation expense, primarily as a result of an increase of $4.0 million in variable compensation and incentive costs associated with increased profitability. Selling, general and administrative expenses as a percentage of revenues in the Residential segment decreased by 0.6% to 15.9% of segment revenue during the nine months ended June 30, 2017, as we benefitted from the increased scale of our operations.

 

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Commercial & Industrial

 

     Three Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 58,778        100.0   $ 59,512        100.0

Gross profit

     4,604        7.8     7,630        12.8

Selling, general and administrative expenses

     4,849        8.2     4,771        8.0

Revenue. Revenues in our Commercial & Industrial segment decreased $0.7, or 1.2%, during the three months ended June 30, 2017, compared to the three months ended June 30, 2016. The decrease was driven by a lower volume of large, industrial projects in the Southeast market. This decrease was largely offset by revenue from our fiscal 2016 and 2017 acquisitions through June 30, 2017, which contributed an additional $6.7 million during the three months ended June 30, 2017 compared to the three months ended June 30, 2016. The market for this segment’s services remains highly competitive.

Gross Profit. Our Commercial & Industrial segment’s gross profit during the three months ended June 30, 2017, decreased by $3.0 million, or 39.7%, as compared to the three months ended June 30, 2016. Of this decrease, $2.7 million relates to our Denver and Roanoke branches, which are in the process of winding down operations, as discussed herein. The decrease in margin at these branches is driven by labor cost overruns on four of our projects in connection with the acceleration of schedules by our customers, as well as high rates of employee turnover. These jobs are largely complete as of June 30, 2017, but they will continue to have some impact on our margin percentages through project completion in the fourth quarter of fiscal 2017. The decrease in revenue as discussed above also contributed to the decrease in gross profit in this segment for the three months ended June 30, 2017 as compared with the three months ended June 30, 2016. These decreases were partly offset by the impact of our fiscal 2016 and 2017 acquisitions through June 30, 2017, which contributed an additional $1.4 million of gross profit during the three months ended June 30, 2017 compared to the three months ended June 30, 2016. These newly acquired businesses continue to perform well, generally at higher gross margins than our existing business.

Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the three months ended June 30, 2017, increased $0.1 million, or 1.6%, compared to the three months ended June 30, 2016. Selling, general and administrative expenses as a percentage of revenues increased 0.2% to 8.2% during the three months ended June 30, 2017, compared to the three months ended June 30, 2016. Our fiscal 2016 and 2017 acquisitions through June 30, 2017, increased expense by $1.4 million; however, this increase was offset by lower incentive compensation expense in connection with reduced profitability.

 

     Nine Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 168,006        100.0   $ 158,923        100.0

Gross profit

     13,378        8.0     17,686        11.1

Selling, general and administrative expenses

     14,434        8.6     13,014        8.2

Revenue. Revenues in our Commercial & Industrial segment increased $9.1 million during the nine months ended June 30, 2017, an increase of 5.7% compared to the nine months ended June 30, 2017. The increase in revenue over this period was driven by our Denver and Nebraska locations for the nine months ended June 30, 2017, as compared with the nine months ended June 30, 2016. Our fiscal 2016 and 2017 acquisitions through June 30, 2017, contributed an additional $9.9 million of revenue during the nine months ended June 30, 2017 compared to the nine months ended June 30, 2016. These increases in revenue were partly offset by a decrease in the volume of large industrial projects in the Southeast market. The market for this segment’s services remains highly competitive.

Gross Profit. Our Commercial & Industrial segment’s gross profit during the nine months ended June 30, 2017, decreased by $4.3 million, or 24.4%, as compared to the nine months ended June 30, 2016. As a percentage of revenue, gross profit decreased from 11.1% for the nine months ended June 30, 2016, to 8.0% for the nine months ended June 30, 2017. Gross profit decreased by $4.7 million at our Denver and Roanoke branches, which are in the process of winding down operations, as discussed above. This decrease was due to the effects of project delays and resulting inefficiencies caused by labor cost overruns on four of our projects in connection with the acceleration of schedules by our customers and high rates of employee turnover. These jobs are largely complete as of June

 

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30, 2017, but they will continue to have some impact on our margin percentages through project completion in the fourth quarter of fiscal 2017. This decrease was partly offset by the impact of our fiscal 2016 and 2017 acquisitions in this segment through June 30, 2017, which contributed an additional $1.3 million of gross profit during the nine months ended June 30, 2017, compared to the nine months ended June 30, 2016. These newly acquired businesses continue to perform well, and have generally performed at higher gross margins than our existing business.

Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the nine months ended June 30, 2017, increased $1.4 million, or 10.9%, compared to the nine months ended June 30, 2016, and increased 0.4% as a percentage of revenue. The increase was driven by our fiscal 2016 and 2017 acquisitions, where selling, general and administrative expense for the nine months ended June 30, 2017, increased by $1.2 million.

Infrastructure Solutions

 

     Three Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 22,302        100.0   $ 14,518        100.0

Gross profit

     4,816        21.6     4,673        32.2

Selling, general and administrative expenses

     4,958        22.2     3,248        22.4

Contingent consideration

     (33      -0.1     66        0.5

Loss on sale of assets

     (88      -0.4     51        0.4

Revenue. Revenues in our Infrastructure Solutions segment increased $7.8 million during the three months ended June 30, 2017, an increase of 53.6% compared to the three months ended June 30, 2016. The increase in revenue was driven primarily by additional revenue of $9.0 million contributed by our fiscal 2016 and 2017 acquisitions through June 30, 2017, partly offset by reduced activity at certain of our motor repair facilities.

Gross Profit. Our Infrastructure Solutions segment’s gross profit during the three months ended June 30, 2017 increased $0.1 million as compared to the three months ended June 30, 2016. Gross profit contributed by our fiscal 2016 and 2017 acquisitions through June 30, 2017, increased by $0.7 for the three months ended June 30, 2017 compared with the three months ended June 30, 2016. However, this increase in margin provided by acquired businesses was offset by a decline in activity levels in our motor repair business. Gross margin as a percentage of revenue declined for the three months ended June 30, 2017 compared with the three months ended June 30, 2016, as higher margin motor repair work decreased, and lower margin bus duct work increased, as a percentage of our overall revenue. Although we expect the margins for motor repair and bus duct work to be more similar in the long term, bus duct margins for the three months ended June 30, 2017 were negatively affected by production inefficiencies driven by the mix of work being performed, as well as $0.2 million of amortization of the backlog intangible asset we recorded in connection with the acquisition of Technibus.

Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the three months ended June 30, 2017 increased $1.7 million compared to the three months ended June 30, 2016. The increase was primarily the result of general and administrative expenses incurred by our acquisitions during fiscal 2016 and 2017 through June 30, 2017.

 

     Nine Months Ended June 30,  
     2017     2016  
     $      %     $      %  
     (Dollars in thousands, Percentage of revenues)  

Revenue

   $ 59,572        100.0   $ 40,230        100.0

Gross profit

     14,469        24.3     10,876        27.0

Selling, general and administrative expenses

     13,280        22.3     9,062        22.5

Contingent consideration

     50        0.1     332        0.8

Loss (gain) on sale of assets

     (90      -0.2     828        2.1

 

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Revenue. Revenues in our Infrastructure Solutions segment increased $19.3 million during the nine months ended June 30, 2017, an increase of 48.1% compared to the nine months ended June 30, 2016. The increase was primarily driven by $23.0 million of additional revenue contributed by our fiscal 2016 and 2017 acquisitions through June 30, 2017. These increases were partly offset by a $1.7 million decrease in revenue from our engine components business. Substantially all of the operating assets of our engine components business were sold in April 2016 to a third party.

Gross Profit. Our Infrastructure Solutions segment’s gross profit during the nine months ended June 30, 2017, increased $3.6 million as compared to the nine months ended June 30, 2016. The increase is primarily driven by $4.4 million of additional gross profit contributed by our fiscal 2016 and 2017 acquisitions through June 30, 2017, slightly offset by a decrease in activity levels at our motor repair business. Gross profit for the nine months ended June 30, 2017 included $0.8 million related to the amortization of the backlog intangible asset we recorded in connection with the acquisition of Technibus.

Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the nine months ended June 30, 2017, increased $4.2 million compared to the nine months ended June 30, 2016. The increase was primarily the result of general and administrative costs incurred by our fiscal 2016 and 2017 acquisitions through June 30, 2017, which increased $4.7 million for the nine months ended June 30, 2017, including a $1.7 million increase in intangible amortization for these acquisitions. These additional costs were slightly offset by reduced expense for our motor repair business and the elimination of $0.3 million of general and administrative costs associated with our engine components business.

Contingent Consideration. Results of operations from Calumet Armature & Electric, LLC (“Calumet”), which we acquired in October 2015, have outperformed forecast measures used in our original valuation of the contingent consideration agreement, which we performed following the acquisition. We recorded additional contingent consideration expense of $50 thousand and $0.3 million during the nine months ended June 30, 2017 and 2016, respectively.

Loss on Sale of Asset. We recognized a loss of $0.8 million in conjunction with the write down to net realizable value of certain assets related to our engine component business during the nine months ended June 30, 2016. The sale of these assets to a third party pursuant to an asset purchase agreement was finalized in April 2016.

Interest and Other Expense, net

 

     Three Months Ended June 30,  
     2017      2016  
     (In thousands)  

Interest expense

   $ 351      $ 219  

Deferred financing charges

     56        80  
  

 

 

    

 

 

 

Total interest expense

     407        299  

Other (income) expense, net

     (46      (17
  

 

 

    

 

 

 

Total interest and other expense, net

   $ 361      $ 282  
  

 

 

    

 

 

 

 

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Interest Expense for the three months ended June 30, 2017 and 2016

During the three months ended June 30, 2017, we incurred interest expense of $0.4 million primarily comprised of interest expense from our revolving credit facility, an average letter of credit balance of $6.5 million and an average unused line of credit balance of $60.2 million. This compares to interest expense of $0.3 million for the three months ended June 30, 2016, primarily comprised of interest expense from our revolving credit facility and average letter of credit and unused line of credit balances of $6.9 million and $44.0 million, respectively.

 

     Nine Months Ended June 30,  
     2017      2016  
     (In thousands)  

Interest expense

   $ 1,052      $ 632  

Deferred financing charges

     229        263  
  

 

 

    

 

 

 

Total interest expense

     1,281        895  

Other (income) expense, net

     (94      (49
  

 

 

    

 

 

 

Total interest and other expense, net

   $ 1,187      $ 846  
  

 

 

    

 

 

 

Interest Expense for the nine months ended June 30, 2017 and 2016

During the nine months ended June 30, 2017, we incurred interest expense of $1.3 million primarily comprised of interest expense from our revolving credit facility, an average letter of credit balance of $6.6 million and an average unused line of credit balance of $42.1 million. This compares to interest expense of $0.9 million for the nine months ended June 30, 2016, primarily comprised of interest expense from our revolving credit facility, an average letter of credit balance of $6.9 million and an average unused line of credit balance of $43.2 million.

PROVISION FOR INCOME TAXES

We reported a benefit from income taxes of $1.5 million for the three months ended June 30, 2017, compared to a benefit of $2.9 million for the three months ended June 30, 2016. For the three months ended June 30, 2017, our income tax expense was offset by a $3.7 million benefit associated with the reversal of a reserve previously established for an uncertain tax position. For the three months ended June 30, 2016, we recorded a benefit of $3.6 million related to the release of a valuation allowance in connection with the acquisition of deferred tax liabilities of Technibus.

We reported a provision for income taxes of $1.8 million for the nine months ended June 30, 2017, compared to a benefit of $3.9 million for the nine months ended June 30, 2016. For the nine months ended June 30, 2017, our income tax expense was partly offset by a $3.7 million benefit associated with the reversal of a reserve previously established for an uncertain tax position. For the nine months ended June 30, 2016, we recorded a benefit of $5.0 million related to the release of a valuation allowance in connection with the acquisition of deferred tax liabilities of Technibus, Shanahan, and Calumet.

Excluding the impact of the benefits described above, tax expense for both the three and nine months ended June 30, 2017, as compared to the three and nine months ended June 30, 2016, is higher due to the release of a valuation allowance during the quarter ended September 30, 2016. As a result of the valuation allowance release during the quarter ended September 30, 2016, tax expense is no longer reduced by a corresponding valuation allowance release. See Note 9 – Income Taxes in the Notes to our Condensed Consolidated Financial Statements set forth in Part II, Item 8 of our Annual Report on Form 10-K for the year ended September 30, 2016, for further discussion of the release of this valuation allowance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based upon our Condensed Consolidated Financial Statements included in this report on Form 10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, write-downs for obsolete inventory, income taxes, impairments of long-lived assets, and contingencies and litigation.

BACKLOG

Backlog is a measure of revenue that we expect to recognize from work that has yet to be performed on uncompleted contracts, and from work that has been contracted but has not started, exclusive of short-term projects. While all of our backlog is supported by documentation from customers authorizing the performance of future work, backlog is not a guarantee of future revenues, as contractual commitments may change and our performance may vary. Not all of our work is performed under contracts included in backlog; for example, certain service work is performed under master service agreements on an as-needed basis. Our backlog has decreased from $341 million at September 30, 2016, to $314 million at June 30, 2017. The decrease relates to an increase in work performed on certain Residential multi-family projects which were delayed at September 30, 2016, and the completion of certain large projects at our Communications segment, partly offset by the addition of backlog from our Freeman acquisition.

 

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WORKING CAPITAL

During the nine months ended June 30, 2017, working capital exclusive of cash increased by $9.2 million from September 30, 2016, reflecting a $23.1 million increase in current assets excluding cash and a $13.9 million increase in current liabilities during the period.

During the nine months ended June 30, 2017, our current assets exclusive of cash increased to $199.9 million, as compared to $176.8 million as of September 30, 2016. The increase included $6.0 million of current assets associated with the Freeman and Technical Services acquisitions in fiscal 2017. Accounts receivable and retainage, excluding acquired balances, increased by $8.9 million, primarily driven by increased activity at our Communications segment. The remaining increase was driven by a $3.2 million increase in costs and estimated earnings in excess of billings and a $3.9 million increase in inventory excluding the inventory acquired in business combinations. The increase in costs and estimated earnings in excess of billings is the result of an increase in the amount of work performed at our Communications segment under cost plus arrangements, as well as an increase in work with certain of our national customers. These cost plus arrangements typically take longer to bill than the fixed price arrangements that are more common for the business. Days sales outstanding increased to 62 at June 30, 2017 from 60 at September 30, 2016. While the rate of collections may vary, our typically secured position, resulting from our ability in general to secure liens against our customers’ overdue receivables, offers some protection that collection will occur eventually to the extent that our security retains value.

During the nine months ended June 30, 2017, our total current liabilities increased by $13.9 million to $146.9 million, compared to $133.1 million as of September 30, 2016. The increase was the result of $6.1 million of accounts payable and accrued liabilities added with the Freeman and Technical Services acquisitions in fiscal 2017, as well as higher levels of activity at our Residential and Communications segments.

Surety

We believe the bonding capacity presently provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of June 30, 2017, the estimated cost to complete our bonded projects was approximately $44.0 million.

Effective on July 14, 2017, in connection with the acquisition of NEXT, and in order to support the outstanding surety bonds of NEXT, the Company and certain of its current and future subsidiaries and affiliates entered into a new agreement of indemnity (the “Surety Agreement”) with certain entities affiliated with Travelers Casualty and Surety Company of America (“Travelers”), governing the terms upon which Travelers has issued and may in the future issue surety bonds securing NEXT’s contractual obligations.

