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TMCNet:  INTEGRATED ELECTRICAL SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 10, 2014]

INTEGRATED ELECTRICAL SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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 our Annual Report on Form 10-K/A for the year ended September 30, 2013. For additional information, see "Disclosure Regarding Forward Looking Statements" in Part I of our Annual Report on Form 10-K/A for the year ended September 30, 2013.


OVERVIEWExecutive Overview Please refer to Item 1. "Business" of our Annual Report on Form 10-K/A for the year ended September 30, 2013 for a discussion of the Company's services and corporate strategy. Integrated Electrical Services, Inc., a Delaware corporation, is a holding company that owns and manages diverse operating subsidiaries, comprised of providers of industrial products and infrastructure services to a variety of end markets. Our operations are currently organized into four principal business segments: Communications, Residential, Commercial & Industrial, and Infrastructure Solutions.

RESULTS OF OPERATIONS We report our operating results across our four operating segments: Communications, Residential, Commercial & Industrial and Infrastructure Solutions. Expenses associated with our Corporate office are classified as a fifth segment. The following table presents selected historical results of operations of IES. The Infrastructure Solutions segment was added in connection with the acquisition of MISCOR on September 13, 2013.

Three Months Ended December 31, 2013 2012 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 120,079 100.0 % $ 127,264 100.0 % Cost of services 101,963 84.9 % 109,284 85.9 % Gross profit 18,116 15.1 % 17,980 14.1 % Selling, general and administrative expenses 17,572 14.6 % 14,922 11.7 % Gain on sale of assets (41 ) 0.0 % (19 ) 0.0 % Net income from operations 585 0.5 % 3,077 2.4 % Interest and other (income) expense, net 321 0.3 % 2,329 1.8 % Income from operations before income taxes 264 0.2 % 748 0.6 % Provision (benefit) for income taxes (1 ) 0.0 % 115 0.1 % Net income from continuing operations 265 0.2 % 633 0.5 % Net loss from discontinued operations (141 ) (0.1 )% (138 ) (0.1 )% (Benefit) provision for income taxes - 0.0 % (15 ) 0.0 % Net loss from discontinued operations (141 ) (0.1 )% (123 ) (0.1 )% Net income $ 124 0.1 % $ 510 0.4 % Consolidated revenues for the three months ended December 31, 2013 were $7.2 million lower than for the three months ended December 31, 2012, a decrease of 5.6%. Revenues decreased at our Communications and Commercial & Industrial segments. These decreases were partly offset by growth within our Residential segment. Additionally, Infrastructure Solutions contributed $13.0 million in revenues for the three months ended December 31, 2013.

30-------------------------------------------------------------------------------- Table of Contents Our overall gross profit percentage increased to 15.1% during the three months ended December 31, 2013 as compared to 14.1% during the three months ended December 31, 2012. However, the gross profit percentage for our existing businesses, excluding the Infrastructure Services business acquired in September 2013, was comparable with prior year, at 14.0%. Improved gross profit percentages at our Residential and Commercial & Industrial segments largely offset compressed margins at our Communications segment. Our new Infrastructure Solutions business drove the overall increase in gross profit percentage, as it contributed gross profit of $2.8 million at a 21.2% margin, which included the impact of $0.4 million of additional cost associated with the sale of inventory that was written up to fair value in purchase accounting upon the acquisition of MISCOR in September of 2013.

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 December 31, 2013, our selling, general and administrative expenses were $17.6 million, an increase of $2.7 million, or 17.8%, as compared to the three months ended December 31, 2012. The addition of our Infrastructure Solutions business contributed $2.2 million of the additional cost. The remaining increase primarily resulted from higher personnel and incentive costs directly attributable to increased activity and profitability at our Residential segment, partly offset by lower cost at our Commercial & Industrial segment.

