IES Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2023

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, set forth in Part II, Item 8. “Financial Statements and Supplementary Data” as set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, and the Condensed Consolidated Financial Statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following discussion may contain forward looking statements. For additional information, see “Disclosure Regarding Forward Looking Statements” in Part I of this Quarterly Report on Form 10-Q.

OVERVIEW

Executive Overview

Please refer to Part I, Item 1. “Business” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, 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.

Current Market and Operating Conditions

The Federal Reserve raised the target federal funds rate throughout calendar year 2022 and the first half of calendar year 2023, and has announced an expectation that it will continue to raise the target rate later in calendar year 2023. This has resulted in higher mortgage rates, which when combined with elevated materials and labor costs, have had a substantial impact on the affordability of housing. There continue to be several trends, such as rising household formation and population growth in our key markets, that we expect will drive long-term demand for our services in the single-family housing market. However, as calendar year 2023 progressed, decreased housing affordability has led to uncertainty around near-term demand for our services in this market. Within the various other end markets we serve, our customers' capital budgets for new construction projects may be impacted by broader economic, technological or other factors.

In recent years, the COVID-19 pandemic and its impact on markets, the supply chain and the labor force influenced trends affecting our business. While commodity prices for some of the materials we procure have become less volatile through the first half of calendar year 2023, certain components still have long lead times for delivery, and procurement and the supply chain remain areas of focus for us. We have also experienced in the past, and may again experience in the future, workforce disruptions related to exposure to, or illness from, COVID-19, resulting in production inefficiencies and delays, higher overtime costs, and the need to outsource activities or use more expensive contract labor. 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 continue to have, a significant impact on our operating results.

Please refer to Part I. Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 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 Holdings, Inc., including the results of acquired businesses from the dates acquired.

(Dollars in thousands, Percentage of revenues)

Consolidated revenues for the three months ended June 30, 2023, were $17.2 million higher than for the three months ended June 30, 2022, an increase of 3.0%, with increases at our Residential and Infrastructure Solutions operating segments, partially offset by decreases at our Communications and Commercial & Industrial segments. See further discussion below of changes in revenues for our individual segments.

Consolidated gross profit for the three months ended June 30, 2023 increased $24.8 million compared to the three months ended June 30, 2022. Our overall gross profit percentage was 18.4% during the three months ended June 30, 2023, as compared to 14.6% during the three months ended June 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.

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

During the three months ended June 30, 2023, our selling, general and administrative expenses were $74.3 million, an increase of $7.2 million, or 10.7%, over the three months ended June 30, 2022, driven largely by increased personnel costs at our Residential and Communications operating segments, 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 from 11.8% for the three months ended June 30, 2022 to 12.7% for the three months ended June 30, 2023.

Gain on Sale of Assets. Our results for the three months ended June 30, 2023 include a $1.0 million pretax gain from the sale of excess land at our Infrastructure Solutions segment.

(Dollars in thousands, Percentage of revenues)

Consolidated revenues for the nine months ended June 30, 2023, were $178.8 million higher than for the nine months ended June 30, 2022, an increase of 11.5%, 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 17.6% during the nine months ended June 30, 2023, as compared to 14.3% during the nine months ended June 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 nine months ended June 30, 2023, our selling, general and administrative expenses were $211.4 million, an increase of $21.5 million, or 11.3%, over the nine months ended June 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, as well as the severance charges mentioned above. Selling, general and administrative expenses as a percentage of revenue decreased slightly to 12.2% for the nine months ended June 30, 2023, compared to 12.3% for the nine months ended June 30, 2022.

Gain on Sale of Assets. Our results for the nine months ended June 30, 2023 include a pretax gain on sale of $1.0 million at our Infrastructure Solutions segment discussed above and a pretax gain on sale of $13.0 million from the sale of STR Mechanical, LLC (“STR”) on October 7, 2022. STR previously operated as part of our Commercial & Industrial segment.

Communications

(Dollars in thousands, Percentage of revenues)

Revenues. Our Communications segment’s revenues decreased by $3.1 million during the three months ended June 30, 2023, or 2.2%, compared to the three months ended June 30, 2022. The decrease primarily resulted from a reduction in work on e-commerce distribution centers, largely offset by an increase in demand from high-tech manufacturing customers.