Pursuant to the Surety Agreement, we have agreed to assign to Travelers, as collateral to secure obligations under the Surety Agreement, among other things, our rights, title and interest in, and all accounts receivable and related proceeds arising pursuant to, any contract bonded by Travelers on NEXT’s behalf. Further, under the Surety Agreement, we have agreed that, upon written demand, we will deposit with Travelers, as additional collateral, an amount determined by Travelers to be sufficient to discharge any claim made against Travelers on a bond issued on NEXT’s behalf. The foregoing description of the Surety Agreement does not purport to be complete and is qualified in its entirety by reference to the Surety Agreement, which is included herewith as Exhibit 10.3 to this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

The Revolving Credit Facility

On April 10, 2017, we entered into a Second Amended and Restated Credit and Security Agreement pursuant to our revolving credit facility (the “Amended Credit Agreement”) with Wells Fargo Bank, N.A. Pursuant to the Amended Credit Agreement, our maximum revolver amount increased from $70 million to $100 million, and the maturity date of the revolving credit facility was extended from August 9, 2019 to August 9, 2021. The Amended Credit Agreement also modified our financial covenants by, among other items, implementing a new covenant that requires the Company to maintain a minimum EBITDA (as defined in the Amended Credit Agreement) that will be tested quarterly on a trailing twelve month basis; increasing the minimum Liquidity (as defined in the Amended Credit Agreement) requirement applicable to the Company from 12.5% to 30% of the maximum revolver amount; raising the Company’s required Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) (the “FCCR”) to 1.1:1.0 from 1.0:1.0; and requiring that the FCCR be tested quarterly regardless of the Company’s Liquidity levels.

 

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The Amended Credit Agreement continues to contain other customary affirmative, negative and financial covenants as well as events of default.

As of June 30, 2017, we were in compliance with the financial covenants under the Amended Credit Agreement, requiring that we maintain:

 

    An FCCR, measured quarterly on a trailing four-quarter basis at the end of each quarter, of at least 1.1 to 1.0.

 

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

 

    Minimum EBITDA, measured at the end of each quarter, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto:

 

Applicable Amount   

Applicable Period

$30,000,000    For each four quarter period ending June 30, 2017, September 30, 2017, and December 31, 2017.
$32,500,000    For the four quarter period ending March 31, 2018
$35,000,000    For each four quarter period ending June 30, 2018 and each quarter-end thereafter

At June 30, 2017, our Liquidity was $67.7 million, our Excess Availability was $43.8 million (or greater than 50% of minimum Liquidity), our FCCR was 14.8:1.0; and our EBITDA, as defined in the Amended Credit Agreement for the four quarters ended June 30, 2017 was $42.1 million.

Our FCCR is calculated as follows (with capitalized terms as defined in the Amended Credit Agreement): (i) our trailing twelve month EBITDA, less non-financed capital expenditures (other than capital expenditures financed by means of an advance under the credit facility), cash taxes and all Restricted Junior Payments consisting of certain pass-through tax liabilities, divided by (ii) the sum of our cash interest (other than interest paid-in-kind, amortization of financing fees, and other non-cash interest expense) and principal debt payments (other than repayment of principal on advances under the credit facility and including cash payments with respect to capital leases), any management, consulting, monitoring, and advisory fees paid to an affiliate, and all Restricted Junior Payments (other than pass-through tax liabilities) and other cash distributions; provided, that if any acquisition is consented to by lender after the date of the Amended Credit Agreement, the components of the FCCR will be calculated for such fiscal period after giving pro forma effect to the acquisition assuming that such transaction has occurred on the first day of such period (including pro forma adjustments arising out of events which are directly attributable to such acquisition, are factually supportable, and are expected to have a continuing impact, in each case to be reasonably agreed to by the lender).    

As defined in the Amended Credit Agreement, EBITDA is calculated as consolidated net income (or loss), less extraordinary gains, interest income, non-operating income and income tax benefits and decreases in any change in LIFO reserves, plus stock compensation expense, non-cash extraordinary losses (including, but not limited to, a non-cash impairment charge or write-down), interest expense, income taxes, depreciation and amortization and increases in any change in LIFO reserves, in each case, determined on a consolidated basis in accordance with GAAP; provided, that if any acquisition is consented to by lender after the date of the Amended Credit Agreement, EBITDA for such fiscal period shall be calculated after giving pro forma effect to the acquisition assuming that such transaction has occurred on the first day of such period (including pro forma adjustments arising out of events which are directly attributable to such acquisition, are factually supportable, and are expected to have a continuing impact, in each case to be reasonably agreed to by Lender).

On July 14, 2017, we entered into a Joinder, Limited Consent, and First Amendment to the Amended Credit Agreement permitting certain transactions related to our acquisition of NEXT, including the Surety Agreement. On August 2, 2017, we entered into a Second Amendment to the Amended Credit Agreement, which modified the definition of EBITDA used in calculating our financial covenants to exclude the results from the wind-down Denver and Roanoke branches, up to a maximum exclusion of $5 million for a given measurement period. The amendment also reduces the minimum EBITDA requirement for the quarters ended December 31, 2017 and March 31, 2018 from $32,500,000 to $30,000,000 and $35,000,000 to $32,500,000, respectively. Minimum EBITDA requirements for all other quarters are unchanged. The amendments are included as Exhibits 10.2 and 10.4 to this Quarterly Report on Form 10-Q, and any description of the amendments herein is qualified in its entirety by reference to Exhibits 10.2 and 10.4 hereto.

 

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

At June 30, 2017, we had $6.5 million in outstanding letters of credit with Wells Fargo Bank, N.A and outstanding borrowings of $30.2 million.

Operating Activities

Our cash flow from operations is not only influenced by cyclicality, demand for our services, operating margins and the type of services we provide, but can also be influenced by working capital needs such as the timing of our receivable collections. Working capital needs are generally lower during our fiscal first and second quarters due to the seasonality that we experience in many regions of the country.

Operating activities provided net cash of $10.2 million during the nine months ended June 30, 2017, as compared to $13.9 million of net cash provided in the nine months ended June 30, 2016. The decrease in operating cash flow was primarily the result of decreased earnings.

Investing Activities

Net cash used in investing activities was $18.2 million for the nine months ended June 30, 2017, compared with $59.7 million for the nine months ended June 30, 2016. We used cash of $14.7 million related to the acquisition of Freeman and Technical Services, and $3.8 million for purchases of fixed assets in the nine months ended June 30, 2017. For the nine months ended June 30, 2016, we used $59.7 million related to our fiscal 2016 acquisitions, and $2.2 million for the purchase of fixed assets, offset by $2.2 million received for the sale of our engine components business in our Infrastructure Solutions segment.

Financing Activities

Net cash used in financing activities for the nine months ended June 30, 2017 included $0.9 million for the repurchase of our common stock, $0.4 million paid pursuant to our contingent consideration agreement with the former owners of Calumet, and $0.2 million distributed to our non-controlling interest holders, offset by the return of $0.3 million in cash which had been restricted in support of letters of credit and $0.2 received from the exercise of employee stock options. For the nine months ended June 30, 2016, we borrowed $20.0 million which was used in business acquisitions, partly offset by $0.6 million used for the repurchase of common stock and $0.3 million used to cash collateralize certain letters of credit.

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. Pursuant to this program, we repurchased 51,673 shares of our common stock during the nine months ended June 30, 2017, in open market transactions at an average price of $15.68 per share.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

There have been no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management is actively involved in monitoring exposure to market risk and continues to develop and utilize appropriate risk management techniques. Our exposure to significant market risks includes fluctuations in commodity prices for copper, aluminum, steel and fuel. Commodity price risks may have an impact on our results of operations due to the fixed price nature of many of our contracts. We are also exposed to interest rate risk with respect to our outstanding debt obligations on the Amended Credit Agreement. For additional information see “Disclosure Regarding Forward-Looking Statements” in Part I of this Quarterly Report on Form 10-Q and our risk factors in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

Commodity Risk

Our exposure to significant market risks includes fluctuations in commodity prices for copper, aluminum, steel and fuel. Commodity price risks may have an impact on our results of operations due to the fixed nature of many of our contracts. Over the long-term, we expect to be able to pass along a portion of these costs to our customers, as market conditions in the construction industry will allow. The Company has not entered into any commodity price risk hedging instruments.