Communications Three Months Ended December 31, 2013 2012 $ % $ % (Dollars in thousands, Percentage of revenues) Revenue $ 24,591 100.0 % $ 40,119 100.0 % Gross Profit 3,932 16.0 % 7,232 18.0 % Selling, general and administrative expenses 2,982 12.1 % 3,558 8.9 % Revenue. Our Communications segment revenues decreased by $15.5 million during the three months ended December 31, 2013, a 38.7% decrease compared to the three months ended December 31, 2012. The decrease is primarily the result of the completion of certain high-tech manufacturing projects performed in the three months ended December 31, 2012, which did not recur in the same period in 2013, as well as the decision of a large customer to procure its own materials to be used in our work, rather than sourcing those materials through us. Revenues from high-tech manufacturing projects were $3.3 million during the three months ended December 31, 2013, compared to $11.6 million during the three months ended December 31, 2012. Revenues attributable to data centers were $7.8 million for the three months ended December 31, 2013 compared to $13.8 million for the three months ended December 31, 2012.

Gross Profit. Our Communications segment's gross profit during the three months ended December 31, 2013 decreased $3.3 million, or 45.6%, as compared to the three months ended December 31, 2012. Gross profit as a percentage of revenue decreased 2.0% to 16.0% for the three months ended December 31, 2013, due primarily to the completion of certain high-tech manufacturing projects which were ongoing in the three months ended December 31, 2012, but did not recur in the same period in 2013.

Selling, General and Administrative Expenses. Our Communications segment's selling, general and administrative expenses decreased $0.6 million, or 16.2%, during the three months ended December 31, 2013 compared to the three months ended December 31, 2012 as a result of decreased incentive compensation associated with lower profitability. Selling, general and administrative expenses as a percentage of revenues in the Communication segment increased 3.2% to 12.1% of segment revenue during the three months ended December 31, 2013 compared to the three months ended December 31, 2012. Although costs were reduced, cost as a percentage of revenue still increased, as revenue declined sharply, and certain of our fixed costs were not reduced.

31-------------------------------------------------------------------------------- Table of Contents Residential Three Months Ended December 31, 2013 2012 $ % $ % (Dollars in thousands, Percentage of revenues) Revenue $ 41,212 100.0 % $ 36,005 100.0 % Gross Profit 7,418 18.0 % 6,106 17.0 % Selling, general and administrative expenses 6,481 15.7 % 5,228 14.5 % Revenue. Our Residential segment revenues increased by $5.2 million during the three months ended December 31, 2013, an increase of 14.5% as compared to the three months ended December 31, 2012. Revenues for our multi-family construction increased by $2.3 million during the three months ended December 31, 2013, as overall market conditions have continued to improve. Multi-family construction projects were primarily driven by increased demand for rental housing throughout the regions in which we operate. Single-family construction revenues increased by $2.6 million, primarily in Texas, where the economy has experienced continued growth and population expansion. Revenue was impacted to a lesser degree by decreases in solar installations and increases in cable and service activity.

Gross Profit. During the three months ended December 31, 2013, our Residential segment experienced a $1.3 million, or 21.5%, increase in gross profit as compared to the three months ended December 31, 2012. Gross profit increased due to higher volume of both single-family and multi-family projects, offset by lower volume and reduced gross margin percentage in solar projects. Gross margin percentage increased within single-family and multi-family, as demand has increased and copper prices have become more stable. The increased gross profit percentages for both single-family and multi-family were partly offset by higher group medical and other insurance costs.

Selling, General and Administrative Expenses. Our Residential segment experienced a $1.3 million, or 24.0%, increase in selling, general and administrative expenses during the three months ended December 31, 2013 compared to the three months ended December 31, 2012. Selling, general and administrative expenses as a percentage of revenues in the Residential segment increased 1.2% to 15.7% of segment revenue during the three months ended December 31, 2013.

This increase is attributable primarily to the scaling of operations, including increased incentives in both single-family and multi-family divisions during the three months ended December 31, 2013, and was impacted to a lesser degree by administrative expenses for our solar business, which increased subsequent to the February 2013 acquisition of certain assets of the Acro Group. As incentive compensation is based on cash flow, in addition to earnings, expense for the quarter ended December 31, 2013 was higher because of increased earnings as well as the benefit of the timing of working capital changes.

