IES Holdings, Inc. (IESC) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, set forth in Item 8.“Financial Statements and Supplementary Data” 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 business segments: Communications, Residential, Infrastructure Solutions and Commercial & Industrial.
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, capital spending on data centers, distribution centers, and high-tech manufacturing facilities, 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 interest rate increases, increases in the price of 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 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 2024 as compared to fiscal 2023.
Entering fiscal 2025, we see strong demand across many of our key end markets. However, our business segments each have their own unique set of factors influencing demand for our services. Heading into fiscal 2025, we are cautious about near-term demand for single-family housing as elevated mortgage rates and the impacts of inflation on materials and labor costs have resulted in a decline in housing affordability. In addition, consumer expectations about future interest rate reductions may cause some home buyers to delay purchases in anticipation of lower mortgage costs. In the multi-family business, higher borrowing costs for project owners during fiscal 2024 have resulted in a reduction in backlog at September 30, 2024 compared with September 30, 2023. This will result in lower multi-family revenues in fiscal 2025 as compared with the prior year. However, backlog across our business segments as a whole remains at record levels, reflecting strong demand in key end markets. Demand with respect to data centers, a key end market served by our Communications, Infrastructure Solutions, and Commercial & Industrial segments, remains particularly strong. However, availability of labor and capacity could constrain the rate at which we are able to grow this business.
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 or otherwise access 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 will range from $45 million to $55 million for the year ending on September 30, 2025.
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While the COVID-19 pandemic's impact on markets, the supply chain and the labor force had significantly less of an impact on our business in fiscal 2024 compared with prior fiscal years, COVID-19 and any future pandemic or other public health emergency could impact our workforce, customers and suppliers in the future. An inability to procure materials in a timely manner, to complete work on schedule, and to reflect higher materials or labor costs in our pricing to customers has had, and could have in the future, a significant impact on our operating results.
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, | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||||||||||||
| $ | % | $ | % | $ | % | ||||||||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||||||||||
| Revenues | $ | 2,884,358 | 100.0 | % | $ | 2,377,227 | 100.0 | % | $ | 2,166,808 | 100.0 | % | |||||||||
| Cost of services | 2,187,768 | 75.8 | % | 1,932,688 | 81.3 | % | 1,847,878 | 85.3 | % | ||||||||||||
| Gross profit | 696,590 | 24.2 | % | 444,539 | 18.7 | % | 318,930 | 14.7 | % | ||||||||||||
| Selling, general and administrative expenses | 396,684 | 13.8 | % | 298,625 | 12.6 | % | 262,714 | 12.1 | % | ||||||||||||
| Contingent consideration | 714 | — | % | 277 | — | % | 277 | — | % | ||||||||||||
| Gain on sale of assets | (1,684) | (0.1) | % | (14,139) | (0.6) | % | (69) | — | % | ||||||||||||
| Operating income | 300,876 | 10.4 | % | 159,776 | 6.7 | % | 56,008 | 2.6 | % | ||||||||||||
| Interest and other (income) expense, net | (3,790) | (0.1) | % | 1,228 | 0.1 | % | 3,007 | 0.1 | % | ||||||||||||
| Income from operations before income taxes | 304,666 | 10.6 | % | 158,548 | 6.7 | % | 53,001 | 2.4 | % | ||||||||||||
| Provision for income taxes | 72,165 | 2.5 | % | 38,761 | 1.6 | % | 12,815 | 0.6 | % | ||||||||||||
| Net income | 232,501 | 8.1 | % | 119,787 | 5.0 | % | 40,186 | 1.9 | % | ||||||||||||
| Net income attributable to noncontrolling interest | (13,385) | (0.5) | % | (11,499) | (0.5) | % | (5,424) | (0.3) | % | ||||||||||||
| Net income attributable to IES Holdings, Inc. | $ | 219,116 | 7.6 | % | $ | 108,288 | 4.6 | % | $ | 34,762 | 1.6 | % |
2024 Compared to 2023
Consolidated revenues for the year ended September 30, 2024, were $507.1 million higher than for the year ended September 30, 2023, an increase of 21.3%, with increases at all of our operating segments. See further discussion below of changes in revenues for our individual segments.
Our overall gross profit percentage increased to 24.2% during the year September 30, 2024, as compared to 18.7% during the year ended September 30, 2023. Gross profit as a percentage of revenue increased at all four of our operating 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.
During the year ended September 30, 2024, our selling, general and administrative expenses were $396.7 million, an increase of $98.1 million, or 32.8% over the year ended September 30, 2023, driven by increased personnel costs, primarily at our Residential operating segment, and higher incentive compensation across our business as a result of higher earnings. Selling, general and administrative expenses as a percentage of revenue increased to 13.8% for the year ended September 30, 2024 from 12.6% for the year ended September 30, 2023.