Interest Rate Risk

We are subject to interest rate risk on our floating interest rate borrowings on the Amended Credit Agreement. If LIBOR were to increase, our interest payment obligations on outstanding borrowings would increase, having a negative effect on our cash flow and financial condition. We currently do not maintain any hedging contracts that would limit our exposure to variable rates of interest when we have outstanding borrowings. Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates.

All of the long-term debt outstanding under our revolving credit facility is structured on floating interest rate terms. A one percentage point increase in the interest rates on our long-term debt outstanding under the credit facility as of June 30, 2017, would cause a $0.3 million pre-tax annual increase in interest expense.

Item 4. Controls and Procedures

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.

Disclosure Controls and Procedures

In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of management, including our President and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2017, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding legal proceedings, see Note 12 – Commitments and Contingencies – Legal Matters in the Notes to our Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

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

The following table presents information with respect to purchases of common stock of the Company made during the three months ended June 30, 2017:

 

Date    Total Number of
Shares Purchased
(1)
     Average Price
Paid Per Share
     Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan
(2)
     Maximum
Number of
Shares That May
Yet Be Purchased
Under the
Publicly
Announced Plan
 

April 1, 2016 – April 30, 2017

     723      $ 18.60        —          970,915  

May 1, 2016 – May 31, 2017

     26,580      $ 15.87        23,411        947,504  

June 1, 2016 – June 30, 2017

     28,262      $ 15.61        28,262        919,242  

Total

     55,565      $ 15.77        51,673        919,242  

 

(1) The total number of shares purchased includes (i) shares purchased pursuant to the plan described in footnote (2) below, and (ii) shares surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.
(2) Our Board of Directors has authorized a stock repurchase program for the purchase up to 1.5 million shares of the Company’s common stock from time to time.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

On August 3, 2017, we entered into a Second Amendment to our Amended Credit Agreement which modified our minimum EBITDA requirement, as further described under Part I, Item 2 – Liquidity and Capital Resources – The Revolving Credit Facility of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. The Second Amendment is included as Exhibit 10.4 to this Quarterly Report on Form 10-Q.

Item 6. Exhibits

 

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Exhibit
No.

 

Description

      2.1 —   Stock Purchase Agreement dated as of June 1, 2016, by and among IES Infrastructure Solutions, LLC, IES Holdings, Inc., Technibus, Inc. and Technibus, LLC. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 15, 2016)
      3.1 —   Second Amended and Restated Certificate of Incorporation of IES Holdings, Inc., as amended by the Certificate of Amendment thereto, effective May 24, 2016 (composite). (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2016)
      3.2 —   Certificate of Designations of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 28, 2013)
      3.3 —   Amended and Restated Bylaws of IES Holdings, Inc., effective May 24, 2016. (Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 24, 2016)
      4.1 —   Specimen common stock certificate. (Incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K filed on December 9, 2016)
      4.2 —   Tax Benefit Protection Plan Agreement by and between IES Holdings, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent, dated as of November 8, 2016, including the form of Rights Certificate and Summary of Stockholder Rights Plan attached thereto as Exhibits A and B, respectively. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 9, 2016)
      10.1 —   Second Amended and Restated Credit and Security Agreement, dated as of April 10, 2017, by and among IES Holdings, Inc., each of the other Borrowers and Guarantors named therein and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 10, 2017)
  (1)10.2 —   Joinder, Limited Consent, and First Amendment, dated as of July 14, 2017, to Second Amended and Restated Credit and Security Agreement, dated as of April 10, 2017, by and among IES Holdings, Inc., each of the other Borrowers and Guarantors named therein and Wells Fargo Bank, National Association.
      10.3 —   General Agreement of Indemnity, July 14, 2017, by IES Holdings, Inc. and certain of its present and future subsidiaries and affiliates and Travelers Casualty and Surety Company of America, St. Paul Fire and Marine Insurance Company, and their affiliated, associated and subsidiary companies, successors and assigns. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 14, 2017)
  (1)10.4 —   Second Amendment to the Amended Credit Agreement, dated as of August 2, 2017, to Second Amended and Restated Credit and Security Agreement, dated as of April 10, 2017, by and among IES Holdings, Inc., each of the other Borrowers and Guarantors named therein and Wells Fargo Bank, National Association.
  (1)31.1 —   Rule 13a-14(a)/15d-14(a) Certification of Robert W. Lewey, President,
  (1)31.2 —   Rule 13a-14(a)/15d-14(a) Certification of Tracy A. McLauchlin, Senior Vice President, Chief Financial Officer and Treasurer
  (1)32.1 —   Section 1350 Certification of Robert W. Lewey, President

 

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Exhibit
No.

 

Description

  (1)32.2 —   Section 1350 Certification of Tracy A. McLauchlin, Senior Vice President, Chief Financial Officer and Treasurer
(1)101.INS   XBRL Instance Document
(1)101.SCH   XBRL Schema Document
(1)101.LAB   XBRL Label Linkbase Document
(1)101.PRE   XBRL Presentation Linkbase Document
(1)101.DEF   XBRL Definition Linkbase Document
(1)101.CAL   XBRL Calculation Linkbase Document

 

(1) Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 4, 2017.

IES HOLDINGS, INC.

 

By:  

/s/ TRACY A. MCLAUCHLIN

          Tracy A. McLauchlin
    Senior Vice President, Chief Financial Officer and Treasurer
  (Principal Financial Officer and Authorized Signatory)

 

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EX-10.2

Exhibit 10.2

JOINDER, LIMITED CONSENT, AND FIRST AMENDMENT TO

SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

THIS JOINDER, LIMITED CONSENT, AND FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT (this “Amendment”), dated July 14, 2017, is made and entered into by and among IES HOLDINGS, INC., a Delaware corporation, on behalf of itself and each other Borrower and Guarantor (the “Administrative Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Lender”).

RECITALS

A.    WHEREAS, Borrowers, Guarantors and Lender have entered into that certain Second Amended and Restated Credit and Security Agreement dated as of April 10, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.

B.    WHEREAS, IES Commercial, Inc. (“Buyer”) desires to enter into that certain Membership Interest Purchase Agreement attached hereto as Exhibit A (the “Purchase Agreement” dated on or about July 14, 2017, by and among Buyer, NEXT Electric, LLC a Wisconsin limited liability company (“NEXT”), and OwnersEdge, Inc., a Wisconsin corporation (“Seller”), whereby the Seller will sell and transfer 80% of the Stock of NEXT to Buyer (the “Acquisition”) in violation of Section 7.11 of the Credit Agreement which, in absence the effect of this Amendment, would be an Event of Default under Section 9.2(a) of the Credit Agreement.

C.    WHEREAS, Administrative Borrower has informed Lender that as part of the Acquisition, NEXT will make bridge loans, evidenced by promissory notes, to Michael R. LeMaster, Jeff Ritchie, Tony A. Bierman, Kevin Racziewicz, and Christopher J. Surges (each a “Bridge Loan”) in violation of Section 7.11 of the Credit Agreement, and, with respect to the Bridge Loan made to Christopher J. Surges, in violation of Sections 7.11 and 7.12 of the Credit Agreement which, in the absence of the effect of this Amendment, would be an Event of Default under Section 9.2(a) of the Credit Agreement.

D.    WHEREAS, Administrative Borrower has informed Lender of the existence of Surety Bonds from Travelers Casualty and Surety Company of America (the “Surety Bonds”), in violation of Section 7.18 of the Credit Agreement which, in the absence of the effect of this Amendment, would be an Event of Default under Section 9.2(a) of the Credit Agreement.

E.    WHEREAS, Administrative Borrower, on behalf of itself and each other Borrower and Guarantor, has requested that Lender (i) consent to the Acquisition, Bridge Loans, and Surety Bonds, (ii) join NEXT as a Borrower to the Credit Agreement, and (iii) amend certain provisions in the Credit Agreement as set forth herein.


