SEC Filing | IES Holdings, Inc.

View:

iesc-20200331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM			10-Q

(Mark One)

☑

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

For the quarterly period ended

March 31, 2020

☐

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			001-13783

https://cdn.kscope.io/d626500471ee39e9f44e9d895ead992d-iesc-20200331_g1.gif

IES Holdings, Inc.

(Exact name of registrant as specified in its charter)


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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

IESC

NASDAQ Global Market

Rights to Purchase Preferred Stock

IESC

NASDAQ Global Market

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 every Interactive Data File required to be submitted 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 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

☐

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 May 1, 2020, there were 21,073,719 shares of common stock outstanding.

IES HOLDINGS, INC. AND SUBSIDIARIES

INDEX



			Page
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2020 and September 30, 2019	6
		Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 20 20 and 2 019	7
		Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended March 31, 20 20 and 2019	9
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 20 20 and 20 19	10
		Notes to Condensed Consolidated Financial Statements	11
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
	Item 4. Controls and Procedures			38
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings			38
	Item 1A. Risk Factors			39
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
	Item 3. Defaults Upon Senior Securities			41
	Item 4. Mine Safety Disclosures			41
	Item 5. Other Information			42
	Item 6. Exhibits			42
	Signatures			43

PART I. FINANCIAL INFORMATION

DEFINITIONS

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

•the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for job site closures or work stoppages, supply chain disruptions, construction delays, reduced demand for our services, our ability to collect from our customers, or illness of management or other employees;

•the ability of our controlling stockholder to take action not aligned with other stockholders;

•the sale or disposition of all or any portion of the shares of our common stock held by our controlling stockholder, which, could trigger change of control provisions in a number of our material agreements, including our financing and surety arrangements and our executive severance plan, as well as exercisability of the purchase rights under our tax benefit protection plan;

•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 or write-downs on deferred tax assets;

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

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

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

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

•the relatively low trading volume of our common stock, as a result of which it could be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares;

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

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

•a general reduction in the demand for our services;

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

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

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

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

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

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

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

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

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

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

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

•our ability to successfully manage projects;

•inaccurate estimates used when entering into fixed-priced contracts;

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

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

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

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

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

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

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

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

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

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

•the recognition of tax benefits related to uncertain tax positions;

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

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

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

•liabilities under laws and regulations protecting the environment; and

•loss of key personnel and effective transition of new management.

You should understand that the foregoing, as well as other risk factors discussed in this document and those listed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, 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 without limitation information concerning our controlling stockholder, 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.

Item 1. Financial Statements

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Information)


			March 31,			September 30,
			2020			2019
			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	43,799		$	18,934
	Accounts receivable:
		Trade, net of allowance of $1,154 and $1,184, respectively	180,593			186,279
		Retainage	37,015			29,214
	Inventories			22,288			21,543
	Costs and estimated earnings in excess of billings			27,478			29,860
	Prepaid expenses and other current assets			12,651			10,625
Total current assets							323,824		296,455
Property and equipment, net							26,064		25,746
Goodwill							60,542		50,622
Intangible assets, net							43,810		26,623
Deferred tax assets							33,877		40,874
Operating right of use assets							34,804		—
Other non-current assets							3,423		4,938
Total assets							$	526,344	$	445,258
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable and accrued expenses			164,919			152,909
	Billings in excess of costs and estimated earnings			45,886			40,563
Total current liabilities							210,805		193,472
Long-term debt							28,986		299
Operating long-term lease liabilities							23,457		—
Other non-current liabilities							2,445		1,945
Total liabilities							265,693		195,716
Noncontrolling interest							2,846		3,294
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 21,071,666 and 21,165,011 outstanding, respectively	220			220
	Treasury stock, at cost, 977,863 and 884,518 shares, respectively			(15,643)			(12,483)
	Additional paid-in capital			192,895			192,911
	Retained earnings			80,333			65,600
Total stockholders’ equity							257,805		246,248
Total liabilities and stockholders’ equity							$	526,344	$	445,258

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

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Share Information)

(Unaudited)