Commercial & Industrial Three Months Ended December 31, 2013 2012 $ % $ % (Dollars in thousands, Percentage of revenues) Revenue $ 41,230 100.0 % $ 51,140 100.0 % Gross Profit 3,914 9.5 % 4,642 9.1 % Selling, general and administrative expenses 3,480 8.4 % 3,736 7.3 % Revenue. Revenues in our Commercial & Industrial segment decreased $9.9 million during the three months ended December 31, 2013, a decrease of 19.4% compared to the three months ended December 31, 2012. Our Commercial & Industrial segment is impacted not only by industry construction trends, but also specific industry and local economic trends. Impacts from these trends on our revenues may be delayed due to the long lead time of our projects. During the three months ended December 31, 2013, our revenue decrease was the result of large commercial projects for which we recognized substantial revenue in the three months ended December 31, 2012, but which are now complete or nearing completion.

32-------------------------------------------------------------------------------- Table of Contents Gross Profit. Our Commercial & Industrial segment's gross profit during the three months ended December 31, 2013 decreased by $0.7 million, or 15.7%, as compared to the three months ended December 31, 2012. Commercial & Industrial's gross margin percentage increased 0.4% to 9.5% during the three months ended December 31, 2013, primarily as a result of increased productivity. While we have experienced some reprieve in project bid margins on new work, particularly in our industrial branches, the competitive market that has existed during the prolonged recession has continued to constrain significant increases in project bid margins in most commercial markets.

Selling, General and Administrative Expenses. Our Commercial & Industrial segment's selling, general and administrative expenses during the three months ended December 31, 2013 decreased by $0.3 million, or 6.8%, compared to the three months ended December 31, 2012 as a result of lower compensation expense in connection with lower earnings, as well as a reduction in legal costs.

However, selling, general and administrative expenses as a percentage of revenues in the Commercial & Industrial segment increased by 1.1% during the three months ended December 31, 2013. Despite the reduction in cost, cost as a percentage of revenue still increased as revenues declined sharply, and certain fixed costs were not reduced.

Infrastructure Solutions Three Months Ended December 31, 2013 $ % (Dollars in thousands, Percentage of revenues) Revenue $ 13,046 100.0 % Gross Profit 2,852 21.9 % Selling, general and administrative expenses 2,387 18.3 % The Infrastructure Solutions segment was added in connection with the acquisition of MISCOR on September 13, 2013. Therefore, our consolidated results of operations do not include results for this segment for the quarter ended December 31, 2012.

Restructuring Charges In the second quarter of our 2011 fiscal year, we began the 2011 Restructuring Plan that was designed to consolidate operations within our Commercial & Industrial business. Pursuant to the 2011 Restructuring Plan, we planned to either sell or close certain underperforming facilities within our Commercial & Industrial operations. The 2011 Restructuring Plan was a key element of our commitment to return the Company to profitability. The results of operations related to the 2011 Restructuring Plan are included in the net loss from discontinued operations within our Consolidated Statements of Comprehensive Income for the three months ended December 31, 2013 and 2012.

The facilities directly affected by the 2011 Restructuring Plan were in several locations throughout the country, including Arizona, Florida, Iowa, Louisiana, Massachusetts, Nevada and Texas. These facilities were selected due to their business prospects at that time and the extended time frame needed to return the facilities to a profitable position.

The following table presents the elements of costs incurred for the 2011 Restructuring Plan: Three Months Ended December 31, 2013 2012 (In thousands) Severance compensation $ - $ (62 ) Consulting and other charges - 1,099 Lease termination costs - 133 Total restructuring charges $ - $ 1,170 33 -------------------------------------------------------------------------------- Table of Contents Interest and Other Expense, net Three Months Ended December 31, 2013 2012 (In thousands) Interest expense $ 391 $ 472 Deferred financing charges 127 135 Total interest expense 518 607 Interest income (1 ) (12 ) Other (income) expense, net (197 ) 1,734 Total interest and other expense, net $ 320 $ 2,329 Interest Expense During the three months ended December 31, 2013, we incurred interest expense of $0.5 million primarily comprised of interest expense from the Wells Fargo Term Loan, an average letter of credit balance of $6.6 million under the 2012 Credit Facility and an average unused line of credit balance of $23.4 million. This compares to interest expense of $0.6 million for the three months ended December 31, 2012, on a debt balance primarily comprised of the Tontine Term Loan, an average letter of credit balance of $8.5 million under the 2006 Credit Facility and an average unused line of credit balance of $21.5 million.

