IES HOLDINGS, INC.
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" of this Annual Report on
Form 10-K. For additional information, see "Disclosure Regarding Forward Looking
Statements" in Part I of this Annual Report on Form 10-K.
OVERVIEW
Executive Overview
Please refer to Item 1. "Business" of this Annual Report on Form 10-K for a
discussion of the Company's services and corporate strategy. IES Holdings, Inc. ,
a Delaware corporation, is a holding company that owns and manages operating
subsidiaries, comprised of providers of industrial products and infrastructure
services to a variety of end markets. Our operations are currently organized
into four principal business segments: Commercial & Industrial, Communications,
Infrastructure Solutions and Residential.
Industry Trends
Our performance is affected by a number of trends that drive the demand for our services. In particular, the markets in which we operate are exposed to many regional and national trends such as the demand for single and multi-family housing, the need for mission critical facilities as a result of technology-driven advancements, the degree to which in-house maintenance departments outsource maintenance and repair work, output levels and equipment utilization at heavy industrial facilities, demand for our rail and infrastructure services and custom engineered products, and changes in commercial, institutional, public infrastructure and electric utility spending. Over the long term, we believe that there are numerous factors that could positively drive demand and affect growth within the industries in which we operate, including (i) population growth, which will increase the need for commercial and residential facilities, (ii) aging public infrastructure, which must be replaced or repaired, (iii) an increasing demand for data storage, (iv) increased emphasis on environmental and energy efficiency, which may lead to both increased public and private spending, and (v) demand for natural gas which is expected to spur the construction of and modifications to heavy industrial facilities. However, there can be no assurance that we will not experience a decrease in demand for our services due to economic, technological or other factors beyond our control, including weakness in the oil and gas sector, interest rate changes, increases in steel and commodity prices and other economic factors, which may reduce the demand for housing including in theTexas region, where our Residential division operates and may impact levels of construction. For a further discussion of the industries in which we operate, please see Item 1. "Business - Operating Segments" of this Annual Report on Form 10-K. Business Outlook While there are differences among the Company's segments, on an overall basis, increased demand for the Company's services and the Company's previous investment in growth initiatives and other business-specific factors discussed below resulted in aggregate year-over-year revenue growth in fiscal 2019 as compared to fiscal 2018. Among our segments, year-over-year revenue growth rates during fiscal 2019 were driven primarily by organic growth. Provided that no significant deterioration in general economic conditions occurs, the Company expects total revenues from existing businesses to increase on a year-over-year basis during fiscal 2020 due to an increase in overall demand for the services we provide, efforts to increase our market share, and current backlog levels. We remain focused on controlled growth within many of our markets which continue to experience highly competitive margins and increasing costs. To continue to grow our business, including through acquisitions and the funding of working capital, we may require a significant amount of cash. Our ability to generate cash depends on many externally influenced factors, including demand for our services, the availability of projects at margins acceptable to us, the ultimate collectability of our receivables, our ability to borrow on our credit facility, and our ability to raise funds in the capital markets, among many other factors. We anticipate that the combination of cash on hand, cash flows from operations and available capacity under our credit facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. We expect that our fixed asset requirements will range from$5.0 million to$7.0 million for the fiscal year ending onSeptember 30, 2020 , and we may acquire these assets either through capital expenditures or through lease agreements. 22
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RESULTS OF OPERATIONS
We report our operating results across our four operating segments: Commercial &
Industrial, Communications, Infrastructure Solutions and Residential. Expenses
associated with our corporate office are classified separately. The following
table presents selected historical results of operations of IES, as well as the
results of acquired businesses from the dates acquired.
Year Ended September 30,
2019 2018 2017
$ % $ % $ %
(Dollars inthousands, Percentage of revenues)
Revenues$ 1,076,996 100.0 % $
876,828 100.0 %
Cost of services 894,893 83.1 % 726,866 82.9 % 670,246 82.7 %
Gross profit 182,103 16.9 %
149,962 17.1 % 140,498 17.3 %
Selling, general and administrative
expenses 140,575 13.1 % 123,920 14.1 % 120,370 14.8 %
Contingent consideration (374 ) - % 103 - % (145 ) - %
Loss (gain) on sale of assets 52 - % (15 ) - % (69 ) - %
Operating income 41,850 3.9 %
25,954 3.0 % 20,342 2.5 %
Interest and other expense, net 1,709 0.2 % 1,606 0.2 % 1,537 0.2 %
Operating income before income taxes 40,141 3.7 % 24,348 2.8 % 18,805 2.3 %
Provision (benefit) for income taxes
(1) 6,663 0.6 % 38,151 4.4 % 5,211 0.6 %
Net income (loss) 33,478 3.1 % (13,803 ) (1.6 )% 13,594 1.7 %
Net income attributable to
noncontrolling interest (272 ) - % (354 ) - % (172 ) - % Net income (loss) attributable to IES Holdings, Inc.$ 33,206 3.1 % $
(14,157 ) (1.6 )%
(1)The year ended
2019 Compared to 2018