Our results for the year ended September 30, 2023 included a pretax gain of $13.0 million from the sale of STR Mechanical, LLC (“STR”), which previously operated as part of our Commercial & Industrial segment, on October 7, 2022.
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2023 Compared to 2022
Consolidated revenues for the year ended September 30, 2023, were $210.4 million higher than for the year ended September 30, 2022, an increase of 9.7%, with increases at our Communications, Residential and Infrastructure Solutions operating segments,
partially offset by a decrease at our Commercial & Industrial segment. See further discussion below of changes in revenues for our
individual segments.
Our overall gross profit percentage increased to 18.7% during the year ended September 30, 2023, as compared to 14.7% during the year ended September 30, 2022. Gross profit as a percentage of revenue increased at all four of our operating segments. See further discussion below of changes in gross margin for our individual segments.
During the year ended September 30, 2023, our selling, general and administrative expenses were $298.6 million, an increase of $35.9 million, or 13.7% over the year ended September 30, 2022, driven by increased personnel costs, primarily at our Residential operating segment, in connection with its growth, including higher incentive compensation at the division level as a result of higher earnings. Additionally, our Residential segment recorded severance charges of $3.6 million in connection with a reorganization of its
management structure. Selling, general and administrative expenses as a percentage of revenue increased to 12.6% for the year ended September 30, 2023 from 12.1% for the year ended September 30, 2022.
Communications
2024 Compared to 2023
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 776,474 | 100.0 | % | $ | 600,776 | 100.0 | % | |||||
| Cost of services | 623,844 | 80.3 | % | 494,964 | 82.4 | % | |||||||
| Gross Profit | 152,630 | 19.7 | % | 105,812 | 17.6 | % | |||||||
| Selling, general and administrative expenses | 65,752 | 8.5 | % | 54,344 | 9.0 | % | |||||||
| (Gain) loss on sale of assets | (18) | — | % | 12 | — | % | |||||||
| Operating Income | 86,896 | 11.2 | % | 51,456 | 8.6 | % |
Revenue. Our Communications segment’s revenues increased by $175.7 million, or 29.2%, during the year ended September 30, 2024, compared to the year ended September 30, 2023. This increase primarily resulted from increased demand from our data center, high-tech manufacturing and e-commerce distribution center customers.
Gross Profit. Our Communications segment’s gross profit during the year ended September 30, 2024, increased $46.8 million, or 44.2%, as compared to the year ended September 30, 2023. Gross profit as a percentage of revenue increased from 17.6% for the year ended September 30, 2023 to 19.7% for the year ended September 30, 2024. The increase in gross profit and gross profit as a percentage of revenue primarily reflects increased volume, successful project execution, favorable contract pricing and the impact of a more disciplined bidding process.
Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased $11.4 million, or 21.0% during the year ended September 30, 2024, as compared to the year ended September 30, 2023. The increase is a result of higher personnel costs including higher incentive compensation as a result of higher earnings, investment in an organizational structure that will enhance the scalability of our business, and higher wages in an increasingly competitive labor market. Selling, general and administrative expenses as a percentage of revenue in the Communications segment were 8.5% during the year ended September 30, 2024, compared to 9.0% for the year ended September 30, 2023.
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2023 Compared to 2022
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 600,776 | 100.0 | % | $ | 559,777 | 100.0 | % | |||||
| Cost of services | 494,964 | 82.4 | % | 490,959 | 87.7 | % | |||||||
| Gross Profit | 105,812 | 17.6 | % | 68,818 | 12.3 | % | |||||||
| Selling, general and administrative expenses | 54,344 | 9.0 | % | 46,717 | 8.3 | % | |||||||
| Loss on sale of assets | 12 | — | % | 12 | — | % | |||||||
| Operating Income | 51,456 | 8.6 | % | 22,089 | 3.9 | % |
Revenue. Our Communications segment’s revenues increased by $41.0 million, or 7.3%, during the year ended September 30, 2023
compared to the year ended September 30, 2022. This increase primarily resulted from increased demand from our high-tech
manufacturing and data center customers.
Gross Profit. Our Communications segment’s gross profit during the year ended September 30, 2023, increased $37.0 million, or
53.8%, as compared to the year ended September 30, 2022. Gross profit as a percentage of revenue increased from 12.3% for the year
ended September 30, 2022 to 17.6% for the year ended September 30, 2023. The increase in gross profit and gross profit as a
percentage of revenue partially reflects the impact of $19.9 million of project losses incurred in the year ended September 30, 2022
resulting from execution issues relating to an expansion into a new, adjacent service area. Although these projects continued to
negatively impact our results throughout fiscal 2022, we have since completed all such projects, and are no longer working in this
service area. Gross profit also increased as a result of an increase in revenues in the year ended September 30, 2023 compared to the
year ended September 30, 2022 as discussed above.
Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased
$7.6 million, or 16.3% during the year ended September 30, 2023, as compared to the year ended September 30, 2022. The increase is
a result of higher personnel costs including higher incentive compensation as a result of higher earnings, investment in an
organizational structure that will enhance the scalability of our business, and higher wages in a competitive labor market. Selling,
general and administrative expenses as a percentage of revenue in the Communications segment were 9.0% during the year ended
September 30, 2023, compared to 8.3% for the year ended September 30, 2022.
Residential
2024 Compared to 2023
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 1,388,840 | 100.0 | % | $ | 1,279,504 | 100.0 | % | |||||
| Cost of services | 1,024,440 | 73.8 | % | 1,026,524 | 80.2 | % | |||||||
| Gross Profit | 364,400 | 26.2 | % | 252,980 | 19.8 | % | |||||||
| Selling, general and administrative expenses | 228,371 | 16.4 | % | 169,737 | 13.3 | % | |||||||
| Contingent consideration | 36 | — | % | 277 | — | % | |||||||
| (Gain) loss on sale of assets | (1,354) | (0.1) | % | 69 | — | % | |||||||
| Operating Income | 137,347 | 9.9 | % | 82,897 | 6.5 | % |
Revenue. Our Residential segment’s revenues increased by $109.3 million, or 8.5%, during the year ended September 30, 2024, as compared to the year ended September 30, 2023. The increase was primarily driven by an $81.0 million increase in revenues from our plumbing and HVAC business as we expanded our offerings during the year ended September 30, 2024. Our single-family electrical business continued to have strong demand as revenues increased by $14.9 million, while multi-family and other revenue increased by $13.4 million resulting from continued strong demand and successful execution of existing backlog, partially offset by a reduction in activity in certain areas as we became more selective in our bidding process.
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Gross Profit. During the year ended September 30, 2024, our Residential segment gross profit increased by $111.4 million, or 44.0%, as compared to the year ended September 30, 2023, and gross margin as a percentage of revenue increased to 26.2% during the year ended September 30, 2024 from 19.8% for the year ended September 30, 2023. The increase in profitability was driven primarily by improved project execution in our multi-family business, as well as the benefit of improved procurement and other processes implemented as part of the reorganization of the segment in fiscal 2023.
Selling, General and Administrative Expenses. Our Residential segment's selling, general and administrative expenses increased by $58.6 million, or 34.5%, during the year ended September 30, 2024, compared to the year ended September 30, 2023. Selling, general and administrative expenses as a percentage of revenue in the Residential segment increased to 16.4% during the year ended September 30, 2024, from 13.3% during the year ended September 30, 2023. The increase was driven primarily by higher personnel costs in connection with a reorganization of the segment's management structure in fiscal 2023 and increased incentive profit sharing for division management resulting from higher earnings.
2023 Compared to 2022
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 1,279,504 | 100.0 | % | $ | 1,131,414 | 100.0 | % | |||||
| Cost of services | 1,026,524 | 80.2 | % | 928,161 | 82.0 | % | |||||||
| Gross Profit | 252,980 | 19.8 | % | 203,253 | 18.0 | % | |||||||
| Selling, general and administrative expenses | 169,737 | 13.3 | % | 144,100 | 12.7 | % | |||||||
| Contingent consideration | 277 | — | % | 277 | — | % | |||||||
| Loss on sale of assets | 69 | — | % | 20 | — | % | |||||||
| Operating Income | 82,897 | 6.5 | % | 58,856 | 5.2 | % |
Revenue. Our Residential segment’s revenues increased by $148.1 million, or 13.1%, during the year ended September 30, 2023, as
compared to the year ended September 30, 2022. The increase was driven by the impact of price increases in connection with higher
materials costs and continued strong demand, particularly in the Florida single-family electrical, plumbing and HVAC market. Revenue in our single-family electrical business increased by $56.8 million for the year ended September 30, 2023, compared to the year ended September 30, 2022, and revenue in our single-family plumbing & HVAC business increased by $79.0 million, while multifamily and other revenue increased by $12.3 million.
Gross Profit. During the year ended September 30, 2023, our Residential segment gross profit increased by $49.7 million, or 24.5%,
as compared to the year ended September 30, 2022. The increase in gross profit was driven primarily by increased activity, as well as
the impact of price increases and an easing of supply chain challenges that impacted prior year efficiency. Gross margin as a
percentage of revenue increased to 19.8% during the year ended September 30, 2023 from 18.0% for the year ended September 30,
2022, as prior year gross margins were negatively impacted by higher labor and material costs, but improved incrementally throughout
fiscal year 2022 as pricing actions were implemented.