Interest Income For the three months ended December 31, 2013 and 2012 we earned interest income of $1 thousand and $12 thousand on the average Cash and Cash Equivalents balances of $16.2 million and $19.0 million, respectively.

Other (Income) Expense During the three months ended December 31, 2012, we fully reserved for an outstanding receivable for a settlement agreement with a former surety. The surety has failed to make payments in accordance with the settlement agreement, and has proposed a modified payment structure to satisfy the debt. The Company concluded that collectability was not probable as of December 31, 2012, and has recorded a reserve for the entire balance of $1.7 million. The reserve was recorded as other expense within our Consolidated Statements of Comprehensive Income. For the three months ended December 31, 2013, we recovered $0.1 million of this settlement. The recovery was recorded as other income within our Consolidated Statements of Comprehensive Income. Please refer to Note 14, "Commitments and Contingencies" in the Notes to the Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

PROVISION FOR INCOME TAXES Our provision for income taxes decreased from $115 thousand for the three months ended December 31, 2012 to a benefit of $1 thousand for the three months ended December 31, 2013. The decrease is attributable to a decrease in the projected effective tax rate and a reduction in state income tax expense attributable to a previous period.

WORKING CAPITAL During the three months ended December 31, 2013, working capital increased by $0.3 million from September 30, 2013, reflecting a $12.9 million decrease in current assets and a $13.3 million decrease in current liabilities during the period.

During the three months ended December 31, 2013, our current assets decreased by $12.9 million, or 9.0%, to $131.1 million, as compared to $144.0 million as of September 30, 2013. Cash and cash equivalents decreased by $3.5 million during the three months ended December 31, 2013 as compared to September 30, 2013. The current trade accounts receivables, net, decreased by $7.0 million at December 31, 2013, as compared to September 30, 2013. Days sales outstanding ("DSOs") decreased to 54 as of December 31, 2013 from 59 as of September 30, 2013. The improvement was driven predominantly by increased collection efforts.

While the rate of collections may vary, our secured position, resulting from our ability to secure liens against our customers' overdue receivables, reasonably assures that collection will occur eventually to the extent that our security retains value. Inventory decreased $3.5 million during the three months ended December 31, 2013 compared to September 30, 2013, due primarily to the timing of materials usage on certain of our Commercial & Industrial jobs.

34-------------------------------------------------------------------------------- Table of Contents During the three months ended December 31, 2013, our total current liabilities decreased by $13.3 million to $85.3 million, compared to $98.6 million as of September 30, 2013. During the three months ended December 31, 2013, accounts payable and accrued expenses decreased $12.7 million. Billings in excess of costs decreased by $0.6 million during the three months ended December 31, 2013 compared to September 30, 2013. Finally, current maturities of long-term debt increased by $0.0 million during the three months ended December 31, 2013.

Surety Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a surety. These bonds provide a guarantee to the customer that we will perform under the terms of our contract and that we will pay our subcontractors and vendors. If we fail to perform under the terms of our contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the sureties for any expenses or outlays they incur on our behalf. To date, we have not been required to make any reimbursements to our sureties for bond-related costs.

As is common in the surety industry, sureties issue bonds on a project-by-project basis and can decline to issue bonds at any time. We believe that our relationships with our sureties will allow us to provide surety bonds as they are required. However, current market conditions, as well as changes in our sureties' assessment of our operating and financial risk, could cause our sureties to decline to issue bonds for our work. If our sureties decline to issue bonds for our work, our alternatives would include posting other forms of collateral for project performance, such as letters of credit or cash, seeking bonding capacity from other sureties, or engaging in more projects that do not require surety bonds. In addition, if we are awarded a project for which a surety bond is required but we are unable to obtain a surety bond, the result could be a claim for damages by the customer for the costs of replacing us with another contractor.