Consolidated revenues for the year endedSeptember 30, 2019 , were$200.2 million higher than for the year endedSeptember 30, 2018 , an increase of 22.8%, with increases at all of our operating segments, driven by strong demand. Our overall gross profit percentage decreased slightly to 16.9% during the year endedSeptember 30, 2019 , as compared to 17.1% during the year endedSeptember 30, 2018 . Gross profit as a percentage of revenue increased at our Infrastructure Solutions and Residential segments but decreased at our Commercial & Industrial and Communications segments, as discussed in further detail for each segment below. Selling, general and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and benefits related to corporate, segment and branch management (including incentive-based compensation), occupancy and utilities, training, professional services, information technology costs, consulting fees, travel and certain types of depreciation and amortization. We allocate certain corporate selling, general and administrative costs across our segments as we believe this more accurately reflects the costs associated with operating each segment. During the year endedSeptember 30, 2019 , our selling, general and administrative expenses were$140.6 million , an increase of$16.7 million , or 13.4%, over the year endedSeptember 30, 2018 , driven by increased personnel costs at our operating segments in connection with their growth. This increase also includes a$4.2 million increase in expenses at the corporate level, primarily related to an increase in stock-based compensation expense, as well as a severance payment to our former President, who stepped down inMarch 2019 . However, selling, general and administrative expense as a percentage of revenue decreased from 14.1% for the year endedSeptember 30, 2018 , to 13.1% for the year endedSeptember 30, 2019 , as we benefited from the increased scale of our operations. 2018 Compared to 2017 Consolidated revenues for the year endedSeptember 30, 2018 , were$66.1 million higher than for the year endedSeptember 30, 2017 , an increase of 8.2%. Revenues increased within our Commercial & Industrial, Infrastructure Solutions, and Residential segments driven by an increase in demand for their service offerings combined with continued improvement of conditions in the markets in which they operate. Businesses acquired in fiscal 2017 and 2018 contributed$61.0 million of the revenue increase year over year, partially offset by 23 -------------------------------------------------------------------------------- a$23.7 million decrease in revenue at theDenver and Roanoke branches of our Commercial & Industrial segment, where the wind-down of operations that occurred over the last 18 months is substantially complete. Our overall gross profit percentage decreased slightly to 17.1% during the year endedSeptember 30, 2018 , as compared to the year endedSeptember 30, 2017 . Businesses acquired in fiscal 2017 and 2018 contributed an additional$6.6 million of gross profits for the year endedSeptember 30, 2018 , as compared with the year endedSeptember 30, 2017 . Gross profit as a percentage of revenue increased at our Commercial & Industrial and Communications segments and decreased at our Infrastructure Solutions and Residential segments, as discussed in further detail for each segment below. During the year endedSeptember 30, 2018 , our selling, general and administrative expenses were$123.9 million , an increase of$3.6 million , or 2.9%, as compared to the year endedSeptember 30, 2017 . The increase is primarily attributable to expense incurred at businesses acquired during fiscal 2017 and 2018, which contributed$6.0 million of the increase year over year. This increase was partly offset by a reduction in variable compensation expense. On a consolidated basis, our selling, general and administrative expense decreased slightly as a percentage of revenue from 14.8% for the year endedSeptember 30, 2017 , to 14.1% for the year endedSeptember 30, 2018 , largely as a result of decreased personnel costs and intangible amortization expense. Commercial & Industrial 2019 Compared to 2018 Year Ended September 30, 2019 2018 $ % $ % (Dollars in thousands, Percentage of revenues) Revenue$ 305,624 100.0 %$ 274,299 100.0 % Cost of services 275,722 90.2 % 244,656 89.2 % Gross Profit 29,902 9.8 % 29,643 10.8 % Selling, general and administrative expenses 27,815 9.1 % 27,031 9.9 % Contingent consideration - - % (100 ) - % Gain on sale of assets (30 ) - % (37 ) - % Operating income 2,117 0.7 % 2,749 1.0 %
Revenue. Revenues in our Commercial & Industrial segment increased
Gross Profit. Our Commercial & Industrial segment's gross profit during the year endedSeptember 30, 2019 increased by$0.3 million , or 0.9%, as compared to the year endedSeptember 30, 2018 . We benefited from higher volumes; however, these benefits were offset by certain project inefficiencies during the second half of the year. As a percentage of revenue, gross profit decreased from 10.8% for the year endedSeptember 30, 2018 , to 9.8% for the year endedSeptember 30, 2019 , as a result of these project inefficiencies. Selling, General and Administrative Expenses. Our Commercial & Industrial segment's selling, general and administrative expenses during the year endedSeptember 30, 2019 , increased$0.8 million , or 2.9%, compared to the year endedSeptember 30, 2018 , but decreased 1.0% as a percentage of revenue, as we benefited from the increased scale of our operations and a focus on controlling costs. 24
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2018 Compared to 2017
Year Ended September 30,
2018 2017
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 274,299 100.0 % $ 227,606 100.0 %
Cost of services 244,656 89.2 % 208,619 91.7 %
Gross profit 29,643 10.8 % 18,987 8.3 %
Selling, general and administrative expenses 27,031 9.9 % 20,170 8.8 %
Contingent consideration (100 ) - % - - %
Gain on sale of assets (37 ) - % (32 ) - %
Operating income (loss) 2,749 1.0 % (1,151 ) (0.5 )%
Revenue. Revenues in our Commercial & Industrial segment increased$46.7 million , or 20.5%, during the year endedSeptember 30, 2018 , as compared to the year endedSeptember 30, 2017 . The increase in revenue over this period was driven by our 2017 business acquisitions, which contributed$42.7 million of additional revenue during the year endedSeptember 30, 2018 compared to the year endedSeptember 30, 2017 . This increase was partly offset by a$23.7 decrease in revenue attributable to the winding down of operations at ourDenver andRoanoke locations for the year endedSeptember 30, 2018 , as compared with the year endedSeptember 30, 2017 . Additionally, increased bid volume at several of our branches and improving market conditions in certain areas also contributed to the overall increase in revenues. Gross Profit. Our Commercial & Industrial segment's gross profit during the year endedSeptember 30, 2018 increased by$10.7 million , or 56.1%, as compared to the year endedSeptember 30, 2017 . As a percentage of revenue, gross profit increased from 8.3% for the year endedSeptember 30, 2017 , to 10.8% for the year endedSeptember 30, 2018 . The increase was driven by$5.9 million of additional gross profit contributed by our fiscal 2017 business acquisitions during the year endedSeptember 30, 2018 , compared to the year endedSeptember 30, 2017 . Additionally, for the year endedSeptember 30, 2018 , gross margin at ourDenver and Roanoke branches, where the wind down of operations is substantially