Selling, General and Administrative Expenses. Our Residential segment's selling, general and administrative expenses increased by
$25.6 million, or 17.8%, during the year ended September 30, 2023, compared to the year ended September 30, 2022. The increase
was driven primarily by higher personnel costs in connection with business growth, including incentive profit sharing for division
management. Selling, general and administrative expenses for the year ended September 30, 2023 also included the $3.6 million of
severance charges discussed above, as we reorganized the segment's management structure. We also incurred other discrete expenses
in the year ended September 30, 2023 in connection with implementing this reorganization as we began combining multiple
administrative facilities into a single location and consolidating several underperforming branches. Selling, general and administrative
expenses as a percentage of revenues in the Residential segment increased to 13.3% during the year ended September 30, 2023, from
12.7% during the year ended September 30, 2022.
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Infrastructure Solutions
2024 Compared to 2023
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 351,096 | 100.0 | % | $ | 217,353 | 100.0 | % | |||||
| Cost of services | 245,743 | 70.0 | % | 162,905 | 74.9 | % | |||||||
| Gross Profit | 105,353 | 30.0 | % | 54,448 | 25.1 | % | |||||||
| Selling, general and administrative expenses | 37,394 | 10.7 | % | 26,260 | 12.1 | % | |||||||
| Contingent consideration | 678 | 0.2 | % | — | — | % | |||||||
| Gain on sale of assets | (184) | (0.1) | % | (1,029) | (0.5) | % | |||||||
| Operating Income | 67,465 | 19.2 | % | 29,217 | 13.4 | % |
Revenue. Revenues in our Infrastructure Solutions segment increased by $133.7 million, or 61.5% during the year ended September 30, 2024 compared to the year ended September 30, 2023. The increase in revenues was driven primarily by continued strong demand in our custom engineered solutions manufacturing businesses. We also acquired Greiner Industries, Inc. (“Greiner”) on April 1, 2024, which contributed $34.0 million in revenue in the year ended September 30, 2024.
Gross Profit. Our Infrastructure Solutions segment’s gross profit for the year ended September 30, 2024 increased by $50.9 million, or 93.5%, as compared to the year ended September 30, 2023, primarily resulting from higher volumes, improved pricing and operating efficiencies at our custom engineered solutions manufacturing facilities as well as the impact of investments to increase capacity we have made over the last several years. Gross profit as a percent of revenue increased to 30.0% for the year ended September 30, 2024 compared to 25.1% for the year ended September 30, 2023.
Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the year ended September 30, 2024, increased $11.1 million, or 42.4%, compared to the year ended September 30, 2023, primarily as a result of increased employee compensation cost to support growth in the business, in part due to the acquisition of Greiner in April 2024, and increased incentive profit sharing resulting from higher earnings. Selling, general and administrative expenses as a percentage of revenue decreased from 12.1% for the year ended September 30, 2023, to 10.7% for the year ended September 30, 2024 as we benefited from the scale of our operations.
Gain on Sale of Assets. Our results for the year ended September 30, 2023 included a $1.0 million gain from the sale of a portion of the property on which one of our operating facilities is located. The sale of this excess land will have no impact on the operations of the facility.
2023 Compared to 2022
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 217,353 | 100.0 | % | $ | 167,113 | 100.0 | % | |||||
| Cost of services | 162,905 | 74.9 | % | 138,444 | 82.8 | % | |||||||
| Gross Profit | 54,448 | 25.1 | % | 28,669 | 17.2 | % | |||||||
| Selling, general and administrative expenses | 26,260 | 12.1 | % | 25,129 | 15.0 | % | |||||||
| Gain on sale of assets | (1,029) | (0.5) | % | (46) | — | % | |||||||
| Operating Income | 29,217 | 13.4 | % | 3,586 | 2.1 | % |
Revenue. Revenues in our Infrastructure Solutions segment increased by $50.2 million, or 30.1% during the year ended September 30,
2023 compared to the year ended September 30, 2022. The increase in revenue was driven primarily by increased demand at our
generator enclosure business.