As of December 31, 2013, the estimated cost to complete our bonded projects was approximately $55.2 million. We believe the bonding capacity presently provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of December 31, 2013, we utilized $0.5 million of cash (as is included in "Other Non-Current Assets" in our Consolidated Balance Sheet) as collateral for certain of our previous bonding programs.

The 2012 Revolving Credit Facility On August 9, 2012, we entered into a Credit and Security Agreement (the "Credit Agreement"), for a $30.0 million revolving credit facility (the "2012 Credit Facility") with Wells Fargo Bank, National Association ("Wells Fargo") with a maturity date of August 9, 2015, unless earlier terminated. We have subsequently entered into two amendments to the 2012 Credit Facility. On February 12, 2013, we entered into an amendment of our 2012 Credit Facility (the "Amendment"), extending the terms to August 9, 2016, adding IES Renewable Energy, LLC as a borrower, and providing for a term loan (the "Wells Fargo Term Loan"). On September 13, 2013, we entered into an amendment of the 2012 Credit Facility (the "Second Amendment") in connection with the acquisition of MISCOR, increased our total Wells Fargo Term Loan by $10.2 million to $13.7 million, removed the requirement to cash collateralize our outstanding letters of credit, and added IES Subsidiary Holdings Inc., Magnetech Industrial Services, Inc., and HK Engine Components LLC, as borrowers.

The 2012 Credit Facility is guaranteed by our subsidiaries and secured by first priority liens on substantially all of our subsidiaries' existing and future acquired assets, exclusive of collateral provided to our surety providers. The 2012 Credit Facility also restricts us from paying cash dividends and places limitations on our ability to repurchase our common stock.

The 2012 Credit Facility contains customary affirmative, negative and financial covenants. The 2012 Credit Facility requires that we maintain a fixed charge coverage ratio of not less than 1.0:1.0 at any time that our Liquidity (the aggregate amount of unrestricted cash and cash equivalents on hand plus Excess Availability) or Excess Availability fall below the level stipulated within the 2012 Credit Facility, the First Amendment, and Second Amendment. The Second Amendment provided for tiered thresholds. Through December 31, 2013, our Liquidity could not fall below $15.0 million. Thereafter, our Liquidity must not fall below $20.0 million. Our Excess Availability must not fall below $4.0 million through September 30, 2013. This minimum threshold increases by $0.3 million monthly through December 31, 2013, at which time and thereafter, our Excess Availability must not fall below $5.0 million. As of December 31, 2013, our Liquidity was in excess of $15.0 million and Excess Availability was in excess of $4.0 million; had we not met these thresholds at December 31, 2013, we would not have met the required 1.0:1.0 fixed charge coverage ratio test.

35-------------------------------------------------------------------------------- Table of Contents Borrowings under the 2012 Credit Facility may not exceed a "borrowing base" that is determined monthly by our lenders based on available collateral, primarily certain accounts receivables, inventories and personal property and equipment.

Under the terms of the 2012 Credit Facility, amounts outstanding bear interest at a per annum rate equal to a Daily Three Month LIBOR (as defined in the Credit Agreement), plus an interest rate margin, which is determined quarterly.

In addition, we are charged monthly in arrears for (1) an unused commitment fee of 0.50% per annum, (2) a collateral monitoring fee ranging from $1 thousand to $2 thousand, based on the then-applicable interest rate margin, (3) a letter of credit fee based on the then-applicable interest rate margin and (4) certain other fees and charges as specified in the Credit Agreement.

At December 31, 2013, we had $5.8 million available to us under the 2012 Credit Facility, $6.7 million in outstanding letters of credit with Wells Fargo and no outstanding borrowings.