F.    WHEREAS, Lender has agreed to (i) consent to the Acquisition, (ii) join NEXT as a Borrower to the Credit Agreement, and (iii) amend the Credit Agreement in connection with the consummation of the Acquisition on the terms and conditions as set forth herein.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound agree as follows:

ARTICLE I

AMENDMENT

Effective as of the Effective Date (as defined below), the Credit Agreement is hereby amended and supplemented as follows:

1.01    Amendment to Section 7.12. Section 7.12 of the Credit Agreement is hereby amended by (a) deleting the reference to “and” at the end of clause (d), (b) inserting a reference to “; and” at the end of clause (e), and (c) inserting new clause (f) as follows:

“(f)    so long as no Default or Event of Default has occurred and is continuing, IES Commercial may make additional capital contributions to NEXT in an aggregate amount not to exceed $750,000.”

1.02    Amendment to Schedule 1.1.

(a)    Schedule 1.1 of the Credit Agreement is hereby amended by adding the following defined terms in the appropriate alphabetical order:

IES Commercial” means IES Commercial, Inc., a Delaware corporation.

NEXT” means NEXT Electric, LLC, a Wisconsin limited liability company.

First Amendment Effective Date” means July 14, 2017.

(b)    Schedule 1.1 of the Credit Agreement is hereby amended by amending the definition of “Change of Control” by (a) replacing each reference to “eight percent” therein with a reference to “eighty percent”, (b) replacing the reference to “and” at the end of clause (d) with “,”, (c) replacing the reference to “.” at the end of clause (e) with “and”, and (d) inserting new clause (f) as follows:

“(f) IES Commercial or another Loan Party (subject to execution of a Pledged Interests Addendum pursuant to Section 6.12(h)(iii)) ceases to own eighty percent (80%) (or such greater amount that IES Commercial or another Loan Party may own from time to time following the Closing Date) of the membership interests of NEXT.”

 

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(c)    The defined term “Permitted Investments” in Schedule 1.1 of the Credit Agreement is hereby amended by (i) inserting “and” at the end of clause (i) thereof and (ii) inserting new clause (j) therein to read as follows:

“(j)    Investments (subject to the limitations in Section 7.12(f)) by IES Commercial or another Loan Party consisting of eighty percent (80%) of the membership interests of NEXT, or such greater amount owned by IES Commercial or another Loan Party from time to time in NEXT (provided, that IES Commercial or another Loan Party shall deliver an updated Pledged Interest Addendum pursuant to Section 5.26(d) of Exhibit D for any additional interest held in NEXT following the First Amendment Effective Date).”

(d)    The defined term “Restricted Junior Payment” in Schedule 1.1 of the Credit Agreement is hereby amended and restated as follows:

Restricted Junior Payment” means (a) any declaration or payment of any dividend or the making of any other payment or distribution on account of Stock issued by any Loan Party (including any payment in connection with any merger or consolidation involving any Loan Party) or to the direct or indirect holders of Stock issued by any Loan Party in their capacity as such (other than dividends or distributions payable in Stock (other than Prohibited Preferred Stock) issued by any Loan Party), or (b) any purchase, redemption, or other acquisition or retirement for value (including in connection with any merger or consolidation involving any Loan Party) of any Stock issued by any Loan Party; provided so long as no Default or Event of Default exists or would result therefrom, (i) repurchases of Stock issued by Parent solely to satisfy federal income tax withholding obligations of employees with respect to stock-based compensation issued to them in accordance with applicable compensation plans shall not be deemed a Restricted Junior Payment so long as such repurchases are made in the ordinary course of business and in an aggregate amount not to exceed $1,500,000 in any fiscal year of Borrowers, (ii) Parent may repurchase Stock issued by Parent for an aggregate purchase price not to exceed $7,500,000, in the aggregate, on or before January 31, 2019 with respect to any vesting of performance based phantom stock units granted by Parent on October 2, 2015 and June 6, 2016, (iii) NEXT may make distributions of excess cash to the direct or indirect holders of Stock issued by NEXT and (iv) NEXT may make distributions to certain equity owners thereof with respect to an exercise of any such equity owner’s put rights pursuant to Section 10.3 of that certain Operating Agreement of NEXT Electric LLC dated as of July 14, 2017, among NEXT and the equity owners of NEXT as in effect as of such date.”

ARTICLE II

CONSENT AND JOINDER

2.01    Consent to the Acquisition. Subject to the terms and conditions set forth below, Lender hereby (a) consents to Buyer consummating the Acquisition pursuant to the terms of the Purchase Agreement, (b) consents to NEXT making the Bridge Loans, (c) consents to the Surety

 

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Bonds, and (d) agrees that no Default or Event of Default shall have occurred or be deemed to have occurred under the Credit Agreement or any of the Loan Documents solely as a result of Acquisition consummated pursuant to the Purchase Agreement.

2.02    Consent to Joinder. Administrative Borrower, on behalf of itself and each other Borrower and Guarantor, and Lender consents to the joinder of NEXT to the Credit Agreement and all of the other Loan Documents, as more fully described below.

2.03    Joinder to the Credit Agreement and Loan Documents. Immediately following the consummation of the Acquisition, NEXT shall join in, assume, adopt, become a co-borrowers and a co-obligors and become jointly and severally liable with respect to all Obligations (irrespective of when such Obligations first arose) under the Credit Agreement and all of the other Loan Documents. Without limiting the foregoing, NEXT hereby (a) agrees to all of the terms and conditions contained in the Credit Agreement and the other Loan Documents with the same legal effect as if it was an original signatory thereto, (b) affirms all of the representations and warranties of the Borrowers and all of the covenants, each as set forth in the Credit Agreement, (c) grants to Lender a continuing general lien upon, and security interest in, all of the Collateral in which NEXT has rights as security for the Obligations as though it were an original signatory party to the Credit Agreement, and NEXT authorizes Lender to file UCC financing statements to evidence the same, which financing statements may identify the Collateral as “all assets” or “all personal property” or words of like import, and (d) promises to pay all Obligations in full when due in accordance with the Credit Agreement and the other Loan Documents. Further, NEXT agrees that the Obligations are performable in accordance with their terms, without setoff, defense, counter-claim or claims in recoupment. For the avoidance of doubt, each Administrative Borrower, on behalf of itself and each other Borrower and Guarantor, NEXT, and Lender acknowledge and agree that this Section 2.03 shall be deemed effective immediately upon the consummation of the Acquisition.

ARTICLE III

NO WAIVER

3.01    No Waiver. This Amendment is a limited consent and other than as set forth above in Articles I and II hereof, nothing contained in this Amendment shall be construed as an amendment of, consent to, or waiver by, Lender of any covenant or provision of the Credit Agreement, the other Loan Documents, this Amendment, or of any other contract or instrument between any Loan Party and Lender, and the failure of Lender at any time or times hereafter to require strict performance by the Loan Parties of any provision thereof shall not waive, affect or diminish any right of Lender to thereafter demand strict compliance therewith. Lender hereby reserves all rights granted under the Credit Agreement, the other Loan Documents, this Amendment and any other contract or instrument between any Loan Party and Lender.