complete, improved by$4.7 million compared with the year endedSeptember 30, 2017 . This increase was partly offset by a$1.9 million charge to adjust the contract value on a large project based on the terms of a memorandum of agreement. Selling, General and Administrative Expenses. Our Commercial & Industrial segment's selling, general and administrative expenses during the year endedSeptember 30, 2018 , increased$6.9 million , or 34.0%, compared to the year endedSeptember 30, 2017 , and increased 1.1% as a percentage of revenue. The increase was driven by our fiscal 2017 business acquisitions, where selling, general and administrative expense for the year endedSeptember 30, 2018 , increased by$4.1 million . The remaining increase relates primarily to employee expense associated with management hired to provide additional oversight at the regional and branch levels. During fiscal 2017, we completed a detailed review of the operations of our Commercial & Industrial segment and decided to wind down operations at ourDenver, Colorado andRoanoke, Virginia branches within our Commercial & Industrial segment. AtSeptember 30, 2018 , we had approximately$1.5 million of backlog remaining at these branches. The following table summarizes the results of ourDenver and Roanoke branches, which are included in the consolidated Commercial & Industrial segment results shown above: Year Ended September 30, 2018 2017 Revenues$ 8,572 $ 32,231 Cost of services 9,441 37,819 Selling, general and administrative expenses 1,772 2,848 Gain on sale of assets (1 ) (27 ) Operating loss$ (2,640 ) $ (8,409 ) 25
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Communications
2019 Compared to 2018
Year Ended September 30,
2019 2018
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 321,246 100.0 % $ 219,655 100.0 %
Cost of services 264,746 82.4 % 179,518 81.7 %
Gross Profit 56,500 17.6 % 40,137 18.3 %
Selling, general and administrative expenses 31,850 9.9 % 26,003 11.8 %
Contingent consideration (97 ) - % (85 ) - %
Gain on sale of assets (6 ) - % (4 ) - %
Operating Income 24,753 7.7 % 14,223 6.5 %
Revenue. Our Communications segment's revenues increased by $101.6 million , or
46.3%, during the year ended September 30, 2019 , compared to the year ended
September 30, 2018 . This increase primarily resulted from increased demand from
several of our data center customers. Revenues in our Communications segment can
vary from period to period based on the capital spending cycles of our
customers.
Gross Profit. Our Communications segment's gross profit during the year ended
September 30, 2019 , increased $16.4 million , or 40.8%, as compared to the year
ended September 30, 2018 . While total gross profits increased in connection with
higher volumes, gross profit as a percentage of revenue decreased 0.7% to 17.6%
for the year ended September 30, 2019 , as we took on a larger proportion of
cost-plus arrangements. These arrangements provide us with a reimbursement for
our costs plus a markup, and are typically lower margin, but also lower risk, as
compared with our fixed-cost arrangements.
Selling, General and Administrative Expenses. Our Communications segment's
selling, general and administrative expenses increased $5.8 million , or 22.5%
during the year ended September 30, 2019 , as compared to the year ended
September 30, 2018 . The increase is a result of higher personnel cost,
particularly related to continuing investment to support the growth of the
business, along with higher incentive compensation in connection with improved
profitability and cash flows. Selling, general and administrative expenses as a
percentage of revenues in the Communications segment decreased by 1.9% to 9.9%
of segment revenue during the year ended September 30, 2019 , compared to the
year ended September 30, 2018 , as we benefited from the increased scale of our
operations.
2018 Compared to 2017
Year Ended September 30,
2018 2017
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 219,655 100.0 % $ 225,275 100.0 %
Cost of services 179,518 81.7 % 187,419 83.2 %
Gross Profit 40,137 18.3 % 37,856 16.8 %
Selling, general and administrative expenses 26,003 11.8 % 24,219 10.8 %
Contingent consideration (85 ) - % - - %
Gain on sale of assets (4 ) - % (1 ) - %
Operating Income 14,223 6.5 % 13,638 6.0 %
Revenue. Our Communications segment's revenues decreased by $5.6 million , or
2.5%, during the year ended September 30, 2018 , as compared to the year ended
September 30, 2017 . This decrease in revenue was primarily the result of two
large projects with non-recurring customers we completed in fiscal 2017: $7.9
million of revenue from a large system upgrade project for a school district,
and $5.6 million related to construction of a sporting venue. The decrease in
revenue was offset by growth with our data center customers, as well as the
acquisition of Azimuth Communications, Inc. ("Azimuth"), which contributed $4.3
million of additional revenue during the year ended September 30, 2018 compared
to the year ended September 30, 2017 . Our revenues for the year ended September
30, 2018 , were also affected by the timing of capital spending by certain of our
data center customers. Revenues in our Communications segment can vary based on
the capital spending cycles of our customers.
26
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Gross Profit. Our Communications segment's gross profit during the year ended
September 30, 2018 , increased $2.3 million , or 6.0%, as compared to the year
ended September 30, 2017 . Gross profit as a percentage of revenue increased 1.5%
to 18.3% for the year ended September 30, 2018 . The increase was driven
primarily by improved project execution. As revenue growth slowed in 2018, our
margins benefitted from lower training and hiring costs that often affect us
during periods of higher growth. Additionally, our acquisition of Azimuth during
fiscal 2018 contributed $1.0 million of additional gross profit during the year
ended September 30, 2018 , compared to the year ended September 30, 2017 .
Selling, General and Administrative Expenses. Our Communications segment's
selling, general and administrative expenses increased $1.8 million , or 7.4%
during the year ended September 30, 2018 , as compared to the year ended
September 30, 2017 . Selling, general and administrative expenses as a percentage
of revenues in the Communications segment increased to 11.8% of segment revenue
during the year ended September 30, 2018 , compared to 10.8% for the year ended
September 30, 2017 . The increase was driven by our acquisition of Azimuth during
fiscal 2018, which incurred selling, general and administrative expense for the
year ended September 30, 2018 , of $1.6 million , which includes amortization of
intangible assets.
