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, designs and installs integrated electrical and
technology systems and provides infrastructure products and services to a
variety of end markets, including data centers, residential housing, and
commercial and industrial facilities. Our operations are organized into four
principal business segments: Communications, Residential, Infrastructure
Solutions and Commercial & Industrial.
23
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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, demand for back-up power, 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, and (iv) increased emphasis on environmental and energy efficiency, which may lead to increased public and private spending. 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 copper, aluminum, steel, fuel, electrical components, certain plastics, and other commodity prices and other economic factors, which may reduce the demand for housing in the regions 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 2021 as compared to fiscal 2020. In addition, revenue growth during fiscal 2021 at our Residential and Infrastructure Solutions segments reflects the contribution of acquisitions completed during fiscal 2021. 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 2022 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 12 months. We expect our capital expenditures, including the expected expansion and improvement of certain of our operating facilities in fiscal 2022, will range from$30.0 million to$35.0 million for the year ending onSeptember 30, 2022 . Impact of COVID-19 on Our Business The COVID-19 pandemic and its ongoing impact on markets and the supply chain continue to influence trends affecting our business. We are seeing indicators that some of our customers that delayed projects or reduced operations during the pandemic are resuming normal levels of activity. However, we continue to experience elevated prices or limited availability for certain materials necessary for our projects, notably copper, aluminum, steel, fuel, electrical components, and certain plastics. The COVID-19 pandemic and related responses are continuing to evolve and, therefore, continue to present potential new risks to our business, particularly in light of new variants of the virus. To date, the COVID-19 pandemic has had a number of adverse impacts on our results of operations. We continue to monitor and implement evolving health and safety protocols, including vaccine or testing mandates imposed by either governmental entities or our customers and the prohibitions on vaccine mandates adopted by certain of the states in which we operate that may conflict with federal vaccine mandates. Factors that we expect will continue to affect our results of operations in the future include, but are not limited to, the potential impacts on our workforce of either illness or the shut-down of job sites; the impact of government or customer vaccine or testing mandates on employee recruiting and retention; a reduced demand for our services; increases in operating costs due to disruptions, personal protective equipment requirements and other increased employment-related costs; supply chain disruptions; increased material prices; and limitations on the ability of our customers to pay us on a timely basis. We may also be more vulnerable to security breaches, cyber-attacks, computer viruses, ransomware, or other similar events, particularly with respect to employees working remotely. We are continuing to monitor conditions affecting our business and will take actions as may be necessary to protect the health and safety of our employees and to serve our customers. The ultimate impact and the extent to which the COVID-19 pandemic will 24 -------------------------------------------------------------------------------- continue to affect our business, results of operations and financial condition are difficult to predict and depend on numerous evolving factors outside our control including: emergence of new variants of the virus; government, social, business and other actions that have been and will be taken in response to the pandemic; any additional waves of COVID-19 infections; vaccine efficacy on new variants of the virus; the impact of government or customer vaccine or testing mandates on employee recruiting and retention; and the effect of the pandemic on short- and long-term general economic conditions. We are continuing to experience elevated prices for commodities such as copper and steel, as well as electrical components. Some materials, such as certain plastics, have also become more difficult to procure due to increased demand or limited availability. We seek to mitigate supply chain risk by maintaining relationships with multiple vendors, and to recoup higher materials costs through adjusted pricing. However, we may not be able to pass on all increased costs, and our suppliers may be unable to provide the materials we require. An inability to procure materials in a timely manner, or to reflect higher materials costs in our pricing to customers, could result in a loss of revenue or lower profit margins, and could have a significant impact on our operating results. Please refer to Part I. Item 1A. "Risk Factors" of this Annual Report on Form 10-K for further information. RESULTS OF OPERATIONS We report our operating results across our four operating segments: Communications, Residential, Infrastructure Solutions and Commercial & Industrial. 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, 2021 2020 2019 $ % $ % $ % (Dollars in thousands, Percentage of revenues) Revenues$ 1,536,493 100.0 %$ 1,190,856 100.0 %$ 1,076,996 100.0 % Cost of services 1,248,495 81.3 % 962,897 80.9 % 894,893 83.1 % Gross profit 287,998 18.7 % 227,959 19.1 % 182,103 16.9 % Selling, general and administrative expenses 202,251 13.2 % 170,911 14.4 % 140,575 13.1 % Goodwill impairment expense - - % 6,976 0.7 % - - % Contingent consideration 211 - % (11) - % (374) - % Loss (gain) on sale of assets (47) - % - - % 52 - % Operating income 85,583 5.6 % 50,083 4.2 % 41,850 3.9 % Interest and other expense, net 676 - % 789 0.1 % 1,709 0.2 % Operating income before income taxes 84,907 5.5 % 49,294 4.1 % 40,141 3.7 % Provision for income taxes 16,231 1.1 % 8,740 0.7 % 6,663 0.6 % Net income 68,676 4.5 % 40,554 3.4 % 33,478 3.1 %
Net (income) loss attributable to noncontrolling
interest (2,018) (0.1) % 1,045 0.1 % (272) - %
Net income attributable to IES Holdings, Inc. $ 66,658 4.3 % $ 41,599 3.5 % $ 33,206 3.1 %
2021 Compared to 2020
Consolidated revenues for the year ended September 30, 2021 , were $345.6 million
higher than for the year ended September 30, 2020 , an increase of 29.0% with
increases across all segments, driven by strong demand and the contribution of
acquired businesses.