		Three Months Ended March 31,
		2020				2019
Revenues				$	291,277		$	256,914
Cost of services					240,013			213,679
	Gross profit			51,264			43,235
Selling, general and administrative expenses					42,036			35,070
Contingent consideration					—			(149)
Loss (gain) on sale of assets					(1)			98
	Operating income			9,229			8,216
Interest and other (income) expense:
Interest expense					320			535
Other (income) expense, net					268			(112)
Income from operations before income taxes					8,641			7,793
Provision for income taxes					2,428			2,336
Net income					6,213			5,457
Net loss attributable to noncontrolling interest					18			32
Comprehensive income attributable to IES Holdings, Inc.				$	6,231		$	5,489

Earnings per share attributable to IES Holdings, Inc.:
	Basic		$	0.30		$	0.26
	Diluted		$	0.29		$	0.26

Shares used in the computation of earnings per share:
	Basic			20,847,245			21,139,096
	Diluted			21,122,310			21,379,746

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

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In Thousands, Except Share Information)

(Unaudited)


		Six Months Ended March 31,
		2020				2019
Revenues				$	567,320		$	500,756
Cost of services					465,841			415,920
	Gross profit			101,479			84,836
Selling, general and administrative expenses					79,908			67,156
Contingent consideration					—			(115)
Loss (gain) on sale of assets					(37)			95
	Operating income			21,608			17,700
Interest and other (income) expense:
Interest expense					559			1,082
Other (income) expense, net					409			(65)
Income from operations before income taxes					20,640			16,683
Provision for income taxes					5,897			4,243
Net income					14,743			12,440
Net income attributable to noncontrolling interest					(10)			(67)
Comprehensive income attributable to IES Holdings, Inc.				$	14,733		$	12,373

Earnings per share attributable to IES Holdings, Inc.:
	Basic		$	0.70		$	0.58
	Diluted		$	0.69		$	0.58

Shares used in the computation of earnings (loss) per share:
	Basic			20,865,460			21,187,834
	Diluted			21,132,519			21,424,522

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

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

(In Thousands, Except Share Information)


		Three Months Ended March 31, 2020
		Common Stock							Treasury Stock								Retained Earnings	Total Stockholders' Equity
		Shares		Amount				Shares	Amount			APIC
BALANCE, December 31, 2019			22,049,529		$	220		(826,353)	$	(11,998)	$	192,499	$	74,057	$	254,778
	Issuances under compensation plans	—			—		21,171		308		(308)		—		—
	Acquisition of treasury stock	—			—		(178,431)		(4,037)		—		—		(4,037)
	Options exercised	—			—		5,750		84		(50)		—		34
	Non-cash compensation	—			—		—		—		754		—		754
	Decrease in noncontrolling interest	—			—		—		—		—		45		45
	Net income attributable to IES Holdings, Inc.	—			—		—		—		—		6,231		6,231
BALANCE, March 31, 2020			22,049,529		$	220		(977,863)	$	(15,643)	$	192,895	$	80,333	$	257,805


		Three Months Ended March 31, 2019
		Common Stock							Treasury Stock								Retained Earnings	Total Stockholders' Equity
		Shares		Amount				Shares	Amount			APIC
BALANCE, December 31, 2018			22,049,529		$	220		(763,426)	$	(8,896)	$	194,607	$	39,300	$	225,231
	Issuances under compensation plans	—			—		287,186		3,653		(3,653)		—		—
	Acquisition of treasury stock	—			—		(191,442)		(3,200)		—		—		(3,200)
	Non-cash compensation	—			—		—		—		625		—		625
	Net income attributable to IES Holdings, Inc.	—			—		—		—		—		5,489		5,489
BALANCE, March 31, 2019			22,049,529		$	220		(667,682)	$	(8,443)	$	191,579	$	44,789	$	228,145


		Six Months Ended March 31, 2020
		Common Stock							Treasury Stock								Retained Earnings	Total Stockholders' Equity
		Shares		Amount				Shares	Amount			APIC
BALANCE, September 30, 2019			22,049,529		$	220		(884,518)	$	(12,483)	$	192,911	$	65,600	$	246,248
	Issuances under compensation plans	—			—		116,580		1,650		(1,650)		—		—
	Acquisition of treasury stock	—			—		(215,675)		(4,894)		—		—		(4,894)
	Options exercised	—			—		5,750		84		(50)		—		34
	Non-cash compensation	—			—				—		1,684		—		1,684
	Net income attributable to IES Holdings, Inc.	—			—		—		—		—		14,733		14,733
BALANCE, March 31, 2020			22,049,529		$	220		(977,863)	$	(15,643)	$	192,895	$	80,333	$	257,805