Gross Profit. Our Infrastructure Solutions segment’s gross profit for the year ended September 30, 2023, increased by $25.8 million,
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or 89.9%, as compared to the year ended September 30, 2022. Gross profit for the year ended September 30, 2022 was negatively
impacted by supply chain disruptions, COVID-19 related labor inefficiencies, and operating inefficiencies in connection with the
relocation of our Tulsa, Oklahoma operation to a new, larger facility in order to accommodate increased demand for our generator
enclosure products. Additionally, gross profit for the year ended September 30, 2023 was positively impacted by an increase in
revenues from our generator enclosure business as discussed above, as well as improved operating margins in our custom engineered
solutions business. Gross profit as a percent of revenue increased to 25.1% for the year ended September 30, 2023 compared to 17.2%
for the year ended September 30, 2022.
Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses
during the year ended September 30, 2023, increased $1.1 million, or 4.5%, compared to the year ended September 30, 2022. Selling,
general and administrative expenses as a percentage of revenue decreased from 15.0% for the year ended September 30, 2022, to
12.1% for the year ended September 30, 2023 as we benefited from the scale of our operations.
Gain on Sale of Assets. Our results for the year ended September 30, 2023 included a $1.0 million gain from the sale of a portion of
the property on which one of our operating facilities is located. The sale of this excess land will have no impact on the operations of
the facility.
Commercial & Industrial
2024 Compared to 2023
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 367,948 | 100.0 | % | $ | 279,594 | 100.0 | % | |||||
| Cost of services | 293,741 | 79.8 | % | 248,295 | 88.8 | % | |||||||
| Gross Profit | 74,207 | 20.2 | % | 31,299 | 11.2 | % | |||||||
| Selling, general and administrative expenses | 32,925 | 8.9 | % | 25,225 | 9.0 | % | |||||||
| Gain on sale of assets | (114) | — | % | (13,198) | (4.7) | % | |||||||
| Operating Income (Loss) | 41,396 | 11.3 | % | 19,272 | 6.9 | % |
Revenue. Revenues in our Commercial & Industrial segment increased $88.4 million, or 31.6%, during the year ended September 30, 2024, compared to the year ended September 30, 2023. The increase primarily relates to a large data center project.
Gross Profit. Our Commercial & Industrial segment’s gross profit during the year ended September 30, 2024 increased by $42.9 million, or 137.1%, as compared to the year ended September 30, 2023, and gross profit as a percentage of revenue increased from 11.2% for the year ended September 30, 2023 to 20.2% for the year ended September 30, 2024. Segment results in the year ended September 30, 2024 benefited from favorable project execution and additions to the original scope of work at favorable margins on the large data center project, improved project execution across the business, improving bid margins in certain markets, and a more selective bidding strategy implemented in the prior year.
Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the year ended September 30, 2024 increased $7.7 million, or 30.5%, compared to the year ended September 30, 2023. The increase was driven primarily by increased employee compensation cost, including higher incentive compensation as a result of higher earnings. Selling, general and administrative expenses as a percentage of revenue was 9.0% and 8.9% in the years ended September 30, 2023 and 2024, respectively.
Gain on Sale of Assets. As discussed above, our results for the year ended September 30, 2023 include a pretax gain on sale of $13.0 million from the sale of STR in October 2022.
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2023 Compared to 2022
| Year Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||||||
| $ | % | $ | % | ||||||||||
| (Dollars in thousands, Percentage of revenues) | |||||||||||||
| Revenues | $ | 279,594 | 100.0 | % | $ | 308,504 | 100.0 | % | |||||
| Cost of services | 248,295 | 88.8 | % | 290,314 | 94.1 | % | |||||||
| Gross Profit | 31,299 | 11.2 | % | 18,190 | 5.9 | % | |||||||
| Selling, general and administrative expenses | 25,225 | 9.0 | % | 30,557 | 9.9 | % | |||||||
| Gain on sale of assets | (13,198) | (4.7) | % | (55) | — | % | |||||||
| Operating Income (Loss) | 19,272 | 6.9 | % | (12,312) | (4.0) | % |
Revenue. Revenues in our Commercial & Industrial segment decreased $28.9 million, or 9.4%, during the year ended September 30,
2023, compared to the year ended September 30, 2022. The decrease is primarily due to the sale of our STR business in October 2022,
which contributed revenue of $18.3 million for the year ended September 30, 2022. The decrease in revenues was also the result of a
planned reduction in activity at an underperforming branch where we incurred substantial losses in fiscal 2022.
Gross Profit. Our Commercial & Industrial segment’s gross profit during the year ended September 30, 2023 increased by $13.1
million, or 72.1%, as compared to the year ended September 30, 2022. Gross profit for the year ended September 30, 2022 included
project losses of $16.7 million due to execution issues on two projects at one underperforming branch. The benefit of improved project
execution in 2023 was partially offset by the sale of STR in October 2022, which contributed gross profit of $4.9 million for the year
ended September 30, 2022. Gross profit as a percentage of revenue increased from 5.9% for the year ended September 30, 2022, to
11.2% for the year ended September 30, 2023.
Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses
during the year ended September 30, 2023 decreased $5.3 million, or 17.4%, compared to the year ended September 30, 2022. The
decrease was driven primarily by the sale of STR in October 2022, which recorded branch-level selling, general and administrative
expense of $4.2 million for the year ended September 30, 2022. Additionally, selling, general and administrative expenses for the year
ended September 30, 2022 included $2.3 million of reserves in connection with legal matters related to certain contractual disputes.
Selling, general and administrative expenses as a percentage of revenue decreased from 9.9% for the year ended September 30, 2022
to 9.0% for the year ended September 30, 2023.
Gain on Sale of Assets. As discussed above, our results for the year ended September 30, 2023 include a pretax gain on sale of $13.0
million from the sale of STR in October 2022.
INTEREST AND OTHER EXPENSE, NET
| Year Ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (In thousands) | ||||||||||
| Interest expense | $ | 1,051 | $ | 2,754 | $ | 2,771 | ||||
| Deferred financing charges | 287 | 268 | 199 | |||||||
| Total interest expense | 1,338 | 3,022 | 2,970 | |||||||
| Interest income | (4,042) | (564) | (10) | |||||||
| Other (income) expense, net | (1,086) | (1,230) | 47 | |||||||
| Total other (income) expense, net | (5,128) | (1,794) | 37 | |||||||
| Total interest and other (income) expense, net | (3,790) | 1,228 | 3,007 |
During the year ended September 30, 2024, we incurred interest expense of $1.3 million primarily comprised of interest expense on our finance lease agreements and fees on an average letter of credit balance of $5.5 million under our revolving credit facility and an average unused line of credit balance of $144.5 million. The reduction in interest expense in the year ended September 30, 2024 compared to the year ended September 30, 2023 was a result of a decrease in average outstanding borrowings under our revolving credit facility, which had no outstanding balance during the year ended September 30, 2024. Total other income, net of $5.1 million in the year ended September 30, 2024 was primarily the result of interest income of $4.0 million and unrealized gains on investments in trading securities of $1.8 million.
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During the year ended September 30, 2023, we incurred interest expense of $3.0 million primarily comprised of interest expense on an
average outstanding balance of $26.9 million under our revolving credit facility and on our finance lease agreements, in addition to
fees on an average letter of credit balance of $4.7 million under our revolving credit facility and an average unused line of credit
balance of $117.8 million. Interest expense in the year ended September 30, 2023 remained relatively consistent compared to the year
ended September 30, 2022 as a decrease in interest expense incurred on our revolving credit facility resulting from a lower average
outstanding balance was offset by an increase in interest expense related to a higher volume of active finance leases. Total other income, net of $1.8 million in the year ended September 30, 2023 was primarily the result of gains on investments in equity securities of $1.0 million.
During the year ended September 30, 2022, we incurred interest expense of $3.0 million primarily comprised of interest expense on an average outstanding balance of $82.3 million under our revolving credit facility, in addition to fees on an average letter of credit balance of $4.5 million under our revolving credit facility and an average unused line of credit balance of $49.2 million.
PROVISION FOR INCOME TAXES
For the year ended September 30, 2024, we recorded income tax expense of $72.2 million, which reflects a higher pretax income than in the year ended September 30, 2023, partially offset by $5.5 million of non-cash tax benefits from the recognition of previously unrecognized tax benefits in fiscal 2024.
For the year ended September 30, 2023, we recorded income tax expense of $38.8 million, which reflects a higher pretax income than
in the year ended September 30, 2022.
For the year ended September 30, 2022, we recorded income tax expense of $12.8 million, which reflects a $0.8 million benefit related
to the recognition of previously unrecognized tax benefits.
WORKING CAPITAL
During the year ended September 30, 2024, working capital exclusive of cash increased by $53.4 million from September 30, 2023, reflecting a $175.4 million increase in current assets excluding cash partially offset by a $122.0 million increase in current liabilities during the period.
During the year ended September 30, 2024, our current assets exclusive of cash increased to $770.9 million, as compared to $595.5 million as of September 30, 2023. An increase in activity and the timing of billings at our Communications and Infrastructure Solutions businesses, along with trade receivables acquired as part of the Greiner acquisition, drove a $106.0 million increase in trade accounts receivable and a $12.9 million increase in retainage. 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. Additionally, marketable securities increased by $35.0 million as a portion of our excess cash during the year ended September 30, 2024 was invested in trading securities, and costs and estimated earnings in excess of contract billings increased by $11.5 million primarily from contract assets acquired as part of the Greiner acquisition.