Our overall gross profit percentage decreased to 18.7% during the year ended
September 30, 2021 , as compared to 19.1% during the year ended September 30,
2020 . Gross profit as a percentage of revenue increased at our Infrastructure
Solutions and Commercial & Industrial segments, but decreased at our
Communications and Residential segments. See further discussion below of changes
in gross margin for our individual segments.
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, business 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.
25
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During the year ended September 30, 2021 , our selling, general and
administrative expenses were $202.3 million , an increase of $31.3 million , or
18.3% over the year ended September 30, 2020 , driven by increased personnel
costs at our Communications and Residential operating segments in connection
with their growth, increased incentive compensation in connection with improved
results at those segments, and the impact of businesses acquired during fiscal
2021. Selling, general and administrative expenses as a percentage of revenue
decreased to 13.2% for the year ended September 30, 2021 from 14.4% for the year
ended September 30, 2020 .
As described below, for the year ended
2020 Compared to 2019 Consolidated revenues for the year endedSeptember 30, 2020 , were$113.9 million higher than for the year endedSeptember 30, 2019 , an increase of 10.6% with increases at our Communications and Residential segments, driven by strong demand. Our overall gross profit percentage increased to 19.1% during the year endedSeptember 30, 2020 , as compared to 16.9% during the year endedSeptember 30, 2019 . Gross profit as a percentage of revenue increased at our Communications, Infrastructure Solutions and Residential segments but decreased at our Commercial & Industrial segment, as discussed in further detail with respect to each segment below. During the year endedSeptember 30, 2020 , our selling, general and administrative expenses were$170.9 million , an increase of$30.3 million , or 21.6% over the year endedSeptember 30, 2019 , driven by increased personnel costs at our operating segments in connection with their growth, as well as an increase in certain selling, general and administrative expenses at our Commercial & Industrial segment as described below. This increase also includes a$1.8 million increase in expenses at the corporate level, primarily related to a severance payment to our former CEO, who stepped down inJuly 2020 . As a percentage of revenue, selling, general and administrative expenses increased to 14.4% for the year endedSeptember 30, 2020 from 13.1% for the year endedSeptember 30, 2019 . For the year endedSeptember 30, 2020 , we recognized a non-cash goodwill impairment charge of$7.0 million relating to our Commercial & Industrial segment. Communications 2021 Compared to 2020 Year Ended September 30, 2021 2020 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues$ 445,968 100.0 %$ 395,141 100.0 % Cost of services 361,197 81.0 % 317,013 80.2 % Gross Profit 84,771 19.0 % 78,128 19.8 % Selling, general and administrative expenses 41,373 9.3 % 37,674 9.5 % (Gain)/Loss on sale of assets (4) - % 8 - % Operating Income 43,402 9.7 % 40,446 10.2 % Revenue. Our Communications segment's revenues increased by$50.8 million , or 12.9%, during the year endedSeptember 30, 2021 , compared to the year endedSeptember 30, 2020 . This increase primarily resulted from increased demand from our data center and distribution 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 endedSeptember 30, 2021 , increased$6.6 million , or 8.5%, as compared to the year endedSeptember 30, 2020 . Gross profit as a percentage of revenue decreased from 19.8% for the year endedSeptember 30, 2020 to 19.0% for the year endedSeptember 30, 2021 , as we invested in hiring and training personnel, particularly in estimating and project management, to grow the business. Additionally, during the fourth fiscal quarter of 2020, we benefited from some larger than typical efficiency gains from strong project execution.
Selling, General and Administrative Expenses. Our Communications segment's
selling, general and administrative expenses increased
26
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was a result of higher personnel cost, particularly related to continuing
investment to support the growth of the business, along with higher incentive
compensation expense in connection with improved profitability and cash flows.