The Second Amendment to the 2012 Credit Facility increased our total Wells Fargo Term Loan by $10.2 million to $13.7 million. The Wells Fargo Term Loan is payable in equal monthly installments of $0.3 million through August 9, 2016, with the residual unpaid principal balance due on that date. The Second Amendment also extended the terms, and reduced the annual interest rate to 5% plus 3 Month LIBOR, through September 13, 2014. Following that time, the Wells Fargo Term Loan amounts outstanding bear interest at a per annum rate equal to a Daily Three Month LIBOR plus an interest rate margin, which is determined quarterly.

The Tontine Term Loan On December 12, 2007, we entered into the Tontine Term Loan, a $25 million senior subordinated loan agreement, with Tontine, which the Company terminated and prepaid in full subsequent to the first quarter of fiscal 2013, as further described below.

The Tontine Term Loan bore interest at 11.0% per annum and was due on May 15, 2013. Interest was payable quarterly in cash or in-kind at our option. Any interest paid in-kind would bear interest at 11.0% in addition to the loan principal. The Tontine Term Loan was subordinated to the 2012 Credit Facility.

The Tontine Term Loan was an unsecured obligation of the Company and its subsidiary borrowers and contained no financial covenants or restrictions on dividends or distributions to stockholders. The Tontine Term Loan was amended on August 9, 2012 in connection with the Company entering into the 2012 Credit Facility. The amendment did not materially impact the Company's obligations under the Tontine Term Loan.

On April 30, 2010, we prepaid $15 million of principal on the Tontine Term Loan.

On May 1, 2010, Tontine assigned the Tontine Term Loan to Tontine Capital Overseas Master Fund II, L.P, also a related party. Pursuant to its terms, we were permitted to repay the Tontine Term Loan at any time prior to the maturity date at par, plus accrued interest without penalty within the restrictions of the 2012 Credit Facility. On February 13, 2013, we repaid the remaining $10 million of principal on the Tontine Term Loan, plus accrued interest, with existing cash on hand and proceeds from the Wells Fargo Term Loan.

Capital Lease The Company leases certain equipment under agreements, which are classified as capital leases and included in property, plant and equipment. We recognized amortization expense of $22 thousand and $46 thousand during the three months ended December 31, 2013 and 2012, respectively. These amounts are included in depreciation expense in the accompanying statements of comprehensive income.

LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2013, we had cash and cash equivalents of $17.3 million, working capital of $45.8 million, and $6.7 million of letters of credit outstanding under our 2012 Credit Facility. We anticipate that the combination of cash on hand, cash flows and available capacity under our 2012 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 2012 Credit Facility, if needed.

We were not required to test our covenants under our 2012 Credit Facility during the period. Had we been required to test our covenants, we would have failed at December 31, 2013.

36 -------------------------------------------------------------------------------- Table of Contents We continue to closely monitor the financial markets and general national and global economic conditions. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted in the future by adverse conditions in the financial markets.

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.

Operating activities used net cash of $2.2 million during the three months ended December 31, 2013, as compared to $3.3 million of net cash provided in the three months ended December 31, 2012. We used substantially more cash to reduce our accounts payable and accrued expenses in three months ended December 31, 2013 as compared to three months ended December 31, 2012.

Investing Activities In the three months ended December 31, 2013, net cash used in investing activities was $0.3 million as compared to $0.4 million in the three months ended December 31, 2012. Expenditures in both periods relate to the purchase of property and equipment.

Financing Activities Financing activities used net cash of $1.0 million in the three months ended December 31, 2013 compared to $0.8 million used in the three months ended December 31, 2012. Financing activities for the three months ended December 31, 2013 included $0.9 million in payments on our Wells Fargo Term Loan and $0.1 million for the repurchase of common stock to satisfy payroll tax obligations.

Financing activities in the three months ended December 31, 2012 included an increase of $0.4 million in restricted cash to satisfy the requirements of our 2012 Credit Facility. This requirement was removed in 2013, reducing the restricted cash balance to zero. Financing activities in the three months ended December 31, 2012 also included $0.4 million for the repurchase of common stock to satisfy payroll tax obligations.