		Six Months Ended March 31, 2019
		Common Stock							Treasury Stock								Retained Earnings	Total Stockholders' Equity
		Shares		Amount				Shares	Amount			APIC
BALANCE, September 30, 2018			22,049,529		$	220		(843,993)	$	(8,937)	$	196,810	$	32,314	$	220,407
	Issuances under compensation plans	—			—		499,874		5,905		(5,905)		—		—
	Acquisition of treasury stock	—			—		(323,563)		(5,411)		—				(5,411)
	Cumulative effect adjustment from adoption of new accounting standard	—			—		—		—		—		102		102
	Non-cash compensation	—			—		—		—		674		—		674
	Net loss attributable to IES Holdings, Inc.	—			—		—		—		—		12,373		12,373
BALANCE, March 31, 2019			22,049,529		$	220		(667,682)	$	(8,443)	$	191,579	$	44,789	$	228,145

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

IES HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)


			Six Months Ended March 31,
			2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	14,743		$	12,440
	Adjustments to reconcile net income to net cash provided by operating activities:
		Bad debt expense		281			248
		Deferred financing cost amortization		204			156
		Depreciation and amortization		5,597			4,846
		Loss (gain) on sale of assets		(37)			95
		Non-cash compensation expense		1,684			674
		Deferred income taxes		4,543			4,243
	Changes in operating assets and liabilities:
		Accounts receivable		8,595			(9,616)
		Inventories		(220)			(2,873)
		Costs and estimated earnings in excess of billings		2,847			3,152
		Prepaid expenses and other current assets		(8,942)			(764)
		Other non-current assets		1,543			(1,370)
		Accounts payable and accrued expenses		(2,035)			(144)
		Billings in excess of costs and estimated earnings		4,113			(948)
		Other non-current liabilities		(195)			(736)
Net cash provided by operating activities						32,721			9,403
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment				(2,898)			(3,929)
	Proceeds from sale of assets				53			7
	Cash paid in conjunction with business combinations				(28,952)			—
Net cash used in investing activities						(31,797)			(3,922)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Borrowings of debt				592,422			122
	Repayments of debt				(563,093)			(10,144)
	Cash paid for finance leases				(71)			—
	Distribution to noncontrolling interest				(457)			(137)
	Purchase of treasury stock				(4,894)			(5,411)
	Options exercised				34			—
Net cash provided by (used in) financing activities						23,941			(15,570)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						24,865			(10,089)
CASH, CASH EQUIVALENTS, beginning of period						18,934			26,247
CASH, CASH EQUIVALENTS, end of period					$	43,799		$	16,158

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
		Cash paid for interest	$	410		$	1,008
		Cash paid for income taxes (net)	$	522		$	523

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

IES HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements

(All Amounts in Thousands Except Share Amounts)

(Unaudited)

1. BUSINESS AND ACCOUNTING POLICIES

Description of the Business

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

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

•Communications – Nationwide provider of technology infrastructure services, including the design, build, and maintenance of the communications infrastructure within data centers for co-location and managed hosting customers for both large corporations and independent businesses.

•Infrastructure Solutions – Provider of electro-mechanical solutions for industrial operations, including apparatus repair and custom-engineered products such as generator enclosures to be used in data centers and other industrial applications.

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

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

Seasonality and Quarterly Fluctuations

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

Basis of Financial Statement Preparation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of IES, our 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, 2019. In the opinion of management, the unaudited Condensed Consolidated Financial Statements contained in this report include all known accruals and adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods reported herein. Any such adjustments are of a normal recurring nature.

Noncontrolling Interest

In connection with our acquisitions of STR Mechanical, LLC in fiscal 2016 and NEXT Electric, LLC (“NEXT Electric”) in fiscal 2017, we acquired an 80 percent interest in each of the entities, with the remaining 20 percent interest in each such entity being retained by the respective third party seller. The interests retained by those third party sellers are identified on our Condensed Consolidated Balance Sheets as noncontrolling interest, classified outside of permanent equity. Under the terms of each entity’s operating agreement, after five years from the date of the acquisition, we may elect to purchase, or the third party seller may require us to purchase, part or all of the remaining 20 percent interest in the applicable entity. The purchase price is variable, based on a multiple of earnings as defined in the operating agreements. Therefore, this noncontrolling interest is carried at the greater of the balance determined under Accounting Standards Codification (“ASC”) 810 and the redemption amounts assuming the noncontrolling interests

were redeemable at the balance sheet date. If all of these interests had been redeemable at March 31, 2020, the redemption amount would have been $2,434.