Selling, general and administrative expenses as a percentage of revenues in the
Communications segment decreased from 9.5% for the year ended September 30, 2020
to 9.3% of segment revenue during the year ended September 30, 2021 , as we
benefited from the increased scale of our operations.
2020 Compared to 2019
Year Ended September 30,
2020 2019
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 395,141 100.0 % $ 321,246 100.0 %
Cost of services 317,013 80.2 % 264,746 82.4 %
Gross Profit 78,128 19.8 % 56,500 17.6 %
Selling, general and administrative expenses 37,674 9.5 % 31,850 9.9 %
Contingent consideration - - % (97) - %
(Gain)/Loss on sale of assets 8 - % (6) - %
Operating Income 40,446 10.2 % 24,753 7.7 %
Revenue. Our Communications segment's revenues increased by $73.9 million , or
23.0%, during the year ended September 30, 2020 , compared to the year ended
September 30, 2019 . This increase primarily resulted from increased demand from
our data center and distribution 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, 2020 , increased $21.6 million , or 38.3%, as compared to the year
ended September 30, 2019 . Gross profit as a percentage of revenue increased to
19.8% from 17.6% for the year ended September 30, 2020 , as we took on a larger
proportion of fixed-cost arrangements and we benefited efficiency gains from
strong project execution.
Selling, General and Administrative Expenses. Our Communications segment's
selling, general and administrative expenses increased $5.8 million , or 18.3%
during the year ended September 30, 2020 , as compared to the year ended
September 30, 2019 . The increase was 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 from 9.9% for the
year ended September 30, 2019 to 9.5% of segment revenue during the year ended
September 30, 2020 , as we benefited from the increased scale of our operations,
as well as a temporary reduction in travel expense.
Residential
2021 Compared to 2020
Year Ended September 30,
2021 2020
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 687,347 100.0 % $ 411,790 100.0 %
Cost of services 553,546 80.5 % 318,034 77.2 %
Gross Profit 133,801 19.5 % 93,756 22.8 %
Selling, general and administrative expenses 92,761 13.5 % 63,668 15.5 %
Contingent consideration 211 - % - - %
Loss on sale of assets 86 - % 2 - %
Operating Income 40,743 5.9 % 30,086 7.3 %
Revenue. Our Residential segment's revenues increased by $275.6 million , or
66.9%, during the year ended September 30, 2021 , as compared to the year ended
September 30, 2020 , reflecting the revenue contribution of businesses acquired
in fiscal 2021, strong demand for single-family and multi-family housing and the
impact of price increases in connection with a higher cost of materials. We
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acquired K.E.P. Electric, Inc. ("KEP"), Bayonet Plumbing, Heating &
Air-Conditioning, LLC ("Bayonet"), and Edmonson Electric, LLC ("Edmonson")
during the year ended September 30, 2021 . Collectively, these acquired
businesses contributed $172.6 million of revenue for the year ended September
30, 2021 . Inclusive of these acquired businesses, revenue in our single-family
business increased by $215.3 million for the year ended September 30, 2021 ,
compared to the year ended September 30, 2020 , while multi-family and other
revenue increased by $60.2 million . Excluding the impact of the businesses
acquired during fiscal 2021, our Residential segment's revenues grew by 25.0%
for the year ended September 30, 2021 .
Gross Profit. During the year ended September 30, 2021 , our Residential segment
experienced a $40.0 million , or 42.7%, increase in gross profit as compared to
the year ended September 30, 2020 . The increase in gross profit was driven
primarily by $27.9 million contributed by the businesses acquired in fiscal
2021, as well as higher volumes, partly offset by increased commodity prices.
Gross margin as a percentage of revenue decreased from 22.8% for the year ended
September 30, 2020 to 19.5% during the year ended September 30, 2021 , primarily
as a result of higher commodity prices.
Selling, General and Administrative Expenses. Our Residential segment's selling,
general and administrative expenses increased $29.1 million , or 45.7%, during
the year ended September 30, 2021 , compared to the year ended September 30,
2020 . Selling, general and administrative expenses incurred at the businesses
acquired during fiscal 2021, including amortization of intangible assets,
contributed $20.1 million of the increase. The remaining increase was driven by
higher personnel cost in connection with business growth, including incentive
profit sharing for division management. Selling, general and administrative
expenses as a percentage of revenues in the Residential segment decreased from
15.5% during the year ended September 30, 2020 to 13.5% during the year ended
September 30, 2021 , as we benefited from the increased scale of our operations.
