IES Holdings, Inc. 10-K

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, is a holding company that owns and manages operating subsidiaries that design and install integrated electrical and technology systems and provide infrastructure products and services to a variety of end markets, including data centers, residential housing, and commercial and industrial facilities. Our operations are currently organized into four principal 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, the degree to which in-house maintenance departments outsource maintenance and repair work, output levels and equipment utilization at heavy industrial facilities, demand for our rail and infrastructure services and custom engineered products, and changes in commercial, institutional, public infrastructure and electric utility spending. Over the long term, we believe that there are numerous factors that could positively drive demand and affect growth within the industries in which we operate, including (i) population growth, which will increase the need for commercial and residential facilities, (ii) aging public infrastructure, which must be replaced or repaired, (iii) an increasing demand for data storage, (iv) increased emphasis on environmental and energy efficiency, which may lead to both increased public and private spending, and (v) demand for natural gas which is expected to spur the construction of and modifications to heavy industrial facilities. However, there can be no assurance that we will not experience a decrease in demand for our services due to economic, technological or other factors beyond our control, including weakness in the oil and gas sector, interest rate changes, increases in steel and commodity prices and other economic factors, which may reduce the demand for housing including in the Texas region, where our Residential division operates, and may impact levels of construction. For a further discussion of the industries in which we operate, please see Item 1. “ Business - Operating Segments ” of this Annual Report on Form 10-K. Business Outlook While there are differences among the Company’s segments, on an overall basis, increased demand for the Company’s services and the Company’s previous investment in growth initiatives and other business-specific factors discussed below resulted in aggregate year-over-year revenue growth in fiscal 2020 as compared to fiscal 2019. Revenue growth rates during fiscal 2020 at our Communications and Residential segments were driven primarily by organic growth. Provided that no significant deterioration in general economic conditions occurs, the Company expects total revenues from existing businesses to increase on a year-over-year basis during fiscal 2021 due to an increase in overall demand for the services we provide, efforts to increase our market share, and current backlog levels. We remain focused on controlled growth within many of our markets which continue to experience highly competitive margins and increasing costs. To continue to grow our business, including through acquisitions and the funding of working capital, we may require a significant amount of cash. Our ability to generate cash depends on many externally influenced factors, including demand for our services, the availability of projects at margins acceptable to us, the ultimate collectability of our receivables, our ability to borrow on our credit facility, and our ability to raise funds in the capital markets, among many other factors. We anticipate that the combination of cash on hand, cash flows from operations and available capacity under our credit facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. We expect that our fixed asset requirements will range from $7.0 million to $10.0 million for the fiscal year ending on September 30, 2021, and we may acquire these assets either through capital expenditures or through lease agreements. Impact of COVID-19 on Our Business The COVID-19 pandemic and related governmental responses have caused, and are likely to continue to cause, significant disruption to the economy, the operations of our customers and vendors, and the health of millions of individuals, including our employees and 23 customers, across the markets in which we operate and beyond. As such, COVID-19 has adversely affected, and is expected to continue to adversely affect, our business. State and local governments in most of the localities where we operate have deemed most of our business activities to be essential or critical, and therefore we are generally permitted to continue operating in those localities while “stay at home” orders are in effect during this pandemic. As a result, we are focused on protecting the health and safety of our employees while maintaining the continuity of our operations. We have implemented operational and protective measures to protect our employees and customers, including screening for COVID-19 symptoms, providing personal protective equipment, increased cleaning and sanitizing, and physical distancing measures to the extent possible. While most of our facilities and job sites continue to operate, certain state and local governments have recently re-imposed certain orders that could cause more shutdowns. We have seen COVID-19 affect demand in some areas of our business, where construction or maintenance projects have been delayed; however, there are other areas in which we have seen an increase in demand, particularly as it relates to critical infrastructure for data centers and communications. COVID-19 presents potential new risks to our business. There have been some adverse COVID-19 impacts on our results of operations during fiscal 2020. We have experienced some challenges to date, including the implementation of new health and safety protocols and responding to changing federal, state and local orders. We have also seen some delays