Leases

We enter into various contractual arrangements for the right to use facilities, vehicles and equipment. We evaluate whether each of these arrangements contains a lease and classify all identified leases as either operating or finance. If the arrangement is subsequently modified, we re-evaluate our classification. The lease term generally ranges from two to ten years for facilities and three to five years for vehicles and equipment. Our lease terms may include the exercise of renewal or termination options when it is reasonably certain these options will be exercised. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.

Upon commencement of the lease, we recognize a lease liability and corresponding right-of use ("ROU") asset for all leases with an initial term greater than twelve months. Lease liabilities represent the present value of our future lease payments over the expected lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate as the discount rate in calculating the present value of the lease payments. The incremental borrowing rate is determined by identifying a synthetic credit rating for the consolidated company, where treasury functions are centrally managed, and adjusting the interest rates from associated indexes for differences in credit risk and interest rate risk. We have elected to combine the lease and nonlease components in the recognition of our lease liabilities across all classes of underlying assets. ROU assets represent our right to control the use of the leased asset during the lease and are recognized in an amount equal to the lease liability with adjustments for prepaid or accrued rent, lease incentives or unamortized initial direct costs. Costs associated with operating lease assets are recognized on a straight-line basis over the term of the lease. Our lease assets are tested for impairment in the same manner as long-lived assets used in operations.

Certain lease contracts include obligations to pay for other services, such as operations and maintenance. Where the costs of these services can be identified as fixed or fixed-in-substance, the costs are included as part of the future lease payments. If the cost is not fixed at the inception of the lease, the cost is recorded as a variable cost in the period incurred.

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, 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.

Accounting Standards Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”), which requires companies to consider historical experiences, current market conditions and reasonable and supportable forecasts in the measurement of expected credit losses, with further clarifications made in April 2019 and May 2019 with the issuances of Accounting Standard Updates No. 2019-04 and 2019-05. This update is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, although early adoption is permitted. We are currently evaluating the impact it will have on our Condensed Consolidated Financial Statements. We plan to adopt this standard on October 1, 2020.

In August 2018, the FASB issued Accounting Standard Update No. 2018-13, Fair Value Measurement Disclosure Framework (“ASU 2018-13”), to modify certain disclosure requirements for fair value measurements. Under the new guidance, registrants will need to disclose weighted average information for significant unobservable inputs for all Level 3 fair value measurements. The guidance does not specify how entities should calculate the weighted average, but requires them to explain their calculation. The new guidance also requires disclosing the changes in unrealized gain and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period. This guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, although early adoption is permitted for either the entire standard or only the provisions that eliminate or modify the requirements. We plan to adopt this standard on October 1, 2020, and do not expect the adoption to have a material effect on our Condensed Consolidated Financial Statements.

Accounting Standards Recently Adopted

In February 2016, the FASB issued Accounting Standard Update No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, lessees need to recognize a ROU asset and a lease liability on the Balance Sheet for all leases, other than those that meet the definition of a short-term lease. For income statement purposes, leases must be classified as either operating or finance. Operating leases result in straight-line expense, while finance leases are accounted for similar to capital leases under the previous lease accounting standard. We adopted ASU 2016-02 on October 1, 2019 using a modified retrospective transition approach. Using the optional transition method allowed under Accounting Standard Update No. 2018-11, prior period amounts were not adjusted retrospectively and continue to be reported using the previous accounting standards in effect for the period presented. We elected to utilize all of the available practical expedients with the exception of the practical expedient permitting the use of hindsight when determining the lease term and assessing impairment of ROU assets. Therefore, we did not reassess whether any of our existing or expired contracts contained leases or the classification of or initial direct costs included in our existing or expired leases.