2020 Compared to 2019
Year Ended September 30,
2020 2019
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 411,790 100.0 % $ 313,336 100.0 %
Cost of services 318,034 77.2 % 248,562 79.3 %
Gross Profit 93,756 22.8 % 64,774 20.7 %
Selling, general and administrative expenses 63,668 15.5 % 46,864 15.0 %
(Gain)/Loss on sale of assets 2 - % (17) - %
Operating Income 30,086 7.3 % 17,927 5.7 %
Revenue. Our Residential segment's revenues increased by $98.5 million , or
31.4%, during the year ended September 30, 2020 , as compared to the year ended
September 30, 2019 . The increase was driven by increases in our single-family
business, where revenues increased by $26.8 million , and our multi-family
businesses, where revenues excluding those provided by current year business
acquisitions, increased by $61.0 million for the year ended September 30, 2020 ,
compared with the year ended September 30, 2019 . In February 2020 , we acquired
Aerial Lighting & Electric, Inc. , ("Aerial") which contributed $9.3 million in
revenue during the year ended September 30, 2020 subsequent to our acquisition
of the business.
Gross Profit. During the year ended September 30, 2020 , our Residential segment
experienced a $29.0 million , or 44.7%, increase in gross profit as compared to
the year ended September 30, 2019 . The increase in gross profit was driven
primarily by higher volumes and improved commodity prices. Gross margin as a
percentage of revenue increased from 20.7% to 22.8% during the year ended
September 30, 2020 , as compared with the year ended September 30, 2019 , as we
benefited from improved commodity prices and the increased scale of our
operations. Our newly acquired Aerial business contributed $1.7 million in gross
profit during the year ended September 30, 2020 subsequent to our acquisition of
the business.
Selling, General and Administrative Expenses. Our Residential segment
experienced a $16.8 million , or 35.9%, increase in selling, general and
administrative expenses during the year ended September 30, 2020 , compared to
the year ended September 30, 2019 . 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, as
well as $2.3 million in selling, general and administrative expenses incurred at
Aerial during the year ended September 30, 2020 subsequent to our acquisition of
the business, including amortization of intangible assets. Selling, general and
administrative expenses as a percentage of revenues in the Residential segment
increased from 15.0% to 15.5% of segment revenue during the year ended September
30, 2020 .
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Infrastructure Solutions
2021 Compared to 2020
Year Ended September 30,
2021 2020
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 146,980 100.0 % $ 128,379 100.0 %
Cost of services 106,048 72.2 % 93,358 72.7 %
Gross Profit 40,932 27.8 % 35,021 27.3 %
Selling, general and administrative expenses 23,966 16.3 % 20,418 15.9 %
(Gain)/Loss on sale of assets (10) - % 35 - %
Operating Income 16,976 11.5 % 14,568 11.3 %
Revenue. Revenues in our Infrastructure Solutions segment increased by $18.6
million , or 14.5% during the year ended September 30, 2021 compared to the year
ended September 30, 2020 . Increased demand for our custom power solutions was
partially offset by lower revenue from our industrial services business. The
demand for our motor repair services continues to be affected by reduced demand
from customers in the steel and rail industries. During the year ended September
30, 2021 , we acquired Wedlake Fabricating, Inc. ("Wedlake"), which contributed
$7.1 million of revenue for the year ended September 30, 2021 .
Gross Profit. Our Infrastructure Solutions segment's gross profit for the year
ended September 30, 2021 , increased by $5.9 million , as compared to the year
ended September 30, 2020 , reflecting improved overall operational efficiencies.
Gross profit as a percent of revenue increased to 27.8% for the year ended
September 30, 2021 compared to 27.3% for the year ended September 30, 2020 ,
largely as the result of those efficiencies, as management has continued to
focus on procurement, engineering, and quality.
Selling, General and Administrative Expenses. Our Infrastructure Solutions
segment's selling, general and administrative expenses during the year ended
September 30, 2021 , increased $3.5 million compared to the year ended September
30, 2020 . The increase in fiscal 2021 includes $1.6 million of expenses
incurred, including amortization of intangible assets, at our newly acquired
Wedlake business. The selling, general and administrative expenses as a
percentage of revenue increased from 15.9% for the year ended September 30,
2020 , to 16.3% for the year ended September 30, 2021 , primarily as a result of
the increase in expenses, including amortization expense, related to Wedlake.