During the year ended September 30, 2024, our total current liabilities increased by $122.0 million to $522.6 million, compared to $400.6 million as of September 30, 2023, driven by a $55.2 million increase in contract billings in excess of costs and estimated earnings, which varies based on the timing of contract billings on projects on which revenue is recognized using the percentage of completion method, and a $66.8 million increase in accounts payable and accrued expenses primarily as a result of increased activity and the timing of payments across all of our operating segments, and an increase in income tax payable based on the timing of tax payments.
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
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issue bonds for our work. If our sureties decline to issue bonds for our work, our alternatives will 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.
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. As of September 30, 2024, the estimated cost to complete our bonded projects was approximately $133.9 million.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2024, we had cash and cash equivalents of $100.8 million and $143.4 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
On April 28, 2022, we entered into a Third Amended and Restated Credit and Security Agreement (the "Amended Credit Agreement"), which increased our maximum borrowing amount from $125 million to $150 million. The Amended Credit Agreement also removed the aggregate cap on our investments in certain securities and the cap on our ability to make stock repurchases, in each case subject to the satisfaction of certain liquidity requirements. All other customary affirmative, negative and financial covenants and events of default were unchanged by the amendment.
Borrowings under the Amended Credit Agreement may not exceed a "Borrowing Base,” as defined in the Amended Credit Agreement, determined monthly based on available collateral, primarily certain accounts receivables, inventories, and equipment. Amounts outstanding bear interest at a per annum rate equal to the Daily Three Month Secured Overnight Financing Rate ("SOFR"), 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 (each as defined in the Amended Credit Agreement) at any time during the period | 2.00 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 | 1.75 percentage points | ||
| III | If Liquidity is greater than or equal to 50% of the Maximum Revolver Amount at all times during the period | 1.50 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 (4) appraisal fees, costs and expenses and (5) certain other fees and charges as specified in the Amended Credit Agreement.
As of September 30, 2024, we were in compliance with the financial covenants under the Amended Credit Agreement, requiring that we maintain:
• 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 of at least 10% of the Maximum Revolver Amount, or $15.0 million; with, for purposes of this covenant, at least 50% of our Liquidity comprised of Excess Availability (as defined in the Amended Credit Agreement).
At September 30, 2024, our Liquidity was $244.2 million, our Excess Availability was $143.4 million (or greater than 50% of minimum Liquidity), and our Fixed Charge Coverage Ratio was 3.4:1.0.
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
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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 our lenders, 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 our lenders).
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.
If in the future our Liquidity falls below $15.0 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 September 30, 2024, we had $4.8 million in outstanding letters of credit and no outstanding borrowings under our revolving credit facility.
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, after taking into consideration the liquidity required to support and invest in the Company's operations, permits the Company to invest in marketable securities, including equities and fixed income securities that can be easily bought and sold on a public market, and non-marketable securities, including equity and fixed income investments in private companies as well as private investments in public companies, subject to size limits and required approvals for certain investments.
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 $234.4 million during the year ended September 30, 2024, as compared to $153.9 million of net cash provided in the year ended September 30, 2023. The increase in operating cash flow resulted primarily from increased earnings partially offset by an increase in cash used in working capital during the year ended September 30, 2024 compared to the year ended September 30, 2023
Operating activities provided net cash of $153.9 million during the year ended September 30, 2023, as compared to $16.3 million of
net cash provided in the year ended September 30, 2022. The increase in operating cash flow resulted primarily from increased
earnings and a reduction in cash used in working capital during the year ended September 30, 2023 compared to the year ended
September 30, 2022
Investing Activities
Net cash used in investing activities was $108.8 million for the year ended September 30, 2024, compared to $2.8 million of net cash provided by investing activities in the year ended September 30, 2023. During the year ended September 30, 2024, we completed the acquisition of Greiner for $67.0 million. We also had capital expenditures of $45.2 million as we acquired new facilities to increase the manufacturing capacity of our Infrastructure Solutions segment's operations, purchased new assets instead of entering into new lease agreements at our Residential and Communications segments, and made other capital expenditures to support the growth of our business. During the year ended September 30, 2023, the sale of assets, including the sale of STR, provided cash of $20.6 million, which was partially offset by capital expenditures of $17.7 million.
Net cash provided by investing activities was $2.8 million for the year ended September 30, 2023, compared to $29.5 million of net
cash used in investing activities in the year ended September 30, 2022. During the year ended September 30, 2023, the sale of assets,
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including the sale of STR, provided cash of $20.6 million, which was partially offset by $17.7 million used for capital expenditures. Investing activities for the year ended September 30, 2022 include $29.3 million of capital expenditures primarily related to the
acquisition of a new operating facility for our Wedlake business, as well as an additional facility to support the growth of our
Residential business in Florida.