Gross Profit. Our Communications segment’s gross profit during the three months ended June 30, 2023 increased by $11.4 million compared to the three months ended June 30, 2022. Gross profit as a percentage of revenue increased from 10.9% to 19.2%. During the three months ended June 30, 2022, we recorded $7.8 million of losses in the quarter ended June 30, 2022 as a result of 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. We did not incur any similar losses during the three months ended June 30, 2023.

Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased by $2.1 million, or 18.5%, during the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase is primarily a result of higher personnel cost 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 9.7% during the three months ended June 30, 2023, compared to 8.0% for the three months ended June 30, 2022.

(Dollars in thousands, Percentage of revenues)

Revenues. Our Communications segment's revenues increased by $27.2 million during the nine months ended June 30, 2023, or 6.8%, compared to the nine months ended June 30, 2022. The increase primarily resulted from increased demand from our data center and high-tech manufacturing customers.

Gross Profit. Our Communications segment’s gross profit during the nine months ended June 30, 2023 increased $26.7 million, or 56.2%, as compared to the nine months ended June 30, 2022. Gross profit as a percentage of revenue increased from 11.8% to 17.2%. The increase in gross profit and gross profit as a percentage of revenue primarily reflects the impact of $17.1 million of project losses incurred in the nine months ended June 30, 2022 resulting from the expansion into the new service area discussed above. We did not incur any similar losses during the nine months ended June 30, 2023.

Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased $5.5 million, or 16.1%, during the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022. The increase is a result of higher personnel cost 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 revenues in the Communications segment increased from 8.4% during the nine months ended June 30, 2022 to 9.2% during the nine months ended June 30, 2023.

Residential

(Dollars in thousands, Percentage of revenues)

Revenues. Our Residential segment’s revenues increased by $16.2 million, or 5.4%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase was driven by continued strong demand, particularly in the multi- family and Florida single-family markets. Single-family revenues increased by $4.1 million and multi-family and other revenues increased $12.2 million for the three months ended June 30, 2023 compared to the prior year period.

Gross Profit. During the three months ended June 30, 2023, our Residential segment's gross profit increased by $4.5 million, or 8.5%, compared to the three months ended June 30, 2022. The increase in gross profit was driven primarily by increased activity, as well as an easing of supply chain challenges that impacted prior year efficiency. Gross profit as a percentage of revenue increased to 18.0% during the three months ended June 30, 2023, from 17.5% for the three months ended June 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 $4.7 million, or 12.6%, during the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase was driven by higher personnel costs in connection with business growth, including incentive profit sharing for division management. Selling, general and administrative expenses for the three months ended June 30, 2023 also included $3.6 million of severance charges, as we reorganized the segment's management structure. In connection with this reorganization, we also began combining multiple administrative facilities into a single location and consolidating several underperforming branches, resulting in higher administrative expenses in the three months ended June 30, 2023 as these steps were implemented. Selling, general and administrative expenses as a percentage of revenue in the Residential segment increased to 13.2% during the three months ended June 30, 2023, compared to 12.3% in the three months ended June 30, 2022.

(Dollars in thousands, Percentage of revenues)

Revenues. Our Residential segment's revenues increased by $138.3 million, or 17.2%, during the nine months ended June 30, 2023, compared to the nine months ended June 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 multi-family and Florida single-family markets. Revenue in our single-family business increased by $76.4 million and multi-family and other revenue increased by $61.8 million for the nine months ended June 30, 2023 compared to the prior year period.

Gross Profit. During the nine months ended June 30, 2023, our Residential segment's gross profit increased by $30.8 million, or 21.8%, as compared to the nine months ended June 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 18.2% during the nine months ended June 30, 2023, from 17.5% during the nine months ended June 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 $17.2 million, or 16.9%, during the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022. The increase was driven by higher personnel costs in connection with business growth, including incentive profit sharing for division management. Selling, general and administrative expenses for the nine months ended June 30, 2023 also included the $3.6 million of severance charges related to the reorganization of the segment's management structure mentioned above. Selling, general and administrative expenses as a percentage of revenue in the Residential segment decreased slightly to 12.6% during the nine months ended June 30, 2023, as compared to 12.7% during the nine months ended June 30, 2022.