2020 Compared to 2019
Year Ended September 30,
2020 2019
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 128,379 100.0 % $ 136,790 100.0 %
Cost of services 93,358 72.7 % 105,863 77.4 %
Gross Profit 35,021 27.3 % 30,927 22.6 %
Selling, general and administrative expenses 20,418 15.9 % 18,664 13.6 %
Contingent consideration - - % (277) (0.2) %
Loss on sale of assets 35 - % 105 0.1 %
Operating Income 14,568 11.3 % 12,435 9.1 %
Revenue. Revenues in our Infrastructure Solutions segment decreased by $8.4
million during the year ended September 30, 2020 , a decrease of 6.1% compared to
the year ended September 30, 2019 . The decrease in revenue was driven primarily
by the timing of project schedules at certain of our large customers, compared
to unusually strong demand in the prior year. We also experienced a decrease in
demand for our motor repair services, as several of our large customers
temporarily shut down facilities in response to the COVID-19 pandemic. Plant
Power and Control Systems, L.L.C. ("PPCS") contributed $12.6 million in revenue
during the year ended September 30, 2020 subsequent to our acquisition of the
business.
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Gross Profit. Our Infrastructure Solutions segment's gross profit during the
year ended September 30, 2020 , increased by $4.1 million , as compared to the
year ended September 30, 2019 . Gross profit as a percent of revenue increased
from 22.6% for the year ended September 30, 2019 to 27.3% for the year ended
September 30, 2020 primarily as a result of successful project execution as well
as our continued focus on procurement, engineering, and quality which resulted
in a decrease in operating costs. Our newly acquired PPCS business contributed
$3.4 million in gross profit during the year ended September 30, 2020 subsequent
to our acquisition of the business.
Selling, General and Administrative Expenses. Our Infrastructure Solutions
segment's selling, general and administrative expenses during the year ended
September 30, 2020 , increased by $1.8 million compared to the year ended
September 30, 2019 , driven by $2.0 million of expense, including amortization of
intangible assets, incurred at our newly acquired PPCS business. Expenses
incurred at PPCS were partly offset by a decrease in travel and healthcare
costs. The selling, general and administrative expenses as a percentage of
revenue increased from 13.6% for the year ended September 30, 2019 , to 15.9% for
the year ended September 30, 2020 .
Commercial & Industrial
2021 Compared to 2020
Year Ended September 30,
2021 2020
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenue $ 256,198 100.0 % $ 255,546 100.0 %
Cost of services 227,704 88.9 % 234,492 91.8 %
Gross Profit 28,494 11.1 % 21,054 8.2 %
Selling, general and administrative expenses 28,172 11.0 % 32,128 12.6 %
Goodwill impairment expense - - % 6,976 2.7 %
Contingent consideration - - % (11) - %
Gain on sale of assets (92) - % (45) - %
Operating Income 414 0.2 % (17,994) (7.0) %
Revenue. Revenues in our Commercial & Industrial segment increased $0.7 million ,
or 0.3%, during the year ended September 30, 2021 , compared to the year ended
September 30, 2020 . The market for our Commercial & Industrial segment's
services remains highly competitive, and disruptions caused by the COVID-19
pandemic resulted in some delays in the awarding of new projects and the
progress of certain existing projects, as well as decreased demand for new
construction in certain sectors we serve, particularly through the first six
months of fiscal 2021. However, we have seen an increase in activity during the
past few months, as many of our customers have reverted to more typical levels
of activity.
Gross Profit. Our Commercial & Industrial segment's gross profit during the year
ended September 30, 2021 increased by $7.4 million , or 35.3%, as compared to the
year ended September 30, 2020 . We have improved project efficiency, enhanced our
procurement process, and focused on controlling costs. As a result, gross profit
as a percent of revenues increased from 8.2% for the year ended September 30,
2020 , to 11.1% for the year ended September 30, 2021 .
Selling, General and Administrative Expenses. Our Commercial & Industrial
segment's selling, general and administrative expenses during the year ended
September 30, 2021 decreased $4.0 million , or 12.3%, compared to the year ended
September 30, 2020 . The higher expense in fiscal 2020 primarily reflected a
write-off recorded in 2020 related to a commercial dispute, as well as costs
incurred in 2020 to improve our procurement process. Selling, general and
administrative expenses as a percentage of revenue decreased from 12.6% for the
year ended September 30, 2020 to 11.0% for the year ended September 30, 2021 .