in the awarding of new projects, as well as the progress of existing projects. Factors that we expect will affect our results in the future include, but are not limited to, the potential impacts on our workforce of either illness or government orders forcing job sites to shut down and requiring employees to remain at home, a reduced demand for our services, increases in operating costs due to disruptions and personal protective equipment requirements, and limitations on the ability of our customers to pay us on a timely basis. We are continuing to monitor conditions affecting our business, and will take actions as may be necessary to ensure the health and safety of our employees and to serve our customers. Please refer to Part I. Item 1A. " Risk Factors " of this Annual Report on Form 10-K for further information. RESULTS OF OPERATIONS We report our operating results across our four operating segments: Communications, Residential, Infrastructure Solutions and Commercial & Industrial. Expenses associated with our corporate office are classified separately. The following table presents selected historical results of operations of IES, as well as the results of acquired businesses from the dates acquired. Year Ended September 30, 2020 2019 2018 $ % $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 1,190,856 100.0 % $ 1,076,996 100.0 % $ 876,828 100.0 % Cost of services 962,897 80.9 % 894,893 83.1 % 726,866 82.9 % Gross profit 227,959 19.1 % 182,103 16.9 % 149,962 17.1 % Selling, general and administrative expenses 170,911 14.4 % 140,575 13.1 % 123,920 14.1 % Goodwill impairment expense 6,976 0.7 % — — % — — % Contingent consideration (11) — % (374) — % 103 — % Loss (gain) on sale of assets — — % 52 — % (15) — % Operating income 50,083 4.2 % 41,850 3.9 % 25,954 3.0 % Interest and other expense, net 789 0.1 % 1,709 0.2 % 1,606 0.2 % Operating income before income taxes 49,294 4.1 % 40,141 3.7 % 24,348 2.8 % Provision for income taxes (1) 8,740 0.7 % 6,663 0.6 % 38,151 4.4 % Net income (loss) 40,554 3.4 % 33,478 3.1 % (13,803) (1.6) % Net (income) loss attributable to noncontrolling interest 1,045 0.1 % (272) — % (354) — % Net income (loss) attributable to IES Holdings, Inc. $ 41,599 3.5 % $ 33,206 3.1 % $ (14,157) (1.6) % (1) The year ended September 30, 2018 includes a charge of $31.3 million to re-measure our net deferred taxes in connection with the Tax Cuts and Jobs Act. 2020 Compared to 2019 Consolidated revenues for the year ended September 30, 2020, were $113.9 million higher than for the year ended September 30, 2019, an increase of 10.6% with increases at our Communications and Residential segments, driven by strong demand. Our overall gross profit percentage increased to 19.1% during the year ended September 30, 2020, as compared to 16.9% during the year ended September 30, 2019. Gross profit as a percentage of revenue increased at our Communications, Infrastructure Solutions 24 and Residential segments but decreased at our Commercial & Industrial segment, as discussed in further detail with respect to each segment below. Selling, general and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and benefits related to corporate, 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, 2020, our selling, general and administrative expenses were $170.9 million, an increase of $30.3 million, or 21.6% over the year ended September 30, 2019, driven by increased personnel costs at our operating segments in connection with their growth, as well as an increase in certain selling, general and administrative expenses at our Commercial & Industrial segment as described below. This increase also includes a $1.8 million increase in expenses at the corporate level, primarily related to a severance payment to our former CEO, who stepped down in July 2020. As a percentage of revenue, selling, general and administrative expenses increased to 14.4% for the year ended September 30, 2020 from 13.1% for the year ended September 30, 2019. As described below, for the year ended September 30, 2020, we recognized a non-cash goodwill impairment charge of $7.0 million relating to our Commercial & Industrial segment. 2019 Compared to 2018 Consolidated revenues for the year ended September 30, 2019, were $200.2 million higher than for the year ended September 30, 2018, an increase of 22.8%, with increases at all of our operating segments, driven by strong demand. Our overall gross profit percentage decreased slightly to 16.9% during the year ended September 30, 2019, as compared to 17.1% during the year ended September 30, 2018. Gross profit as a percentage of revenue increased at our Infrastructure Solutions and Residential segments, but decreased at our Commercial & Industrial and Communications segments, as discussed in further detail with respect to each segment below. During the year ended September 30, 2019, our selling, general and administrative expenses were $140.6 million, an increase of $16.7 million, or 13.4%, over the year ended September 30, 2018, driven by increased personnel costs at our operating segments in connection with their growth. This increase also includes a $4.2 million increase in expenses at the corporate level, primarily related to an increase in stock-based compensation expense, as well as a severance payment to our former President, who stepped down in March 2019. However, selling, general and administrative expense as a percentage of revenue decreased from 14.1% for the year ended September 30, 2018, to 13.1% for the year ended September 30, 2019, as we benefited from the increased scale of our operations. Communications 2020 Compared to 2019 Year Ended September 30, 2020 2019 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 395,141 100.0 % $ 321,246 100.0 % Cost of services 317,013 80.2 % 264,746 82.4 % Gross Profit 78,128 19.8 % 56,500 17.6 % Selling, general and administrative expenses 