Infrastructure
2019 Compared to 2018
Year Ended September 30,
2019 2018
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 136,790 100.0 % $ 97,163 100.0 %
Cost of services 105,863 77.4 % 75,337 77.5 %
Gross Profit 30,927 22.6 % 21,826 22.5 %
Selling, general and administrative expenses 18,664 13.6 % 18,293 18.8 %
Contingent consideration (277 ) (0.2 )% 288 0.3 %
Loss on sale of assets 105 0.1 % 18 - %
Operating Income 12,435 9.1 % 3,227 3.3 %
Revenue. Revenues in our Infrastructure Solutions segment increased by $39.6
million during the year ended September 30, 2019 , an increase of 40.8% compared
to the year ended September 30, 2018 . The increase in revenue relates primarily
to our generator enclosure business, driven by increased demand for enclosures
to be used at data centers. We also experienced an increase in demand for our
motor repair services.
Gross Profit. Our Infrastructure Solutions segment's gross profit during the
year ended September 30, 2019 , increased by $9.1 million , as compared to the
year ended September 30, 2018 , primarily as a result of increased volumes. Gross
profit as a percent of revenue slightly increased to 22.6% for the year ended
September 30, 2019 .
Selling, General and Administrative Expenses. Our Infrastructure Solutions
segment's selling, general and administrative expenses during the year ended
September 30, 2019 , increased by $0.4 million compared to the year ended
September 30, 2018 . However, the selling, general and administrative expenses as
a percentage of revenue decreased from 18.8% for the year ended September 30,
2018 , to 13.6% for the year ended September 30, 2019 . Through a focus on
controlling costs, we were able to scale our business effectively without adding
significant general and administrative expense.
27
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2018 Compared to 2017
Year Ended September 30,
2018 2017
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 97,163 100.0 % $ 83,824 100.0 %
Cost of services 75,337 77.5 % 63,399 75.6 %
Gross Profit 21,826 22.5 % 20,425 24.4 %
Selling, general and administrative expenses 18,293 18.8 % 17,859 21.3 %
Contingent consideration 288 0.3 % (145 ) (0.1 )%
(Gain)/Loss on sale of assets 18 - % (79 ) (0.1 )%
Operating Income 3,227 3.3 % 2,790 3.3 %
Revenue. Revenues in our Infrastructure Solutions segment increased by $13.3
million during the year ended September 30, 2018 , an increase of 15.9% compared
to the year ended September 30, 2017 . The increase was primarily driven by $14.0
million of additional revenue contributed by Freeman Enclosure Systems, LLC
("Freeman"), which we acquired during the second quarter of fiscal 2017. An
increase in revenues from the manufacture of bus duct was offset by a decrease
in revenue from our motor repair business, which remains highly dependent on the
steel industry.
Gross Profit. Our Infrastructure Solutions segment's gross profit during the
year ended September 30, 2018 , increased by $1.4 million , as compared to the
year ended September 30, 2017 . Gross profit as a percent of revenue decreased to
22.5% for the year ended September 30, 2018 . Margins improved year over year at
both our bus duct manufacturing business and our motor repair business. However,
our overall gross margin was affected by the mix of work performed, as Freeman
has lower margins than our motor repair business, but represented a larger
percentage of our total revenues.
Selling, General and Administrative Expenses. Our Infrastructure Solutions
segment's selling, general and administrative expenses during the year ended
September 30, 2018 , increased by $0.4 million compared to the year ended
September 30, 2017 . The increase was primarily the result of $0.3 million
increase in general and administrative costs incurred at Freeman, which was
acquired during the second quarter of fiscal 2017. Additional selling and
administrative costs in support of growth of the business, were largely offset
by a decrease in intangible amortization expense related to the acquisition of
Technibus Inc. in fiscal 2016.
Residential
2019 Compared to 2018
Year Ended September 30,
2019 2018
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 313,336 100.0 % $ 285,711 100.0 %
Cost of services 248,562 79.3 % 227,355 79.6 %
Gross Profit 64,774 20.7 % 58,356 20.4 %Selling, general and administrative expenses 46,864 15.0 %
41,401 14.5 %
(Gain)/Loss on sale of assets (17 ) - % 8 - %
Operating Income 17,927 5.7 % 16,947 5.9 %
Revenue. Our Residential segment's revenues increased by $27.6 million , or 9.7%,
during the year ended September 30, 2019 , as compared to the year ended
September 30, 2018 . The increase was driven by increases in our single-family
business, where revenues increased by $22.0 million , and our multi-family
businesses, where revenues increased by $8.9 million for the year ended
September 30, 2019 , compared with the year ended September 30, 2018 . This
increase was partly offset by a $3.2 million decrease in our solar and service
revenues for the year ended September 30, 2019 , compared with the prior year.
Gross Profit. During the year ended September 30, 2019 , our Residential segment
experienced a $6.4 million , or 11.0%, increase in gross profit as compared to
the year ended September 30, 2018 . The increase in gross profit was driven
primarily by higher volumes. Gross margin as a percentage of revenue increased
0.3% to 20.7% during the year ended September 30, 2019 , as compared with the
year ended September 30, 2018 , as we benefited from improved commodity prices
and the increased scale of our operations.
28
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Selling, General and Administrative Expenses. Our Residential segment
experienced a $5.5 million , or 13.2%, increase in selling, general and
administrative expenses during the year ended September 30, 2019 , compared to
the year ended September 30, 2018 . This increase was driven by increased
compensation expense in connection with a growing business, including both
incentive profit sharing for division management and increased headcount.
Selling, general and administrative expenses as a percentage of revenues in the
Residential segment increased by 0.5% to 15.0% of segment revenue during the
year ended September 30, 2019 .