ARTICLE IV

CONDITIONS PRECEDENT

4.01    Conditions to Effectiveness. This Amendment shall become effective only upon the satisfaction in full, in a manner satisfactory to Lender, of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the “Effective Date”):

 

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(a)    Lender shall have received the following documents or items, each in form and substance satisfactory to Lender and its legal counsel (unless such conditions are waived by Lender in its sole discretion):

(i)    a Pledged Interest Addendum duly executed by Buyer, together with the certificates representing the Pledged Interests for NEXT (if any) and such other items required pursuant to Section 5.26(d) of Exhibit D to the Credit Agreement;

(ii)    a Joinder to the Intercompany Subordination Agreement executed by NEXT;

(iii)    an Intercreditor Agreement with Travelers Casualty and Surety Company of America;

(iv)    an Information Certificate Supplement;

(v)    a Collateral Assignment of Purchase Agreement;

(vi)    updated certificates of insurance, reflecting the addition of NEXT and its location(s), with respect to (i) property and casualty and business interruption insurance policies, showing Lender as certificate holder and loss payee, with lender’s loss payable clause in favor of Lender, and (ii) liability and other third party policies, showing Lender as certificate holder and additional insured party (each in form and substance satisfactory to Lender);

(vii)    a certificate from the appropriate manager or officer of NEXT, Buyer, and Administrative Borrower (i) attesting to the resolutions of NEXT’s, Buyer’s, and Administrative Borrower’s Member authorizing its execution, delivery, and performance of this Amendment and the other Loan Documents to which Buyer or Administrative Borrower are a party, (ii) authorizing specific officers of NEXT, Buyer, and Administrative Borrower to execute the same, (iii) attesting to the incumbency and signatures of such specific officers of NEXT, Buyer, and Administrative Borrower, (iv) representing and warranting that NEXT’s, Buyer’s, and Administrative Borrower’ s Governing Documents attached thereto are true, correct and complete as of the date thereof, and (v) attesting to a certificate of status with respect to NEXT, Buyer, and Administrative Borrower, dated within 10 days of the date hereof, such certificates to be issued by the appropriate officer of the jurisdiction of organization of Buyer and Administrative Borrower, which certificates shall indicate that Buyer and Administrative Borrower are in good standing in such jurisdiction;

(viii)    an amended copy of NEXT’s limited liability company agreement in form and substance satisfactory to Lender;

(ix)    a fully executed copy of the Purchase Agreement, including all amendments thereto, and all other requested agreements or documents in connection therewith, certified by an officer of Administrative Borrower as true, correct and complete;

 

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(x)    fully executed copies of each of the bridge loan promissory notes to certain management employees;

(xi)    payoff letters or payoff statements for NEXT’s secured Indebtedness evidenced by the UCC-1 Financing Statements listed on Exhibit B to the Closing Checklist attached hereto as Exhibit B; and

(xii)    all other documents Lender may reasonably request with respect to any matter relevant to this Amendment or the transactions contemplated hereby, including, without limitation, a legal opinion of Administrative Borrower’s counsel, and Borrowers shall have paid Lender, or made arrangements satisfactory to Lender to pay, all Lender Expenses incurred prior to or in connection with the preparation of this Amendment.

(b)    After giving effect to this Amendment, the representations and warranties made by each Loan Party contained herein and in the Credit Agreement, as amended hereby, and the other Loan Documents, shall be true and correct in all material respects as of the date hereof, as if those representations and warranties were made for the first time on such date.

(c)    After giving effect to this Amendment, each Loan Party is in compliance with all applicable covenants and agreements contained in the Credit Agreement and the other Loan Documents.

(d)    No Default or Event of Default shall exist under any of the Loan Documents (as amended hereby), and no Default or Event of Default will result under any of the Loan Documents from the execution, delivery or performance of this Amendment.

(e)    All corporate and other proceedings, and all documents instruments and other legal matters in connection with the transactions contemplated by this Amendment shall be satisfactory in form and substance to Lender and its counsel.

(f)    Lender shall have received final credit approval for the Credit Facility and the transactions described in this Amendment.

ARTICLE V

RATIFICATIONS, REPRESENTATIONS AND WARRANTIES

5.01    Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Credit Agreement and the other Loan Documents, and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Administrative Borrower, on behalf of itself and each other Loan Party, hereby agrees that all liens and security interest securing payment of the Obligations under the Credit Agreement are hereby collectively renewed, ratified and brought forward as security for the payment and performance of the

 

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Obligations. Administrative Borrower, on behalf of itself and each other Loan Party, and Lender agree that the Credit Agreement and the other Loan Documents, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms.

5.02    Representations and Warranties. Administrative Borrower, on behalf of itself and each other Loan Party, hereby represents and warrants, jointly and severally, to Lender as of the date hereof as follows: (a) it is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; (b) the execution, delivery and performance by it of this Amendment, the Credit Agreement and all other Loan Documents executed and/or delivered in connection herewith are within its powers, have been duly authorized, and do not contravene (i) its Governing Documents or (ii) any applicable law; (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with any governmental body or other Person, is required in connection with the execution, delivery, performance, validity or enforceability of this Amendment, the Credit Agreement or any of the other Loan Documents executed and/or delivered in connection herewith by or against it, except for those consents, approvals or authorizations which (i) will have been duly obtained, made or compiled prior to the Effective Date and which are in full force and effect or (ii) the failure to obtain could not individually or in the aggregate reasonably be expected to cause a Material Adverse Change; (d) this Amendment, the Credit Agreement and all other Loan Documents executed and/or delivered in connection herewith have been duly executed and delivered by it; (e) this Amendment, the Credit Agreement and all other Loan Documents executed and/or delivered in connection herewith constitute its legal, valid and binding obligation enforceable against it in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity; (f) no Default or Event of Default exists, has occurred and is continuing or would result by the execution, delivery or performance of this Amendment; (g) each Loan Party is in compliance with all applicable covenants and agreements contained in the Credit Agreement and the other Loan Documents, as amended hereby; and (h) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof as though made on and as of each such date, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and complete on and as of such earlier date).

ARTICLE VI

POST-CLOSING COVENANTS

6.01    General. The Borrowers covenant and agree to fulfill the obligations set forth on Exhibit C. The failure to have taken such actions or deliver such agreements shall not constitute a Default or an Event of Default or a breach of any representation and warranty until the date specified on Exhibit C (as such date may be extended as provided therein); provided that failure to have taken such action or make such required delivery by the date specified in Exhibit C shall be an immediate Event of Default.

 

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ARTICLE VII

MISCELLANEOUS PROVISIONS

7.01    Survival of Representations and Warranties. All representations and warranties made in the Credit Agreement or the other Loan Documents, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Lender shall affect the representations and warranties or the right of Lender to rely upon them.

7.02    Reference to Credit Agreement. Each of the Credit Agreement and the other Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as amended hereby, are hereby amended so that any reference in the Credit Agreement and such other Loan Documents to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby.

7.03    Expenses of Lender. The Borrowers agree to pay on demand all reasonable costs and expenses incurred by Lender in connection with any and all amendments, modifications, and supplements to the other Loan Documents, including, without limitation, the reasonable costs and fees of Lender’s legal counsel, and all costs and expenses incurred by Lender in connection with the enforcement or preservation of any rights under the Credit Agreement, as amended hereby, or any other Loan Documents, including, without, limitation, the costs and fees of Lender’s legal counsel.

7.04    Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable.

7.05    Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender and each Loan Party and their respective successors and assigns, except that no Loan Party may assign or transfer any of its respective rights or obligations hereunder without the prior written consent of Lender.

7.06    Counterparts. This Amendment may be executed in one or more counterparts (including by electronic ..pdf), each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument.

7.07    Effect of Waiver. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant or condition by any Loan Party shall be deemed a consent to or waiver of any other breach of the same or any other covenant, condition or duty.

7.08    Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment.

7.09    Applicable Law. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

 

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7.10    Final Agreement. THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, EACH AS MODIFIED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS MODIFIED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AGREEMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE BORROWERS AND LENDER.

7.11    Release. ADMINISTRATIVE BORROWER, ON BEHALF OF ITSELF AND EACH LOAN PARTY, HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY ANY LOANS OR EXTENSIONS OF CREDIT FROM LENDER TO THE BORROWERS UNDER THE CREDIT AGREEMENT OR THE OTHER LOAN DOCUMENTS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. ADMINISTRATIVE BORROWER, ON BEHALF OF ITSELF AND EACH LOAN PARTY, HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH ANY LOAN PARTY MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS OR EXTENSIONS OF CREDIT FROM LENDER TO THE BORROWERS UNDER THE CREDIT AGREEMENT OR THE OTHER LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE CREDIT AGREEMENT OR LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.