Infrastructure Solutions

(Dollars in thousands, Percentage of revenues)

Revenues. Revenues in our Infrastructure Solutions segment increased $17.2 million during the three months ended June 30, 2023, an increase of 43.2% compared to the three months ended June 30, 2022, driven primarily by continued strong demand in our generator enclosures business.

Gross Profit. Our Infrastructure Solutions segment’s gross profit during the three months ended June 30, 2023 increased $8.1 million as compared to the three months ended June 30, 2022. Gross profit for the three months ended June 30, 2022 was negatively affected by the impact of 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. Gross profit as a percentage of revenue increased from 15.3% to 24.9%.

Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the three months ended June 30, 2023 increased $0.6 million when compared to the three months ended June 30, 2022, primarily as a result of increased employee compensation cost. Selling, general and administrative expenses as a percentage of revenue decreased from 16.3% to 12.4% as we benefited from the scale of our operations.

Gain on Sale of Assets. Our results for the three months ended June 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.

(Dollars in thousands, Percentage of revenues)

Revenues. Revenues in our Infrastructure Solutions segment increased $35.3 million, or 28.5%, during the nine months ended June 30, 2023 compared to the nine months ended June 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 during the nine months ended June 30, 2023 increased $18.0 million as compared to the nine months ended June 30, 2022. Gross profit for the nine months ended June 30, 2022 was negatively impacted by supply chain disruptions in our generator enclosure business, COVID-19 related labor inefficiencies, and operating inefficiencies in connection with the relocation of our Tulsa operation to a new, larger facility as discussed above. Gross profit as a percentage of revenues increased to 24.5% for the nine months ended June 30, 2023 compared to 16.9% for the nine months ended June 30, 2022.

Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the nine months ended June 30, 2023 decreased $0.1 million compared to the nine months ended June 30, 2022. Selling, general and administrative expenses as a percentage of revenue decreased from 15.3% for the nine months ended June 30, 2022 to 11.8% for the nine months ended June 30, 2023, as we benefited from the scale of our operations.

Gain on Sale of Assets. Our results for the three months ended June 30, 2023 included the $1.0 million gain from the sale of excess land discussed above.

Commercial & Industrial

(Dollars in thousands, Percentage of revenues)

Revenues. Revenues in our Commercial & Industrial segment decreased $13.2 million, or 16.3%, during the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The decrease is primarily due to a planned reduction in activity at an underperforming branch where we incurred substantial losses in fiscal 2022. As a result of limitations placed on the size and duration of its new projects, revenue at this branch decreased by $12.2 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. Additionally, our STR business, which we sold on October 7, 2022, contributed revenue of $4.5 million for the quarter ended June 30, 2022. The markets in which we operate remain highly competitive.

Gross Profit. Our Commercial & Industrial segment’s gross profit during the three months ended June 30, 2023, increased by $0.8 million, as compared to the three months ended June 30, 2022. Gross profit as a percentage of revenue increased from 10.0% for the quarter ended June 30, 2022 to 13.1% for the quarter ended June 30, 2023. Our results for the quarter ended June 30, 2022 were impacted by continuing project inefficiencies at one of our branches which had incurred substantial losses earlier in fiscal 2022.

Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the three months ended June 30, 2023 decreased $1.5 million, or 19.3%, compared to the three months ended June 30, 2022. Selling, general and administrative expenses for the three months ended June 30, 2022 included $0.9 million of reserves in connection with legal matters related to certain contractual disputes, as well as $1.0 million of branch level expenses at our divested STR business. The elimination of these expenses was partly offset by an increase in legal expenses in the three months ended June 30, 2023. Selling, general and administrative expenses as a percentage of revenue decreased from 9.6% to 9.3% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

(Dollars in thousands, Percentage of revenues)

Revenues. Revenues in our Commercial & Industrial segment decreased $21.9 million during the nine months ended June 30, 2023, or 10.0%, compared to the nine months ended June 30, 2022. The decrease is primarily due to a planned reduction in activity at the underperforming branch discussed above. Additionally, our STR business, which we sold in October 2022, contributed revenue of $13.7 million for the nine months ended June 30, 2022.