Bonding Capacity At December 31, 2013, we had adequate surety bonding capacity under our surety agreements. Our ability to access this bonding capacity is at the sole discretion of our surety providers. As of December 31, 2013, the expected cumulative cost to complete for projects covered by our surety providers was $49.2 million. We believe we have adequate remaining available bonding capacity to meet our current needs, subject to the sole discretion of our surety providers. For additional information, please refer to Note 14, "Commitments and Contingencies - Surety" in the notes to our Consolidated Financial Statements.

CONTROLLING SHAREHOLDER On September 13, 2013, Tontine filed an amended Schedule 13D indicating its ownership level of 58% of the Company's outstanding common stock. While Tontine is subject to restrictions under federal securities laws on sales of its shares as an affiliate, on February 20, 2013, pursuant to a Registration Rights Agreement, Tontine delivered a request to the Company for registration of all of its shares of IES common stock, and on February 21, 2013, the Company filed a shelf registration statement (as amended, the "Shelf Registration Statement") to register Tontine's shares. The Shelf Registration Statement was declared effective by the SEC on June 18, 2013. As long as the Shelf Registration Statement remains effective, Tontine will have the ability to resell any or all of its shares from time to time in one or more offerings, as described in the Shelf Registration Statement and in any prospectus supplement filed in connection with an offering pursuant to the Shelf Registration Statement.

Should Tontine sell, exchange, or otherwise dispose of all or a portion of its position in IES, a change in ownership could occur. A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability of net operating losses for federal and state income tax purposes. As of December 31, 2013 we have approximately $466 million of federal NOLs that are available to use to offset taxable income, inclusive of NOLs from the amortization of additional tax goodwill. As of December 31, 2013 we had approximately $315 million of federal NOLs that are available to use to offset taxable income, exclusive of NOLs from the amortization of additional tax goodwill. On January 28, 2013, the Company implemented a tax benefit protection plan (the "NOL Rights Plan") that was designed to deter an acquisition of the Company's stock in excess of a threshold amount that could trigger a change of control within the meaning of Internal Revenue Code Section 382. The NOL Rights Plan was filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on January 28, 2013 and any description thereof is qualified in its entirety by the 37 -------------------------------------------------------------------------------- Table of Contents terms of the NOL Rights Plan. There can be no assurance that the NOL Rights Plan will be effective in deterring a change of control or protecting or realizing the NOLs. Furthermore, a change in control would trigger the change of control provisions in a number of our material agreements, including our 2012 Credit Facility, bonding agreements with our sureties and our executive severance plan.

On April 30, 2010, we prepaid $15.0 million of the original $25.0 million principal outstanding on the Tontine Term Loan; accordingly at September 30, 2012, $10.0 million remained outstanding under the Tontine Term Loan, which was scheduled to mature on May 15, 2013. On February 13, 2013, we repaid the remaining $10.0 million of principal on the Tontine Term Loan, plus accrued interest, with existing cash on hand and proceeds from the Wells Fargo Term Loan. Pursuant to its terms, we were permitted to repay the Tontine Term Loan at any time prior to the maturity date at par, plus accrued interest without penalty within the restrictions of the 2012 Credit Facility.

On September 13, 2013, the Company completed the acquisition of MISCOR. As of July 24, 2013, Tontine beneficially owned 49.9% of the issued and outstanding shares of MISCOR common stock. Given Tontine's significant holdings in both the Company and MISCOR, only the disinterested members of the IES Board of Directors voted on, and unanimously approved, the Merger Agreement. In addition, MISCOR established a special committee of independent directors that voted on and approved the Merger Agreement and recommended approval of the Merger Agreement by the MISCOR full board of directors. After receiving approval from the special committee, the disinterested members of the MISCOR board of directors unanimously approved the Merger Agreement. In connection with the merger, Tontine elected to receive stock consideration in exchange for 100% of its shares of MISCOR common stock tendered pursuant to the merger, such that, according to its amended Schedule 13D filed on September 13, 2013, its ownership of IES common stock increased from approximately 56.7% immediately prior to the merger to approximately 58.0% immediately following the merger.