2018 Compared to 2017
Year Ended September 30,
2018 2017
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 285,711 100.0 % $ 274,039 100.0 %
Cost of services 227,355 79.6 % 210,809 76.9 %
Gross Profit 58,356 20.4 % 63,230 23.1 %
Selling, general and administrative expenses 41,401 14.5 % 43,689 16.0 %
Loss on sale of assets 8 - % 43 - %
Operating Income 16,947 5.9 % 19,498 7.1 %
Revenue. Our Residential segment's revenues increased by $11.7 million , or 4.3%,
during the year ended September 30, 2018 , as compared to the year ended
September 30, 2017 . The increase was driven by our single-family business, where
revenues increased by $28.3 million for the year ended September 30, 2018 ,
compared with the year ended September 30, 2017 . Service and solar revenues also
increased by $4.7 million for the year ended September 30, 2018 , compared with
the prior year. These increases were partly offset by a decrease in multi-family
revenues, which declined by $21.3 million . While backlog was lower at the
beginning of fiscal 2018, we ended fiscal 2018 with backlog up approximately 28%
over prior year.
Gross Profit. During the year ended September 30, 2018 , our Residential segment
experienced a $4.9 million , or 7.7%, decrease in gross profit as compared to the
year ended September 30, 2017 . The decrease in gross profit was driven primarily
by an increase in copper and other commodity prices, as well as an increase in
labor costs, as a result of tightening labor markets. Gross margin as a
percentage of revenue decreased 2.7% to 20.4% during the year ended September
30, 2018 , as compared with the year ended September 30, 2017 .
Selling, General and Administrative Expenses. Our Residential segment
experienced a $2.3 million , or 5.2%, decrease in selling, general and
administrative expenses during the year ended September 30, 2018 , compared to
the year ended September 30, 2017 , driven by decreased compensation expense,
primarily as a result of a decrease of $1.2 million in variable compensation and
incentive costs associated with decreased profitability, partly offset by an
increase in salary and travel costs. Selling, general and administrative
expenses as a percentage of revenues in the Residential segment decreased by
1.5% to 14.5% of segment revenue during the year ended September 30, 2018 .
INTEREST AND OTHER EXPENSE, NET
Year Ended September 30,
2019 2018 2017
(In thousands)
Interest expense $ 1,539 $ 1,658 $ 1,408
Deferred financing charges 318 288 294
Total interest expense 1,857 1,946 1,702
Other income, net (148 ) (340 ) (165 )Total interest and other expense, net 1,709 1,606 1,537
Interest Expense
During the year ended
29
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for the year ended September 30, 2018 , primarily comprised of interest expense
from our revolving credit facility with Wells Fargo, an average letter of credit
balance of $6.6 million under our revolving credit facility and an average
unused line of credit balance of $63.2 million .
For the year ended
PROVISION FOR INCOME TAXES
For the year ended September 30, 2019 , we recorded income tax expense of $6.7
million . Income tax expense was partly offset by a $4.0 million benefit related
to the recognition of previously unrecognized tax benefits.
For the year ended September 30, 2018 , we recorded income tax expense of $38.2
million . Income tax expense was partly offset by a $1.9 million benefit related
to the recognition of previously unrecognized tax benefits. Our income tax
expense included a charge of $31.3 million to re-measure our deferred tax assets
and liabilities to reflect the impact from the enactment of the Tax Cuts and
Jobs Act on December 22, 2017 .
For the year ended September 30, 2017 , we recorded income tax expense of $5.2
million . Income tax expense was partly offset by a $3.7 million benefit related
to the recognition of previously unrecognized tax benefits.
WORKING CAPITAL
During the year ended
During the year endedSeptember 30, 2019 , our current assets exclusive of cash increased to$277.5 million , as compared to$236.4 million as ofSeptember 30, 2018 . The increase primarily relates to a$34.7 million increase in accounts receivable, in connection with growth in our business. Days sales outstanding was 62 as of each ofSeptember 30, 2019 and 2018. 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 year endedSeptember 30, 2019 , our total current liabilities increased by$29.1 million to$193.5 million , compared to$164.4 million as ofSeptember 30, 2018 , primarily related to an increase in accounts payable and accrued liabilities in connection with the growth of our business.
Surety
Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a surety. These bonds provide a guarantee to the customer that we will perform under the terms of our contract and that we will pay our subcontractors and vendors. If we fail to perform under the terms of our contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they incur on our behalf. To date, we have not been required to make any reimbursements to our sureties for bond-related costs. As is common in the surety industry, sureties issue bonds on a project-by-project basis and can decline to issue bonds at any time. We believe that our relationships with our sureties will allow us to provide surety bonds as they are required. However, current market conditions, as well as changes in our sureties' assessment of our operating and financial risk, could cause our sureties to decline to issue bonds for our work. If our sureties decline to issue bonds for our work, our alternatives would include posting other forms of collateral for project performance, such as letters of credit or cash, seeking bonding capacity from other sureties, or engaging in more projects that do not require surety bonds. In addition, if we are awarded a project for which a surety bond is required but we are unable to obtain a surety bond, the result could be a claim for damages by the customer for the costs of replacing us with another contractor. As ofSeptember 30, 2019 , the estimated cost to complete our bonded projects was approximately$88.7 million . We believe the bonding capacity currently provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. 30 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES As ofSeptember 30, 2019 , we had cash and cash equivalents of$18.9 million and$93.5 million of availability under our revolving credit facility. We anticipate that the combination of cash on hand, cash flows from operations and available capacity under our revolving credit facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. Our ability to generate cash flow is dependent on many factors, including demand for our services, the availability of projects at margins acceptable to us, the ultimate collectability of our receivables, and our ability to borrow on our revolving credit facility or raise funds in the capital markets, if needed.