Gross Profit. Our Commercial & Industrial segment’s gross profit during the nine months ended June 30, 2023 increased by $7.5 million, or 64.4%, compared to the nine months ended June 30, 2022. Gross profit for the nine months ended June 30, 2022 was reduced by $13.2 million due to execution issues on two projects at one underperforming branch. The benefit of improved project execution was partially offset by the sale of STR, which contributed gross profit of $3.5 million for the nine months ended June 30,

2022. Gross profit as a percentage of revenue increased from 5.3% for the nine months ended June 30, 2022 to 9.8% for the nine months ended June 30, 2023.

Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the nine months ended June 30, 2023 decreased $5.1 million, or 21.8%, compared to the nine months ended June 30, 2022. The decrease was driven primarily by the sale of STR, which recorded branch level selling, general and administrative expense of $3.2 million for the nine months ended June 30, 2022. Additionally, selling, general and administrative expenses for the nine months ended June 30, 2023 reflected reduced headcount and a reduction in legal reserves as compared with the nine months ended June 30, 2022. Selling, general and administrative expenses as a percentage of revenue decreased from 10.7% for the nine months ended June 30, 2022 to 9.3% for the nine months ended June 30, 2023.

Gain on Sale of Assets. As discussed above, our results for the nine months ended June 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

(In thousands)

During the three months ended June 30, 2023, we incurred interest expense of $0.4 million primarily comprised of interest expense from our revolving credit facility, which had an average outstanding balance of $2.5 million, in addition to fees on an average letter of credit balance of $4.3 million under our revolving credit facility and an average unused line of credit balance of $142.9 million. This compares to interest expense of $0.8 million for the three months ended June 30, 2022, primarily comprised of interest expense from our revolving credit facility, which had an average outstanding balance of $92.8 million, in addition to fees on an average letter of credit balance of $4.2 million under our revolving credit facility and an average unused line of credit balance of $51.4 million. The decrease in interest expense in the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was a result of a decrease in average outstanding borrowings under our revolving credit facility, partly offset by higher borrowing rates.

The improvement in other (income) expense, net for the three months ended June 30, 2023 as compared with June 30, 2022 is primarily the result of gains on investments in equity securities of $0.1 million during the three months ended June 30, 2023, compared with unrealized losses on investments in equity securities of $0.3 million during the three months ended June 30, 2022.

(In thousands)

During the nine months ended June 30, 2023, we incurred interest expense of $2.6 million primarily comprised of interest expense from our revolving credit facility, which had an average outstanding balance of $35.5 million, in addition to fees on an average letter of credit balance of $4.9 million under our revolving credit facility and an average unused line of credit balance of $108.9 million. This compares to interest expense of $1.7 million for the nine months ended June 30, 2022, primarily comprised of interest expense from our revolving credit facility, which had an average outstanding balance of $76.8 million, 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 $46.8 million. The increase in interest expense in the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022 was a result of higher borrowing rates, partly offset by a decrease in average outstanding borrowings under our revolving credit facility.

The improvement in other (income) expense, net for the nine months ended June 30, 2023 as compared with June 30, 2022 is primarily the result of gains on investments in equity securities of $1.0 million in the nine months ended June 30, 2023, compared to unrealized losses on investments in equity securities of $1.0 million in the nine months ended June 30, 2022.

PROVISION FOR INCOME TAXES

We recorded income tax expense of $8.3 million for the three months ended June 30, 2023, compared to $3.6 million for the three months ended June 30, 2022, driven by increased pretax income.

We recorded income tax expense of $26.4 million for the nine months ended June 30, 2023, compared to $6.3 million for the nine months ended June 30, 2022, driven by increased pretax income.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based on our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of our Condensed 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 of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our Condensed 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. For a discussion of our significant accounting policies, please see our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Some of the more significant estimates include revenue recognition, business combinations, valuation allowance for deferred tax assets and income taxes.