On March 29, 2012, we entered into a sublease agreement with Tontine Associates, LLC, an affiliate of our controlling shareholder, for corporate office space in Greenwich, Connecticut. The lease extends from April 1, 2012 through March 31, 2014, with monthly payments due in the amount of $6 thousand. The lease has terms at market rates and payments by the Company are at a rate consistent with that paid by Tontine Associates, LLC to its landlord.

James M. Lindstrom has served as Chief Executive Officer and President of the Company since October 3, 2011. Mr. Lindstrom previously served in such capacities on an interim basis since June 2011 and has served as Chairman of the Company's Board of Directors since February 2011. Mr. Lindstrom was an employee of Tontine from 2006 until October 2011.

David B. Gendell has served as a member of the Company's Board of Directors since February 2012. Mr. Gendell, who is the brother of Jeffrey Gendell, the founder and managing member of Tontine, is also an employee of Tontine.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As is common in our industry, we have entered into certain off-balance sheet arrangements that expose us to increased risk. Our significant off-balance sheet transactions include commitments associated with non-cancelable operating leases, letter of credit obligations, firm commitments for materials and surety guarantees.

We enter into non-cancelable operating leases for many of our vehicle and equipment needs. These leases allow us to retain our cash when we do not own the vehicles or equipment, and we pay a monthly lease rental fee. At the end of the lease, we have no further obligation to the lessor. We may cancel or terminate a lease before the end of its term. Typically, we would be liable to the lessor for various lease cancellation or termination costs and the difference between the fair market value of the leased asset and the implied book value of the leased asset as calculated in accordance with the lease agreement.

Some of our customers and vendors require us to post letters of credit as a means of guaranteeing performance under our contracts and ensuring payment by us to subcontractors and vendors. If our customer has reasonable cause to effect payment under a letter of credit, we would be required to reimburse our creditor for the letter of credit. At December 31, 2013, $0.3 million of our outstanding letters of credit were to collateralize our customers and vendors.

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 December 31, 2013, $6.3 million of our outstanding letters of credit were to collateralize our insurance programs.

38 -------------------------------------------------------------------------------- Table of Contents From time to time, we may enter into firm purchase commitments for materials such as copper wire and aluminum wire, among others, which we expect to use in the ordinary course of business. These commitments are typically for terms less than one year and require us to buy minimum quantities of materials at specified intervals at a fixed price over the term. As of December 31, 2013, we did not have any open purchase commitments.

Many of our customers require us to post performance and payment bonds issued by a surety. Those bonds guarantee the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. In the event that we fail to perform under a contract or pay subcontractors and vendors, the customer may demand the surety to pay or perform under our bond.

Our relationship with our sureties is such that we will indemnify the sureties for any expenses they incur in connection with any of the bonds they issue on our behalf. To date, we have not incurred any costs to indemnify our sureties for expenses they incurred on our behalf.

As of December 31, 2013, our future contractual obligations due by September 30 of each of the following fiscal years include (in thousands) (1): Less than 1 to 3 3 to 5 More than 1 Year Years Years 5 Years Total Long-term debt obligations $ 2,625 $ 10,208 $ - $ - $ 12,833 Operating lease obligations 4,060 6,736 1,956 278 13,030 Capital lease obligations 27 1,780 - - 1,807 Total $ 6,712 $ 18,724 $ 1,956 $ 278 $ 27,670 (1) The tabular amounts exclude the interest obligations that will be created if the debt and capital lease obligations are outstanding for the periods presented.

Our other commitments expire by September 30 of each of the following fiscal years (in thousands): 2014 2015 2016 Thereafter Total Standby letters of credit $ 6,660 $ - $ - $ - $ 6,660 Other commitments - - - - - Total $ 6,660 $ - $ - $ - $ 6,660 39 -------------------------------------------------------------------------------- Table of Contents

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