30
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2020 Compared to 2019
Year Ended September 30,
2020 2019
$ % $ %
(Dollars in thousands, Percentage of revenues)
Revenues $ 255,546 100.0 % $ 305,624 100.0 %
Cost of services 234,492 91.8 % 275,722 90.2 %
Gross Profit 21,054 8.2 % 29,902 9.8 %
Selling, general and administrative expenses 32,128 12.6 % 27,815 9.1 %
Goodwill impairment expense 6,976 2.7 % - - %
Contingent consideration (11) - % - - %
Gain on sale of assets (45) - % (30) - %
Operating Income (Loss) (17,994) (7.0) % 2,117 0.7 %
Revenue. Revenues in our Commercial & Industrial segment decreased $50.1
million , or 16.4%, during the year ended September 30, 2020 , compared to the
year ended September 30, 2019 . The decrease was largely driven by lower demand
for large, industrial projects, particularly in the agricultural and food
processing sectors. We also experienced a reduction in demand for
time-and-material work. The market for this segment's services remains highly
competitive, and disruptions caused by the COVID-19 pandemic resulted in some
delays in the awarding of new projects, as well as the progress of certain
existing projects.
Gross Profit. Our Commercial & Industrial segment's gross profit during the year
ended September 30, 2020 decreased by $8.8 million , or 29.6%, as compared to the
year ended September 30, 2019 . This was driven primarily by a decrease in volume
as discussed above, and certain project inefficiencies. As a percentage of
revenue, gross profit decreased from 9.8% for the year ended September 30, 2019 ,
to 8.2% for the year ended September 30, 2020 , as a result of certain project
inefficiencies, as well as a less efficient absorption of branch level overhead
in connection with lower volumes.
Selling, General and Administrative Expenses. Our Commercial & Industrial
segment's selling, general and administrative expenses during the year ended
September 30, 2020 , increased $4.3 million , or 15.5%, compared to the year ended
September 30, 2019 . The increased expense for the year ended September 30, 2020
includes a reserve for credit losses related to a commercial dispute, as well as
an increase in legal fees. Additionally, we invested in our procurement process
and incurred costs in connection with changes to our organization structure,
with the goal of improving gross margins in the future. Selling, general and
administrative expenses as a percentage of revenue increased to 12.6% from 9.1%,
reflecting the impact of the decreased scale of our operations.
Goodwill Impairment Expense. Throughout 2020, our Commercial & Industrial
segment continued to experience operating losses. Although the business
maintained a focus on operational improvements and cost reductions, its
performance continued to be affected by the ongoing COVID-19 pandemic and other
market factors, which continued to impact customer decisions on awarding of new
work. In this increasingly competitive and uncertain environment, demand for new
construction in market sectors such as retail, office, and hospitality declined,
and our backlog decreased. As a result of these developments, and continuing
operational difficulties, we concluded in performing our annual goodwill
impairment assessment that the fair value of our Commercial & Industrial
reporting unit was less than its carrying amount, which resulted in the
recognition of a non-cash goodwill impairment charge of $7.0 million for the
year ended September 30, 2020 .
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INTEREST AND OTHER EXPENSE, NET
Year Ended September 30,
2021 2020 2019
(In thousands)
Interest expense $ 764 $ 625 $ 1,539
Deferred financing charges 198 152 318
Total interest expense 962 777 1,857
Other (income) expense, net (286) 12 (148)
Total interest and other expense, net 676 789 1,709
During the year endedSeptember 30, 2021 , we incurred interest expense of$1.0 million primarily comprised of interest expense from our revolving credit facility withWells Fargo Bank, N.A. ("Wells Fargo") and fees on an average letter of credit balance of$5.7 million under our revolving credit facility and an average unused line of credit balance of$77.4 million . This compares to interest expense of$0.8 million for the year endedSeptember 30, 2020 primarily comprised of interest expense from our revolving credit facility with Wells Fargo and fees on an average letter of credit balance of$6.9 million under our revolving credit facility and an average unused line of credit balance of$89.6 million . During the year endedSeptember 30, 2019 , we incurred interest expense of$1.9 million primarily comprised of interest expense from our revolving credit facility with Wells Fargo and fees on an average letter of credit balance of$6.6 million under our revolving credit facility and an average unused line of credit balance of$73.7 million . PROVISION FOR INCOME TAXES For the year endedSeptember 30, 2021 , we recorded income tax expense of$16.2 million , which reflects a$5.1 million benefit related to the recognition of previously unrecognized tax benefits. For the year endedSeptember 30, 2020 , we recorded income tax expense of$8.7 million , which reflects a$3.2 million benefit related to the recognition of previously unrecognized tax benefits as well as a$3.3 million benefit related to the release of valuation allowance on certain state net operating loss carryforwards. For the year endedSeptember 30, 2019 , we recorded income tax expense of$6.7 million , which reflects a$4.0 million benefit related to the recognition of previously unrecognized tax benefits. WORKING CAPITAL
During the year ended