There have been no significant changes to our accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

REMAINING PERFORMANCE OBLIGATIONS AND BACKLOG

Remaining performance obligations represent the unrecognized revenue value of our contractual commitments. While backlog is not a defined term under GAAP, it is a common measurement used in our industry, and we believe it improves our ability to forecast future results and identify operating trends that may not otherwise be apparent. Backlog is a measure of revenue that we expect to recognize from work that has yet to be performed on uncompleted contracts and from work that has been contracted but has not started, exclusive of short-term projects. While all of our backlog is supported by documentation from customers, backlog is not a guarantee of future revenues, as contractual commitments may change and our performance may vary. Not all of our work is performed under contracts included in backlog; for example, most of the apparatus repair work that is completed by our Infrastructure Solutions segment is performed under master service agreements on an as-needed basis. Additionally, electrical installation services for single-family housing at our Residential segment are completed on a short-term basis and are therefore excluded from backlog. The table below summarizes our remaining performance obligations and backlog (in thousands):

WORKING CAPITAL

During the nine months ended June 30, 2023, working capital exclusive of cash increased by $8.0 million from September 30, 2022, reflecting a $31.7 million decrease in current liabilities partially offset by a $23.7 million decrease in current assets excluding cash during the period.

During the nine months ended June 30, 2023, our current assets exclusive of cash decreased to $575.9 million, as compared to $599.6 million as of September 30, 2022. A decrease in activity at our Commercial & Industrial business, which generally has longer customer payment terms than our other operating segments, as well as the collection of $5.6 million of aged receivables related to prior year contractual disputes, drove a $30.0 million decrease in trade accounts receivable. Days sales outstanding decreased from 58 at September 30, 2022 to 53 at June 30, 2023. 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. The decrease in trade accounts receivable was partly offset by a $10.4 million increase in retainage, driven by increased activity in our Residential multi-family business, and a $6.3 million increase in inventories as a result of an increase in activity for custom power solutions in our Infrastructure Solutions business.

During the nine months ended June 30, 2023, our total current liabilities decreased by $31.7 million to $370.2 million, compared to $401.9 million as of September 30, 2022, driven by a decrease in business activity at our Commercial & Industrial business, the timing of payments by our Residential and Communications segments, and remittance of all remaining payroll taxes deferred under the Coronavirus Aid, Relief and Economic Security Act.

Surety

We believe the bonding capacity provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of June 30, 2023, the estimated cost to complete our bonded projects was approximately $170.4 million.

LIQUIDITY AND CAPITAL RESOURCES

The Revolving Credit Facility

We are a party to the Third Amended and Restated Credit and Security Agreement (the "Amended Credit Agreement"), which provides for a maximum borrowing amount of $150 million. The Amended Credit Agreement contains customary affirmative, negative and financial covenants and events of default.

Borrowings under the Amended Credit Agreement may not exceed a Borrowing Base, as defined in the Amended Credit Agreement, that is 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:

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 June 30, 2023, 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 June 30, 2023, our Liquidity was $172.0 million, our Excess Availability was $143.4 million (or greater than 50% of minimum Liquidity), and our Fixed Charge Coverage Ratio was 4.1:1.0.

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 June 30, 2023, we had $4.2 million in outstanding letters of credit and no outstanding borrowings under our revolving credit facility.

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. Currently, our working capital needs are higher than they have been historically, as a result of growth of our business, elevated commodity prices, and the steps taken to mitigate the impact of supply chain disruptions.

Net cash provided by operating activities was $96.6 million during the nine months ended June 30, 2023, as compared to $17.8 million of net cash used in operating activities in the nine months ended June 30, 2022. The increase in operating cash flow resulted from increased earnings and a reduction in cash used in working capital during the nine months ended June 30, 2023 as compared with the nine months ended June 30, 2022.