The adoption of ASU 2016-02 resulted in the recognition of ROU assets of approximately $32,434 and operating lease liabilities of approximately $32,237 on our Condensed Consolidated Balance Sheet at the adoption date. The difference between the ROU assets and lease liabilities was primarily due to previously accrued rent expense relating to periods prior to October 1, 2019. The adoption did not have a significant impact on our Condensed Consolidated Statements of Comprehensive Income or Cash Flows. See Note 13, “Leases” for additional discussion of our lease accounting policies and expanded disclosures.

In June 2018, the FASB issued Accounting Standard Update No. 2018-07, Compensation—Stock Compensation (“ASU 2018-07”), to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments for employees, with certain exceptions. Under the new guidance, the cost for nonemployee awards may be lower and less volatile than under current GAAP because the measurement generally will occur earlier and will be fixed at the grant date. This update was adopted as of October 1, 2019 with no impact to our financial statements.

2. CONTROLLING STOCKHOLDER

Tontine Associates, L.L.C. ("Tontine Associates"), together with its affiliates (collectively, “Tontine”), is the Company’s controlling stockholder, owning approximately 57.3 percent of the Company’s outstanding common stock according to a Form 4 filed with the SEC by Tontine on April 3, 2020. Accordingly, Tontine has the ability to exercise significant control over our affairs, including the election of directors and most actions requiring the approval of stockholders.

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

Should Tontine sell or otherwise dispose of all or a portion of its position in IES, a change in ownership of IES could occur. A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability of the Company’s net operating losses (“NOLs”) for federal and state income tax purposes. On November 8, 2016, the Company implemented a 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 in ownership 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 in ownership or protecting the NOLs. Furthermore, a change of 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 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 our Board of Directors since February 2012, and who previously served as Interim Director of Operations from November 2017 to January 2019, as Vice Chairman of the Board from November 2016 to November 2017 and as Chairman of the Board from January 2015 to November 2016. David B. Gendell was an employee of Tontine from 2004 until December 31, 2017.

The Company is party to a sublease agreement with Tontine Associates for corporate office space in Greenwich, Connecticut. The sublease extends through February 27, 2023, with monthly payments due in the amount of approximately $8. Payments by the Company are at a rate consistent with that paid by Tontine Associates to its landlord.

On December 6, 2018, the Company entered into a Board Observer Letter Agreement with Tontine Associates in order to assist Tontine in managing its investment in the Company. Subject to the terms and conditions set forth in the Letter Agreement, the Company granted Tontine the right, at any time that Tontine holds at least 20% of the outstanding common stock of the Company, to appoint a representative to serve as an observer to the Board (the “Board Observer”). The Board Observer, who must be reasonably

acceptable to those members of the Board who are not affiliates of Tontine, shall have no voting rights or other decision making authority. Subject to the terms and conditions set forth in the Letter Agreement, so long as Tontine has the right to appoint a Board Observer, the Board Observer will have the right to attend and participate in meetings of the Board and the committees thereof, subject to confidentiality requirements, and to receive reimbursement for reasonable out-of-pocket expenses incurred in his or her capacity as a Board Observer and such rights to coverage under the Company’s directors’ and officers’ liability insurance policy as are available to the Company’s directors.

3. REVENUE RECOGNITION

Contracts

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

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

Performance Obligations

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

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

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

Variable Consideration

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

Costs of Obtaining a Contract

In certain of our operations, we incur commission costs related to entering into a contract that we only incurred because of that contract. When this occurs, we capitalize that cost and amortize it over the expected term of the contract. At March 31, 2020, we had capitalized commission costs of $59.

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

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by activity and contract type, as these categories reflect how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Our consolidated 2020 and 2019 revenue was derived from the following service activities. Certain prior year amounts have been reclassified to conform to current year presentation. See details in the following tables:


	Three Months Ended March 31,						Six Months Ended March 31,
	2020		2019		2020		2019
Commercial & Industrial	$	65,960	$	79,975	$	133,703	$	152,558
Communications	95,990		70,437		180,279		139,762
Infrastructure Solutions
Industrial Services	10,724		12,145		21,835		24,368
Custom Power Solutions	18,576		22,305		38,748		39,561
Total Infrastructure Solutions	29,300		34,450		60,583		63,929
Residential
Single-family	58,958		51,492		113,832		101,968
Multi-family and Other	41,069		20,560		78,923		42,539
Total Residential	100,027		72,052		192,755		144,507
Total Revenue