During the year endedSeptember 30, 2021 , our current assets exclusive of cash increased to$461.1 million , as compared to$317.9 million as ofSeptember 30, 2020 , primarily as a result of a$73.7 million increase in trade accounts receivable, and a$43.7 million increase in inventory. Certain materials we carry in inventory, particularly copper wire, have increased in price. Further, we have increased the quantity of inventory we are currently carrying to manage procurement risks, as some of our key suppliers have increased lead times necessary to fill our orders. We also acquired$13.2 million of inventory in business combinations during the year endedSeptember 30, 2021 . Prepaid expenses and other current assets increased by$11.9 million , largely as a result of deposits made to secure future deliveries of materials. Increased levels of business activity, as well as the addition of accounts receivable at acquired businesses, drove the increase in trade accounts receivable. Days sales outstanding reduced to 57 as ofSeptember 30, 2021 from 61 as ofSeptember 30, 2020 . 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, 2021 , our total current liabilities increased by$69.2 million to$311.6 million , compared to$242.4 million as ofSeptember 30, 2020 , primarily related to an increase in accounts payable and accrued liabilities. An increase in levels of business activity, as well as current liabilities at businesses acquired, drove the increase in accounts payable and accrued liabilities. 32 --------------------------------------------------------------------------------
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, 2021 , the estimated cost to complete our bonded projects was approximately$80.3 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. LIQUIDITY AND CAPITAL RESOURCES As ofSeptember 30, 2021 , we had cash and cash equivalents of$23.1 million and$55.1 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 revolving credit facility pursuant to an agreement with Wells Fargo (as amended, the "Prior Credit Agreement"). OnDecember 2, 2021 , we amended the Prior Credit Agreement (the "Ninth Amendment" and the Prior Credit Agreement as so amended, the "Amended Credit Agreement") to, among other things, increase the size of the facility from$100 million to$125 million , decrease the required minimum Liquidity (as defined in the Amended Credit Facility) from$20 million to$12.5 million , and extend the maturity date fromSeptember 30, 2024 toSeptember 30, 2026 . The Ninth Amendment also replaced the Daily Three Month London Interbank Offered Rate ("LIBOR") with the Daily Three Month Secured Overnight Financing Rate ("SOFR") (each as defined in the Amended Credit Agreement) as the benchmark rate for establishing the interest rate applicable to our borrowings under the Amended Credit Agreement. Please see note 20 - "Subsequent Events" in the Notes to Consolidated Financial Statements included in this Form 10-K for further information about the terms of the Ninth Amendment. Borrowings under the credit facility may not exceed a "borrowing base" that is determined monthly by Wells Fargo based on available collateral, primarily certain accounts receivables, inventories, and equipment. Under the terms of the Prior Credit Agreement, amounts outstanding bore interest at a per annum rate equal to a Daily Three Month LIBOR (as defined in the Prior Credit Agreement and subject to replacement with a new benchmark as set forth therein), plus an interest rate margin, determined quarterly, based on the following thresholds: Level Thresholds Interest Rate Margin I If Liquidity is less than 35% of the Maximum Revolver Amount (as defined in the Amended Credit Agreement) 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 33
-------------------------------------------------------------------------------- EffectiveDecember 2, 2021 , under the Ninth Amendment, amounts outstanding bear interest at a per annum rate equal to Daily Three Month SOFR (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 2.00 percentage points any time during the period II If Liquidity is greater than or equal to 35% of the Maximum 1.75 percentage points Revolver Amount at all times during the period and less than 50% of the Maximum Revolver Amount at any time during the period III If Liquidity is greater than or equal to 50% of the Maximum 1.50 percentage points Revolver Amount at all times during the period 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 (4) appraisal fees, costs and expenses and (5) certain other fees and charges as specified in the Amended Credit Agreement. The Prior Credit Agreement and the Amended Credit Agreement contain customary affirmative, negative and financial covenants, as well as customary events of default. As ofSeptember 30, 2021 , we were in compliance with the financial covenants under the Prior Credit Agreement in effect as of such date, requiring that we maintain: • a Fixed Charge Coverage Ratio (as defined in the Prior 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 of at least twenty percent (20%) of the Maximum Revolver
Amount, or
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 we make an acquisition consented to by Wells Fargo, 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 such acquisition, are factually supportable, and are expected to have a continuing impact, in each case to be reasonably agreed to by Wells Fargo). As defined in the Amended Credit Agreement, EBITDA is calculated as consolidated net income (or loss), less extraordinary gains, interest income, non-operating income and income tax benefits and decreases in any change in LIFO reserves, plus stock compensation expense, non-cash extraordinary losses (including, but not limited to, a non-cash impairment charge or write-down), Interest Expense, income taxes, depreciation and amortization, and increases in any change in LIFO reserves for such period, determined on a consolidated basis in accordance with GAAP. There was no change to the Fixed Charge Coverage Ratio covenant under the Ninth Amendment. The Ninth Amendment reduced the minimum Liquidity requirement from twenty percent (20%) to ten percent (10%) of the Maximum Revolver Amount, or$12.5 million . If in the future our Liquidity falls below$12.5 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 our then-outstanding indebtedness becoming immediately due and payable.