The Revolving Credit Facility
We maintain a
Terms of the Amended Credit Agreement
Borrowings under the Credit Facility may not exceed a "borrowing base" that is
determined monthly by our lenders based on available collateral, primarily
certain accounts receivables, inventories, and equipment. Under the terms of the
Amended Credit Agreement, amounts outstanding bear interest at a per annum rate
equal to a Daily Three Month LIBOR (as defined in the Amended Credit Agreement),
plus an interest rate margin, which is determined quarterly, based on the
following thresholds:
Level Thresholds Interest Rate Margin
I If Liquidity is less than 35% of the Maximum Revolver
Amount at any time during the period 1.75 percentage points
II If Liquidity is greater than or equal to 35% of the Maximum
Revolver Amount at all times during the period and less
than 50% of the Maximum Revolver Amount at any time during
the period 1.50 percentage points
III If Liquidity is greater than or equal to 50% of the Maximum
Revolver Amount at all times during the period 1.25 percentage points
In addition, we are charged monthly in arrears for (1) an unused commitment fee of 0.25% per annum, (2) a collateral monitoring fee of$5 thousand per quarter, (3) a letter of credit fee based on the then-applicable interest rate margin and (4) certain other fees and charges as specified in the Amended Credit Agreement.
The Amended Credit Agreement contains customary affirmative, negative and financial covenants, as well as events of default.
As of
• a Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement), measured quarterly on a trailing four-quarter basis at the end of each quarter, of at least 1.1 to 1.0; and • minimum Liquidity (as defined in the Amended Credit Agreement) of at least twenty percent (20%) of the Maximum Revolver Amount (as defined in the Amended Credit Agreement), or$20 million ; with, for purposes of this covenant, at least fifty percent (50%) of our Liquidity comprised of Excess Availability (as defined in the Amended Credit Agreement).
At
Our Fixed Charge Coverage Ratio 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 anyLoan Party makes an acquisition consented to by Lender after the date of the Amended Credit Agreement, the components of the Fixed Charge Coverage Ratio 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 31 --------------------------------------------------------------------------------
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, increases in any change in LIFO reserves, and losses from the wind-down of ourDenver and Roanoke branches, up to a maximum exclusion of$5 million for a given measurement period in each case, determined on a consolidated basis in accordance with GAAP; provided, that if any Loan party makes an acquisition 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). If in the future our Liquidity falls below$20 million (or Excess Availability falls below 50% of our minimum Liquidity), our Fixed Charge Coverage Ratio is less than 1.1:1.0, 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 any indebtedness we may take on becoming immediately due and payable.
At
Investments
From time to time, the Company may invest in non-controlling positions in the debt or equity securities of other businesses. Our Board of Directors has approved an investment policy that permits the Company to invest our cash in liquid and marketable securities that include equities and fixed income securities. Equity securities may include unrestricted, publicly traded stock that is listed on a major exchange or a national, over-the-counter market and that is appropriate for our portfolio objectives, asset class, and/or investment style, and fixed income securities are required to have an investment grade credit quality at the time of purchase.
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; however, a seasonal decline in working capital may be offset by needs associated with higher growth or acquisitions. Operating activities provided net cash of$38.7 million during the year endedSeptember 30, 2019 , as compared to$12.2 million of net cash provided in the year endedSeptember 30, 2018 . The increase in operating cash flow resulted primarily from an increase in earnings, partly offset by an increase in working capital in support of our growth. In particular increased accounts receivable resulted in cash outflows of$35.3 million , offset by cash inflows of$22.5 million driven by increased accrued liabilities. Operating activities provided net cash of$12.2 million during the year endedSeptember 30, 2018 , as compared to$22.3 million of net cash provided in the year endedSeptember 30, 2017 . The decrease in operating cash flow is the result of an investment in working capital to support the growth of our business. In particular, costs in excess of billings increased by$18.1 million as a result of an increase in cost-plus work, where costs are typically billed later than in our typical fixed-price arrangements, as well as an increase in orders for generator enclosures, which are billed when shipped.
Investing Activities
In the year endedSeptember 30, 2019 , net cash used in investing activities was$5.7 million as compared to$11.9 million of net cash used by investing activities in the year endedSeptember 30, 2018 . Investing activities for the year endedSeptember 30, 2019 , include$6.3 million of capital expenditures. In the year endedSeptember 30, 2018 , net cash used in investing activities was$11.9 million as compared to$24.5 million of net cash used by investing activities in the year endedSeptember 30, 2017 . Investing activities for the year endedSeptember 30, 2018 , include$7.4 million for the acquisition of businesses, as well as$4.6 million of capital expenditures. 32 --------------------------------------------------------------------------------
Financing Activities
Net cash used in financing activities was$40.3 million in the year endedSeptember 30, 2019 , compared to$2.4 million used in the year endedSeptember 30, 2018 . For the year endedSeptember 30, 2019 , we used$119.5 million to repay a portion of our revolving credit facility, partly offset by$89.3 million of additional borrowings. We also used$9.8 million to repurchase our shares in conjunction with our stock repurchase program, as well as to satisfy statutory withholding requirements upon the vesting of employee stock compensation. Financing activities used net cash of$2.4 million in the year endedSeptember 30, 2018 , compared to$2.7 million used in the year endedSeptember 30, 2017 . For the year endedSeptember 30, 2018 , we used$2.1 million for the repurchase of the common stock under the Company's stock repurchase program. We repurchased an aggregate$1.6 million of common stock in open market transactions, pursuant to the stock repurchase program, and we used an additional$0.5 million for the repurchase of common stock to satisfy employee payroll tax withholding obligations. CONTROLLING SHAREHOLDERTontine Associates, L.L.C. ("Tontine Associates "), together with its affiliates (collectively, "Tontine"), is the Company's controlling stockholder, owning approximately 58 percent of the Company's outstanding common stock according to a Form 4 filed with theSEC by Tontine onOctober 3, 2019 . 