Investing Activities

Net cash provided by investing activities was $9.0 million for the nine months ended June 30, 2023, compared to $26.9 million used in investing activities in the nine months ended June 30, 2022. During the nine months ended June 30, 2023, the sale of assets, including the sale of STR, provided cash of $20.4 million, which was partially offset by $11.3 million used for capital expenditures. During the nine months ended June 30, 2022, we used $26.6 million for 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 for the nine months ended June 30, 2023 was $101.9 million, compared to $38.7 million provided by financing activities for the nine months ended June 30, 2022. Net cash used in financing activities for the nine months ended June 30, 2023 included net repayments on our credit facility of $82.7 million and $8.2 million used for repurchases of our common stock, including repurchases to satisfy statutory withholding requirements upon the vesting of employee stock compensation. Additionally, we distributed $8.5 million to noncontrolling interests under operating agreements in connection with certain acquisitions. Net cash provided by financing activities for the nine months ended June 30, 2022 included net borrowings on our credit facility of $56.5 million, partly offset by $10.5 million used to repurchase our common stock, including repurchases to satisfy statutory withholding requirements upon the vesting of employee stock compensation, and distributions of $6.4 million to noncontrolling interests under operating agreements in connection with certain acquisitions.

Stock Repurchase Program

In 2015, our Board authorized a stock repurchase program for the purchase from time to time of up to 1.5 million shares of the Company’s common stock, and in 2019 authorized the repurchase from time to time of up to an additional 1.0 million shares under the program. In December 2022, our Board terminated the remaining authorization under this program, and approved a new $40.0 million share repurchase program. Share purchases are made for cash in open market transactions at prevailing market prices or in privately negotiated transactions or otherwise. The timing and amount of purchases under the program are determined based upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. All or part of the repurchases may be implemented under a Rule 10b5-1 trading plan, which allows repurchases under pre-set terms at times when the Company might otherwise be prevented from purchasing under insider trading laws or because of self-imposed blackout periods. The program does not require the Company to purchase any specific number of shares and may be modified, suspended, reinstated, or terminated at any time at the Company’s discretion and without notice. We repurchased 224,013 shares pursuant to our repurchase programs during the nine months ended June 30, 2023.

MATERIAL CASH REQUIREMENTS

From time to time, we may enter into firm purchase commitments for materials, such as copper or aluminum wire, which we expect to use in the ordinary course of business. These commitments are typically for terms of less than one year and require us to buy minimum quantities of materials at specific intervals at a fixed price over the term. As of June 30, 2023, we did not have any such commitments to purchase materials outstanding. There have been no other material changes in our material cash requirements from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. We expect that cash and cash equivalents, cash flow from operations and availability under our revolving credit facility will be sufficient to satisfy cash requirements during at least the next 12 months.

Management is actively involved in monitoring exposure to market risk and continues to develop and utilize appropriate risk management techniques. Our exposure to significant market risks includes fluctuations in labor costs and commodity prices. We are also exposed to interest rate risk with respect to our outstanding borrowings under our revolving credit facility. For additional information see “Disclosure Regarding Forward-Looking Statements” in Part I of this Quarterly Report on Form 10-Q and our risk factors in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Commodity Risk

Our exposure to significant market risks includes fluctuations in commodity prices for copper, aluminum, steel, electronic components, certain plastics, and fuel. Commodity price risks may have an impact on our results of operations due to the fixed-price nature of many of our contracts. Over the long term, we expect to be able to pass along a portion of these costs to our customers, as market conditions in the industries we serve will allow.

Interest Rate Risk

Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Any long-term debt that may be outstanding from time to time under our revolving credit facility is structured on floating rate terms. We currently do not maintain any hedging contracts that would limit our exposure to variable rates of interest when we have outstanding borrowings under our revolving credit facility. The Amended Credit Agreement uses SOFR as the benchmark for establishing the interest rate charged on our borrowings. If SOFR were to increase, our interest payment obligations on any then-outstanding borrowings would increase, having a negative effect on our cash flow and financial condition. We had no borrowings outstanding under our revolving credit facility as of June 30, 2023.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure Controls and Procedures

In accordance with Rules 13a-15 and 15d-15 of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no material changes to the risk factors disclosed under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.