Financing Activities
Net cash used in financing activities was $100.5 million in the year ended September 30, 2024. Net cash used in financing activities for the year ended September 30, 2024 included $44.0 million used for the repurchase of our common stock, including repurchases to satisfy statutory withholding requirements upon the vesting of employee stock compensation, $32.0 million paid to acquire the 20 percent noncontrolling interest in Bayonet Plumbing, Heating & Air-Conditioning, LLC, and distributions to noncontrolling interests of $16.2 million under operating agreements in connection with certain acquisitions.
Net cash used in financing activities was $105.8 million in the year ended September 30, 2023. Net cash used in financing activities
for the year ended September 30, 2023 included net repayments on our credit facility of $82.7 million, distributions to noncontrolling
interests of $11.5 million under operating agreements in connection with certain acquisitions, and $8.3 million used for the repurchase
of our common stock, including repurchases to satisfy statutory withholding requirements upon the vesting of employee stock
compensation.
Net cash provided by financing activities was $15.0 million in the year ended September 30, 2022. Net cash provided by financing
activities for the year ended September 30, 2022 included net borrowing on our credit facility of $42.3 million, partly offset by $18.6
million used for the repurchase of our common stock, including repurchases to satisfy statutory withholding requirements upon the
vesting of employee stock compensation. Additionally, we distributed $7.0 million to noncontrolling interests under operating
agreements in connection with certain acquisitions.
CONTROLLING SHAREHOLDER
Tontine Associates, L.L.C. ("Tontine Associates"), together with its affiliates (collectively, "Tontine") is the Company's controlling stockholder, owning approximately 55 percent of the Company’s outstanding common stock based on a Form 4 filed by Tontine with the SEC on September 16, 2024 and the Company's shares outstanding as of November 18, 2024. 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.
The Company is a party to a sublease agreement with Tontine Associates, for corporate office space in Greenwich, Connecticut. In December 2022, the Company entered into an amendment of the sublease agreement, which was set to terminate on February 28, 2023, to extend the term of the agreement through August 31, 2024 and to increase the monthly payments from approximately $8 to approximately $9 effective March 1, 2023. On August 1, 2024, the Company entered into an amendment of the sublease agreement to extend the term of the agreement through September 30, 2025, effective September 1, 2024. Payments by the Company are at a rate consistent with that paid by Tontine Associates to its landlord.
On December 6, 2018, the Company entered into a Board Observer Letter Agreement (the "Observer Agreement") with Tontine Associates in order to assist Tontine in managing its investment in the Company. Subject to the terms and conditions set forth in the 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 a Board Observer, the Board Observer will have the right to attend and participate in meetings of the Board and the committees thereof, subject to confidentiality requirements, and to receive reimbursement for reasonable out-of-pocket expenses incurred in his or her capacity as a Board Observer and such rights to coverage under the Company’s directors’ and officers’ liability insurance policy as are available to directors.
Jeffrey L. Gendell was appointed Chief Executive Officer of the Company effective October 1, 2020, having served as the Company's Interim Chief Executive Officer since July 31, 2020. Mr. Gendell also serves as Chairman of the Board of Directors, a position he has held since November 2016. He is the managing member and founder of Tontine, and the brother of David B. Gendell, who has served as a member of our Board of Directors since February 2012, and who previously served as Interim Director of Operations from November 2017 to January 2019, as Vice Chairman of the Board from November 2016 to November 2017 and as Chairman of the Board from January 2015 to November 2016. David B. Gendell was an employee of Tontine from 2004 until January 2018.
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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. At September 30, 2024, $4.8 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 of September 30, 2024, we did not have any such firm commitments to purchase materials outstanding.
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 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, 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 90.0% 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 10.0% 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
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year ended September 30, 2024. 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 contracts, or initial set-up or mobilization costs, prior to the start of a project. When significant pre‑contract costs are incurred, they will be capitalized and amortized on a percentage of completion basis over the life of the contract.
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. Variable consideration, including claims and unapproved change orders, is estimated at probability weighted value we expect to receive (or the most probable amount we expect to incur in the case of liquidated damages, if any), utilizing estimation methods that best predict the amount of consideration to which we will be entitled (or will be incurred in the case of liquidated damages, if any). We 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 at September 30, 2024, we concluded, based upon the assessment of positive and negative evidence, that it is more likely than not that the Company will generate sufficient taxable income to realize its $22.5 million of 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 deferred tax assets 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 ended September 30, 2021 and forward are subject to federal audit as are prior tax years, to the extent of unutilized net operating losses generated in those years.
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We anticipate that approximately $10.8 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.