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. We are a party to a sublease agreement withTontine Associates for corporate office space inGreenwich, Connecticut . The sublease extends throughFebruary 27, 2023 , with monthly payments due in the amount of approximately$8 thousand . The lease has terms at market rates, and payments by the Company are at a rate consistent with that paid byTontine Associates to its landlord. OnDecember 6, 2018 , the Company entered into a Board Observer Letter Agreement (the "Observer Agreement") withTontine Associates in order to assist Tontine in managing its investment in the Company. Subject to the terms and conditions set forth in the Observer 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 shall serve at the discretion of and 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 Observer Agreement, so long as Tontine has the right to appoint aBoard Observer , theBoard 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 aBoard Observer and such rights to coverage under the Company's directors' and officers' liability insurance policy as are available to other directors.Jeffrey L. Gendell was appointed as a member of the Board of Directors and as Chairman of the Board inNovember 2016 . He is the managing member and founder of Tontine, and the brother ofDavid B. Gendell , who has served as a member of our Board of Directors sinceFebruary 2012 , and who previously served as Interim Director of Operations fromNovember 2017 toJanuary 2019 , as Vice Chairman of the Board fromNovember 2016 toNovember 2017 and as Chairman of the Board fromJanuary 2015 toNovember 2016 .David B. Gendell was an employee of Tontine from 2004 untilDecember 31, 2017 . OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As is common in our industry, we have entered into certain off-balance sheet arrangements that expose us to increased risk. Our significant off-balance sheet transactions include commitments associated with non-cancelable operating leases, letter of credit obligations, firm commitments for materials and surety guarantees. We enter into operating leases for many of our vehicle and equipment needs. These leases allow us to retain our cash when we do not own the vehicles or equipment, and we pay a monthly lease rental fee. At the end of the lease, we have no further obligation to the lessor. We may cancel or terminate a lease before the end of its term. Typically, we would be liable to the lessor for various lease cancellation or termination costs and the difference between the fair market value of the leased asset and the implied book value of the leased asset as calculated in accordance with the lease agreement. Some of our customers and vendors require us to post letters of credit 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, 33 --------------------------------------------------------------------------------
we would be required to reimburse our creditor for the letter of credit. At
Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral, as 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. AtSeptember 30, 2019 ,$6.3 million of our outstanding letters of credit were to collateralize our insurance programs. From time to time, we may enter into firm purchase commitments for materials such as copper wire and aluminum wire, among others, which we expect to use in the ordinary course of business. These commitments are typically for terms less than one year and require us to buy minimum quantities of materials at specified intervals at a fixed price over the term. As ofSeptember 30, 2019 , we did not have any significant open purchase commitments. Many of our customers require us to post performance and payment bonds issued by a surety. Those bonds guarantee the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. In the event that we fail to perform under a contract or pay subcontractors and vendors, the customer may demand the surety to pay or perform under our bond. Our relationship with our sureties is such that we will indemnify the sureties for any expenses they incur in connection with any of the bonds they issue on our behalf and may be required to post collateral to support the bonds. To date, we have not incurred any material costs to indemnify our sureties for expenses they incurred on our behalf. As ofSeptember 30, 2019 , our future contractual obligations due bySeptember 30 of each of the following fiscal years for commenced agreements include (in thousands): Less than 1 to 3 3 to 5 More than 1 Year Years Years 5 Years Total Long-term debt obligations $ -$ 299 $ - $ -$ 299 Operating lease obligations 8,101 10,985 5,269 3,595 27,950 Total$ 8,101 $ 11,284 $ 5,269 $ 3,595 $ 28,249
Our other commitments expire by
2020 2021 2022 Thereafter Total
Standby letters of credit$ 3,018 $ 3,450 $ - $ -$ 6,468 Total$ 3,018 $ 3,450 $ - $ -$ 6,468 CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the Consolidated Financial Statements, and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our Consolidated Financial Statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from those estimates. Accordingly, we have identified the accounting principles which we believe are most critical to our reported financial status by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to revenue recognition, accounting for business combinations, the assessment of goodwill and asset impairment, our allowance for doubtful accounts receivable, the recording of our insurance liabilities and estimation of the valuation allowance for deferred tax assets, and unrecognized tax benefits. These accounting policies, as well as others, are described in Note 2, "Summary of Significant Accounting Policies" in the notes to our Consolidated Financial Statements and at relevant sections in this discussion and analysis. Revenue Recognition. We enter into contracts principally on the basis of competitive bids. We frequently negotiate the final terms and prices of those contracts with the customer. Although the terms of our contracts vary considerably, approximately 88% of our revenues are based on either a fixed price or unit price basis in which we agree to do the work for a fixed amount for the entire project (fixed price) or for units of work performed (unit price). Approximately 12% of our revenues are earned from contracts where we are paid on a time and materials basis. Our most significant cost drivers are the cost of labor, the cost of materials and the cost of casualty and 34 -------------------------------------------------------------------------------- health insurance. These costs may vary from the costs we originally estimated. Variations from estimated contract costs along with other risks inherent in performing fixed price and unit price contracts may result in actual revenue and gross profits or interim projected revenue and gross profits for a project differing from those we originally estimated and could result in losses on projects. Depending on the size of a particular project, variations from estimated project costs could have a significant impact on our operating results for any fiscal quarter or year. We complete most of our projects within one year. We frequently provide service and maintenance work under open-ended, unit price master service agreements which are renewable annually. We recognize revenue on service, time and material work when services are performed. Work performed under a construction contract generally provides that the customers accept completion of progress to date and compensate us for services rendered, measured in terms of units installed, hours expended or some other measure of progress. Revenues from construction contracts are recognized on the percentage-of-completion method. Revenues recognized on a percentage-of-completion basis, all of which are fixed price or cost plus arrangements, comprised approximately 60% of our total revenue for the year endedSeptember 30, 2019 . The percentage-of-completion method for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total costs for each contract at completion. We generally consider contracts substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs, profitability and final contract settlements may result in revisions to costs and income, and the effects of such revisions are recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined. We generally do not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. When significant precontract costs are incurred, they will be capitalized and amortized on a percentage of completion basis over the life of the contract. The current asset "Costs and estimated earnings in excess of billings" represents revenues recognized in excess of amounts billed that management believes will be billed and collected within the next twelve months. 