At
34
--------------------------------------------------------------------------------Investments
From time to time, the Company invests 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, subject to size limits on investments individually and in the aggregate. 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, 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$37.9 million during the year endedSeptember 30, 2021 , as compared to$76.7 million of net cash provided in the year endedSeptember 30, 2020 . The decrease in operating cash flow resulted from an increase in working capital, particularly related to inventory. As commodity prices increased, we also experienced longer lead times for deliveries, and reduced availability for certain products we procure, particularly copper wire. As a result, we increased the amount of inventory we are currently carrying in an effort to ensure the availability of materials to serve our customers. This increase in working capital was partly offset by higher earnings during the year endedSeptember 30, 2021 . Operating activities provided net cash of$76.7 million during the year endedSeptember 30, 2020 , as compared to$38.7 million of net cash provided in the year endedSeptember 30, 2019 . The increase in operating cash flow resulted primarily from an increase in earnings, as well as a$9.0 million benefit from the deferral of payroll taxes as permitted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and a decrease in working capital.
Investing Activities
In the year endedSeptember 30, 2021 , net cash used in investing activities was$99.6 million , as compared to$33.6 million of net cash used in investing activities in the year endedSeptember 30, 2020 . Investing activities for the year endedSeptember 30, 2021 include$7.4 million of capital expenditures and$92.5 million for the acquisition of businesses. Investing activities for the year endedSeptember 30, 2020 include$4.7 million of capital expenditures and$29.0 million for the acquisition of businesses. In the year endedSeptember 30, 2020 , net cash used in investing activities was$33.6 million , as compared to$5.7 million of net cash used in investing activities in the year endedSeptember 30, 2019 . Investing activities for the year endedSeptember 30, 2020 include$4.7 million of capital expenditures and$29.0 million for the acquisition of businesses.
Financing Activities
Net cash provided by financing activities was$31.2 million in the year endedSeptember 30, 2021 , compared to$8.5 million used in the year endedSeptember 30, 2020 . For the year endedSeptember 30, 2021 , we borrowed a net$40.0 million on our revolving credit facility. In addition, we used$7.0 million to repurchase our shares under our stock repurchase program, as well as to satisfy statutory withholding requirements upon the vesting of employee stock compensation. Net cash used in financing activities was$8.5 million in the year endedSeptember 30, 2020 , compared to$40.3 million used in the year endedSeptember 30, 2019 . For the year endedSeptember 30, 2020 , we used$7.7 million to repurchase our shares under our stock repurchase program, as well as to satisfy statutory withholding requirements upon the vesting of employee stock compensation. CONTROLLING SHAREHOLDER Tontine is the Company's controlling shareholder, owning approximately 56 percent of the Company's outstanding common stock as ofDecember 1, 2021 , based on a Form 4 filed by Tontine with theSEC onNovember 18, 2021 . 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. 35 -------------------------------------------------------------------------------- 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 directors.Jeffrey L. Gendell was appointed Chief Executive Officer of the Company effectiveOctober 1, 2020 , having served as the Company's Interim Chief Executive Officer sinceJuly 31, 2020 .Mr. Gendell also serves as Chairman of the Board of Directors, a position he has held sinceNovember 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 letter of credit obligations, firm commitments for materials and surety guarantees. Some of our customers and vendors may 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, we would be required to reimburse our creditor for the letter of credit. 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, 2021 ,$4.3 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, which we expect to use in the ordinary course of business. These commitments are typically for terms of less than one year and require us to buy minimum quantities of materials at specified intervals at a fixed price over the term. As ofSeptember 30, 2021 , we had commitments of$12.3 million outstanding under such agreements to purchase copper wire and other materials over the next 12 months in the ordinary course of business. 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. 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 36 -------------------------------------------------------------------------------- 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 credit losses, 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 91% 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 9% 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 and materials. 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 55% of our total revenue for the year endedSeptember 30, 2021 . 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 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 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, 2021 , we concluded, based 37
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upon the assessment of positive and negative evidence, that it is more likely than not that the Company will generate sufficient taxable income within the applicable NOL carryforward periods to realize$19.0 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 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 Consolidated Balance Sheets. 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, 2018 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$0.2 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.
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