7.12    Consent of Guarantors. The Administrative Borrower, on behalf of each Guarantor, hereby (a) consents to the transactions contemplated by this Amendment, including the Acquisition; and (b) agrees that the Credit Agreement and the other Loan Documents (as amended, restated, supplemented or otherwise modified from time to time) are and shall remain in full force and effect. Although each Guarantor has been informed of the matters set forth

 

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herein and Administrative Borrower, on behalf of the Guarantors, has acknowledged and agreed to same, it understands that the Lender has no obligation to inform it of such matters in the future or to seek its acknowledgment or agreement to future amendments, and nothing herein shall create such a duty. Administrative Borrower, on behalf of each Guarantor, acknowledges that its Guaranty is in full force and effect and ratifies the same, acknowledges that the undersigned has no defense, counterclaim, set-off or any other claim to diminish the undersigned’s liability under such documents, that the undersigned’s consent is not required to the effectiveness of the Credit Agreement and that no consent by it is required for the effectiveness of any future amendment, modification, forbearance or other action with respect to the Collateral, the Advances, the Credit Agreement or any of the other Loan Documents.

7.13    Schedules to the Credit Agreement. The Administrative Borrower, on behalf of each Borrower and each Guarantor, hereby acknowledges that Schedules A-1 (Collection Account), A-2 (Authorized Person), D-1 (Designated Account), P-1 (Permitted Investments), and P-2 (Permitted Liens) that were delivered in connection with the Closing that certain Credit Agreement dated as of August 9, 2012, by and among Lender, Administrative Borrower (f/k/a Integrated Electrical Services, Inc., a Delaware corporation), the other Borrowers from time to time party thereto, and the other Guarantors from time to time party thereto are still in effect as of the date hereof.

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the undersigned has executed this Amendment as of the date first above written.

 

ADMINISTRATIVE BORROWER:
IES HOLDINGS, INC.
By:  

/s/ Tracy A. McLauchlin

Name:   Tracy A. McLauchlin
Title:   Senior Vice President, CFO & Treasurer
NEXT:
NEXT ELECTRIC, LLC
By:  

/s/ Tracy A. McLauchlin

Name:   Tracy A. McLauchlin
Title:   Vice President & Treasurer


WELLS FARGO BANK, NATIONAL ASSOCIATION
By:  

/s/ Howard I. Handman

Name:   Howard I. Handman
Title:   Authorized Signatory


Exhibit A

Purchase Agreement


Exhibit B

Checklist


Exhibit C

Post-Closing Obligations

 

1. Within 30 days following the date hereof (or such later date as Lender may agree in its sole discretion), Administrative Borrower shall deliver to Lender updates, if such updates are necessary, to Schedule A-1, Schedule A-2, and Schedule D-1 to the Credit Agreement, in form and substance satisfactory to Lender.

 

2. Within 30 days following the date hereof (or such later date as Lender may agree in its sole discretion), Administrative Borrower shall deliver to Lender a fully executed deposit account control agreement, in form and substance satisfactory to Lender, for NEXT’s Deposit Accounts at First Business Bank – Milwaukee.

 

3. Within 30 days following the date hereof (or such later date as Lender may agree in its sole discretion), Administrative Borrower shall deliver to Lender replacement Exhibit A and Exhibit B, in form and substance satisfactory to Lender, to that certain Patent and Trademark Security Agreement dated as of August 9, 2012 (as may be amended, restated, supplemented, or otherwise modified from time to time), by and among IES Residential, Inc., a Delaware corporation, the other Borrowers and Guarantors from time to time party thereto in favor of Lender.

 

4. Within 30 days following the date hereof (or such later date as Lender may agree in its sole discretion), Administrative Borrower shall deliver to Lender (a) a good standing certificate or similar certificate of status issued by the Secretary of State of Wisconsin evidencing that NEXT is qualified to business and in good standing in the State of Wisconsin, and (b) the Articles of Organization of NEXT certified by the Secretary of State of Wisconsin.

 

5. Within 180 days following the date hereof (or such later date as Lender may agree in its sole discretion), Administrative Borrower shall deliver to Lender evidence, in form and substance satisfactory to Lender, that NEXT’s Deposit Accounts at First Business Bank – Milwaukee have been transferred to Wells Fargo Bank, National Association or one of its affiliates.
EX-10.4

Exhibit 10.4

SECOND AMENDMENT TO

SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT (this “Amendment”), dated August 2, 2017, is made and entered into by and among IES HOLDINGS, INC., a Delaware corporation, on behalf of itself and each other Borrower and Guarantor (the “Administrative Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Lender”).

RECITALS

A.    WHEREAS, Borrowers, Guarantors and Lender have entered into that certain Second Amended and Restated Credit and Security Agreement dated as of April 10, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.

B.    WHEREAS, Administrative Borrower, on behalf of itself and each other Borrower and Guarantor, has requested that Lender amend certain provisions in the Credit Agreement as set forth herein.

C.    WHEREAS, Lender has agreed to amend the Credit Agreement on the terms and conditions as set forth herein.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound agree as follows:

ARTICLE I

AMENDMENT

Effective as of the Effective Date (as defined below), the Credit Agreement is hereby amended and supplemented as follows:

1.01    Amendment to Section 8(c).

(a)    Section 8(c) of the Credit Agreement is hereby amended by amending and restating the table set forth therein as follows:

 

Applicable Amount    Applicable Period

$30,000,000

  

For each four quarter period

ending March 31, 2017, June 30, 2017,

September 30, 2017, and December 31, 2017

$32,500,000

   For the four quarter period
ending March 31, 2018

$35,000,000

   For the four quarter period
ending June 30, 2018 and each quarter-end
thereafter


1.02    Amendment to Schedule 1.1.

(a)    Schedule 1.1 of the Credit Agreement is hereby amended by amending and restating the definition of “EBITDA” as follows:

EBITDA” means, with respect to any fiscal period, the consolidated net income (or loss), of Borrowers and their Subsidiaries, minus (a) extraordinary gains, (b) interest income, and (c) non-operating income and income tax benefits and decreases in any change in LIFO reserves, plus (a) stock compensation expense, (b) non-cash extraordinary losses (including, but not limited to, a non-cash impairment charge or write-down), (c) Interest Expense, (d) income taxes, (e) depreciation and amortization and increases in any change in LIFO reserves for such period, and (f) net operating losses and expenses associated with winding down IES Commercial Inc.’s commercial and industrial branches in Denver, Colorado and Roanoke, Virginia, not to exceed $5,000,000 in the aggregate , in each case, determined on a consolidated basis in accordance with GAAP; provided, that if any Loan Party makes an Acquisition after the Closing Date consented to by Lender, EBITDA for such fiscal period shall be calculated after giving pro forma effect thereto assuming that such transaction has occurred on the first day of such period (including pro forma adjustments arising out of events which are directly attributable to such Acquisition, are factually supportable, and are expected to have a continuing impact, in each case to be reasonably agreed to by Lender).

ARTICLE II

NO WAIVER

2.01    No Waiver. Other than as set forth above in Article I hereof, nothing contained in this Amendment shall be construed as an amendment of, consent to, or waiver by, Lender of any covenant or provision of the Credit Agreement, the other Loan Documents, this Amendment, or of any other contract or instrument between any Loan Party and Lender, and the failure of Lender at any time or times hereafter to require strict performance by the Loan Parties of any provision thereof shall not waive, affect or diminish any right of Lender to thereafter demand strict compliance therewith. Lender hereby reserves all rights granted under the Credit Agreement, the other Loan Documents, this Amendment and any other contract or instrument between any Loan Party and Lender.

 

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ARTICLE III

CONDITIONS PRECEDENT

3.01    Conditions to Effectiveness. This Amendment shall become effective only upon the satisfaction in full, in a manner satisfactory to Lender, of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the “Effective Date”):

(a)    Lender shall have received the following documents or items, each in form and substance satisfactory to Lender and its legal counsel (unless such conditions are waived by Lender in its sole discretion):

(i)    an executed copy of this Amendment; and

(ii)    all other documents Lender may reasonably request with respect to any matter relevant to this Amendment or the transactions contemplated hereby, and Borrowers shall have paid Lender, or made arrangements satisfactory to Lender to pay, all Lender Expenses incurred prior to or in connection with the preparation of this Amendment, including the amendment fee described in Section 6.13 hereof.