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 completion of the contract. Also included in this asset, from time to time, are claims and unapproved change orders, which include amounts that 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 and unapproved change orders are recorded at estimated realizable value when collection is probable and can be reasonably estimated. We do not recognize profits on construction costs incurred in connection with claims. Claims made by us involve negotiation and, in certain cases, litigation. Such litigation costs are expensed as incurred. Business Combinations. In accounting for business combinations, certain assumptions and estimates are employed in determining the fair value of assets acquired, evaluating the fair value of liabilities assumed, as well as in determining the allocation of goodwill to the appropriate reporting unit. These estimates may be affected by factors such as changing market conditions affecting the industries in which we operate. The most significant assumptions requiring judgment involve identifying and estimating the fair value of intangible assets and the associated useful lives for establishing amortization periods. To finalize purchase accounting for significant intangible assets and liabilities, we utilize the services of independent valuation specialists to assist in the determination of the fair value. Valuation of Intangibles and Long-Lived Assets. We evaluate goodwill for potential impairment at least annually at year end; however, if impairment indicators exist, we will evaluate as needed. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is greater than its carrying value. If we determine that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we perform an impairment test by calculating the fair value of the reporting unit and comparing this calculated fair value with the carrying value of the reporting unit. We estimate the fair value of the reporting unit based on the market approach and income approach. Included in this evaluation are certain assumptions and estimates to determine the fair values of reporting units such as estimates of future cash flows and discount rates, as well as assumptions and estimates related to the valuation of other identified intangible assets. Changes in these assumptions and estimates or significant changes to the market value of our common stock could materially impact our results of operations or financial position. We did not record goodwill impairment during the years endedSeptember 30, 2019 , 2018 or 2017. Each reporting period, we assess impairment indicators related to long-lived assets and intangible assets. If we determine impairment indicators exist, we conduct an evaluation to determine whether any impairment has occurred. This evaluation includes certain assumptions and estimates to determine fair value of asset groups, including estimates about future cash flows and discount rates, among others. Changes in these assumptions and estimates could materially impact our results of operations or financial projections. No impairment charges were recorded in the years endedSeptember 30, 2019 , 2018 or 2017. 35 -------------------------------------------------------------------------------- Current and Non-Current Accounts Receivable and Provision for Doubtful Accounts. We provide an allowance for doubtful accounts for unknown collection issues, in addition to reserves for specific accounts receivable where collection is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, our customers' access to capital, our customers' willingness to pay, general economic conditions, and the ongoing relationships with our customers. In addition to these factors, the method of accounting for construction contracts requires the review and analysis of not only the net receivables, but also the amount of billings in excess of costs and costs in excess of billings. The analysis management utilizes to assess collectability of our receivables includes detailed review of older balances, analysis of days sales outstanding where we include in the calculation, in addition to accounts receivable balances net of any allowance for doubtful accounts, the level of costs in excess of billings netted against billings in excess of costs and the ratio of accounts receivable, net of any allowance for doubtful accounts plus the level of costs in excess of billings, to revenues. These analyses provide an indication of those amounts billed ahead of or behind the recognition of revenue on our construction contracts and are important to consider in understanding the operational cash flows related to our revenue cycle. Risk-Management. We are insured for workers' compensation, automobile liability, general liability, construction defects, pollution, employment practices and employee-related health care claims, subject to deductibles. Our general liability program provides coverage for bodily injury and property damage. Losses up to the deductible amounts are accrued based upon our estimates of the liability for claims incurred and an estimate of claims incurred but not reported. The accruals are derived from actuarial studies, known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of the ultimate expected loss. We believe such accruals to be adequate; however, insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents incurred but not reported and the effectiveness of our safety program. Therefore, if actual experience differs from the assumptions used in the actuarial valuation, adjustments to the reserve may be required and would be recorded in the period that the experience becomes known. Valuation Allowance for Deferred Tax Assets. We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. The estimation of required valuation allowances includes estimates of future taxable income. In assessing the realizability of deferred tax assets atSeptember 30, 2019 , we concluded, based upon the assessment of positive and negative evidence, that it is more likely than not that the Company will generate sufficient table income within the applicable NOL carryforward periods to realize$40.9 million of its deferred tax assets. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. An inability to generate sufficient taxable income in future periods to realize our deferred tax assets may lead to a future need for a valuation allowance and a corresponding reduction in GAAP net income. In addition, any further reduction in the federal statutory tax rate in the future could also cause a reduction in the economic benefit of the NOL available to us and a corresponding charge to reduce the book value of the deferred tax asset recorded on our balance sheet. Income Taxes. GAAP specifies the methodology by which a company must identify, recognize, measure and disclose in its financial statements the effects of any uncertain tax return reporting positions that it has taken or expects to take. GAAP requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions on the presumption that all relevant tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but it prohibits discounting of any of the related tax effects for the time value of money. The evaluation of a tax position is a two-step process. The first step is the recognition process to determine if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement. The tax years endedSeptember 30, 2017 and forward are subject to federal audit as are prior tax years, to the extent of unutilized net operating losses generated in those years. We anticipate that approximately$1.6 million in liabilities for unrecognized tax benefits, including accrued interest, may be reversed in the next twelve months. This reversal is predominantly due to the expiration of the statutes of limitation for unrecognized tax benefits. New Accounting Pronouncements. Recent accounting pronouncements are described in Note 2, "Summary of Significant Accounting Policies - New Accounting Pronouncements" in the notes to our Consolidated Financial Statements and at relevant sections in this discussion and analysis. 36
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