(b)    After giving effect to this Amendment, the representations and warranties made by each Loan Party contained herein and in the Credit Agreement, as amended hereby, and the other Loan Documents, shall be true and correct in all material respects as of the date hereof, as if those representations and warranties were made for the first time on such date.

(c)    After giving effect to this Amendment, each Loan Party is in compliance with all applicable covenants and agreements contained in the Credit Agreement and the other Loan Documents.

(d)    No Default or Event of Default shall exist under any of the Loan Documents (as amended hereby), and no Default or Event of Default will result under any of the Loan Documents from the execution, delivery or performance of this Amendment.

(e)    All corporate and other proceedings, and all documents instruments and other legal matters in connection with the transactions contemplated by this Amendment shall be satisfactory in form and substance to Lender and its counsel.

(f)    Lender shall have received final credit approval for the Credit Facility and the transactions described in this Amendment.

ARTICLE IV

RATIFICATIONS, REPRESENTATIONS AND WARRANTIES

4.01    Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Credit Agreement and the other Loan Documents, and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Administrative Borrower,

 

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on behalf of itself and each other Loan Party, hereby agrees that all liens and security interest securing payment of the Obligations under the Credit Agreement are hereby collectively renewed, ratified and brought forward as security for the payment and performance of the Obligations. Administrative Borrower, on behalf of itself and each other Loan Party, and Lender agree that the Credit Agreement and the other Loan Documents, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms.

4.02    Representations and Warranties. Administrative Borrower, on behalf of itself and each other Loan Party, hereby represents and warrants, jointly and severally, to Lender as of the date hereof as follows: (a) it is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; (b) the execution, delivery and performance by it of this Amendment, the Credit Agreement and all other Loan Documents executed and/or delivered in connection herewith are within its powers, have been duly authorized, and do not contravene (i) its Governing Documents or (ii) any applicable law; (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with any governmental body or other Person, is required in connection with the execution, delivery, performance, validity or enforceability of this Amendment, the Credit Agreement or any of the other Loan Documents executed and/or delivered in connection herewith by or against it, except for those consents, approvals or authorizations which (i) will have been duly obtained, made or compiled prior to the Effective Date and which are in full force and effect or (ii) the failure to obtain could not individually or in the aggregate reasonably be expected to cause a Material Adverse Change; (d) this Amendment, the Credit Agreement and all other Loan Documents executed and/or delivered in connection herewith have been duly executed and delivered by it; (e) this Amendment, the Credit Agreement and all other Loan Documents executed and/or delivered in connection herewith constitute its legal, valid and binding obligation enforceable against it in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity; (f) no Default or Event of Default exists, has occurred and is continuing or would result by the execution, delivery or performance of this Amendment; (g) each Loan Party is in compliance with all applicable covenants and agreements contained in the Credit Agreement and the other Loan Documents, as amended hereby; and (h) the representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the date hereof as though made on and as of each such date, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and complete on and as of such earlier date).

ARTICLE V

MISCELLANEOUS PROVISIONS

5.01    Survival of Representations and Warranties. All representations and warranties made in the Credit Agreement or the other Loan Documents, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Lender shall affect the representations and warranties or the right of Lender to rely upon them.

 

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5.02    Reference to Credit Agreement. Each of the Credit Agreement and the other Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as amended hereby, are hereby amended so that any reference in the Credit Agreement and such other Loan Documents to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby.

5.03    Expenses of Lender. Administrative Borrower, on behalf of itself and each other Borrower and Guarantor, agrees to pay on demand all reasonable costs and expenses incurred by Lender in connection with any and all amendments, modifications, and supplements to the other Loan Documents, including, without limitation, the reasonable costs and fees of Lender’s legal counsel, and all costs and expenses incurred by Lender in connection with the enforcement or preservation of any rights under the Credit Agreement, as amended hereby, or any other Loan Documents, including, without, limitation, the costs and fees of Lender’s legal counsel.

5.04    Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable.

5.05    Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender and each Loan Party and their respective successors and assigns, except that no Loan Party may assign or transfer any of its respective rights or obligations hereunder without the prior written consent of Lender.

5.06    Counterparts. This Amendment may be executed in one or more counterparts (including by electronic ..pdf), each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument.

5.07    Effect of Waiver. No consent or waiver, express or implied, by Lender to or for any breach of or deviation from any covenant or condition by any Loan Party shall be deemed a consent to or waiver of any other breach of the same or any other covenant, condition or duty.

5.08    Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment.

5.09    Applicable Law. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

5.10    Final Agreement. THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, EACH AS MODIFIED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS MODIFIED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN

 

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THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AGREEMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE BORROWERS AND LENDER.

5.11    Release. ADMINISTRATIVE BORROWER, ON BEHALF OF ITSELF AND EACH LOAN PARTY, HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY ANY LOANS OR EXTENSIONS OF CREDIT FROM LENDER TO THE BORROWERS UNDER THE CREDIT AGREEMENT OR THE OTHER LOAN DOCUMENTS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. ADMINISTRATIVE BORROWER, ON BEHALF OF ITSELF AND EACH LOAN PARTY, HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH ANY LOAN PARTY MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS OR EXTENSIONS OF CREDIT FROM LENDER TO THE BORROWERS UNDER THE CREDIT AGREEMENT OR THE OTHER LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE CREDIT AGREEMENT OR LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.

5.12    Consent of Guarantors. The Administrative Borrower, on behalf of each Guarantor, hereby (a) consents to the transactions contemplated by this Amendment; and (b) agrees that the Credit Agreement and the other Loan Documents (as amended, restated, supplemented or otherwise modified from time to time) are and shall remain in full force and effect. Although each Guarantor has been informed of the matters set forth herein and Administrative Borrower, on behalf of the Guarantors, has acknowledged and agreed to same, it understands that the Lender has no obligation to inform it of such matters in the future or to seek its acknowledgment or agreement to future amendments, and nothing herein shall create such a duty. Administrative Borrower, on behalf of each Guarantor, acknowledges that its Guaranty is in full force and effect and ratifies the same, acknowledges that the undersigned has no defense, counterclaim, set-off or any other claim to diminish the undersigned’s liability under such documents, that the undersigned’s consent is not required to the effectiveness of the Credit Agreement and that no consent by it is required for the effectiveness of any future amendment, modification, forbearance or other action with respect to the Collateral, the Advances, the Credit Agreement or any of the other Loan Documents.

 

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5.13    Amendment Fee. Administrative Borrower, on behalf of itself and each other Borrower and Guarantor, shall pay to Lender an amendment fee of $15,000, which shall be fully earned and payable on the date hereof.

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IN WITNESS WHEREOF, the undersigned has executed this Amendment as of the date first above written.

 

ADMINISTRATIVE BORROWER:

 

IES HOLDINGS, INC.

By:  

  /s/ Tracy A. McLauchlin

Name: Tracy A. McLauchlin
Title: Senior Vice President, CFO & Treasurer


WELLS FARGO BANK, NATIONAL ASSOCIATION
By:  

  /s/ Howard I. Handman

Name: Howard I. Handman
Title: Authorized Signatory
EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert W. Lewey, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of IES Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: August 4, 2017

 

/s/ ROBERT W. LEWEY

Robert W. Lewey

President

as Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Tracy A. McLauchlin, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of IES Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: August 4, 2017

 

/s/ TRACY A. MCLAUCHLIN

Tracy A. McLauchlin

Senior Vice President, Chief Financial Officer and Treasurer

as Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of IES Holdings, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2017 (the “Report”), I, Robert W. Lewey, President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 4, 2017     By:  

/s/ ROBERT W. LEWEY

                  Robert W. Lewey
     

                President

    as Principal Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of IES Holdings, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2017 (the “Report”), I, Tracy A. McLauchlin, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 4, 2017     By:  

/s/ TRACY A. MCLAUCHLIN

      Tracy A. McLauchlin
     

Senior Vice President, Chief Financial Officer and Treasurer

as Principal Financial Officer