37,674 9.5 % 31,850 9.9 % Contingent consideration — — % (97) — % (Gain)/Loss on sale of assets 8 — % (6) — % Operating Income 40,446 10.2 % 24,753 7.7 % Revenue. Our Communications segment’s revenues increased by $73.9 million, or 23.0%, during the year ended September 30, 2020, compared to the year ended September 30, 2019. This increase primarily resulted from increased demand from our data center and 25 distribution center customers. Revenues in our Communications segment can vary from period to period based on the capital spending cycles of our customers. Gross Profit. Our Communications segment’s gross profit during the year ended September 30, 2020, increased $21.6 million, or 38.3%, as compared to the year ended September 30, 2019. Gross profit as a percentage of revenue increased to 19.8% for the year ended September 30, 2020, as we took on a larger proportion of fixed-cost arrangements and we benefited from efficiency gains from strong project execution. Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased $5.8 million, or 18.3% during the year ended September 30, 2019, as compared to the year ended September 30, 2018. The increase is a result of higher personnel cost, particularly related to continuing investment to support the growth of the business, along with higher incentive compensation in connection with improved profitability and cash flows. Selling, general and administrative expenses as a percentage of revenues in the Communications segment decreased from 9.9% for the year ended September 30, 2019 to 9.5% of segment revenue during the year ended September 30, 2020, as we benefited from the increased scale of our operations, as well as a temporary reduction in travel expense. 2019 Compared to 2018 Year Ended September 30, 2019 2018 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 321,246 100.0 % $ 219,655 100.0 % Cost of services 264,746 82.4 % 179,518 81.7 % Gross Profit 56,500 17.6 % 40,137 18.3 % Selling, general and administrative expenses 31,850 9.9 % 26,003 11.8 % Contingent consideration (97) — % (85) — % Gain on sale of assets (6) — % (4) — % Operating Income 24,753 7.7 % 14,223 6.5 % Revenue. Our Communications segment’s revenues increased by $101.6 million, or 46.3%, during the year ended September 30, 2019, compared to the year ended September 30, 2018. This increase primarily resulted from increased demand from several of our data center customers. Revenues in our Communications segment can vary from period to period based on the capital spending cycles of our customers. Gross Profit. Our Communications segment’s gross profit during the year ended September 30, 2019, increased $16.4 million, or 40.8%, as compared to the year ended September 30, 2018. While total gross profits increased in connection with higher volumes, gross profit as a percentage of revenue decreased from 18.3% for the year ended September 30, 2018 to 17.6% for the year ended September 30, 2019, as we took on a larger proportion of cost-plus arrangements. These arrangements provide us with a reimbursement for our costs plus a markup, and are typically lower margin, but also lower risk, as compared with our fixed-cost arrangements. Selling, General and Administrative Expenses. Our Communications segment’s selling, general and administrative expenses increased $5.8 million, or 22.5% during the year ended September 30, 2019, as compared to the year ended September 30, 2018. The increase is a result of higher personnel cost, particularly related to continuing investment to support the growth of the business, along with higher incentive compensation in connection with improved profitability and cash flows. Selling, general and administrative expenses as a percentage of revenues in the Communications segment decreased from 11.8% for the year ended September 30, 2018 to 9.9% of segment revenue during the year ended September 30, 2019, compared to the year ended September 30, 2018, as we benefited from the increased scale of our operations. 26 Residential 2020 Compared to 2019 Year Ended September 30, 2020 2019 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 411,790 100.0 % $ 313,336 100.0 % Cost of services 318,034 77.2 % 248,562 79.3 % Gross Profit 93,756 22.8 % 64,774 20.7 % Selling, general and administrative expenses 63,668 15.5 % 46,864 15.0 % (Gain)/Loss on sale of assets 2 — % (17) — % Operating Income 30,086 7.3 % 17,927 5.7 % Revenue. Our Residential segment’s revenues increased by $98.5 million, or 31.4%, during the year ended September 30, 2020, as compared to the year ended September 30, 2019. The increase was driven by increases in our single-family business, where revenues increased by $26.8 million, and our multi-family businesses, where revenues excluding those provided by current year business acquisitions, increased by $61.0 million for the year ended September 30, 2020, compared with the year ended September 30, 2019. In February 2020, we acquired Aerial Lighting & Electric, Inc., ("Aerial"), a Naugatuck, Connecticut-based electrical contractor specializing in the design and installation of electrical systems for multi-family developments. Aerial contributed $9.3 million in revenue during the year ended September 30, 2020 subsequent to our acquisition of the business. Gross Profit. During the year ended September 30, 2020, our Residential segment experienced a $29.0 million, or 44.7%, increase in gross profit as compared to the year ended September 30, 2019. The increase in gross profit was driven primarily by higher volumes and improved commodity prices. Gross margin as a percentage of revenue increased from 20.7% to 22.8% during the year ended September 30, 2020, as compared with the year ended September 30, 2019, as we benefited from improved commodity prices and the increased scale of our operations. Our newly acquired Aerial business contributed $1.7 million in gross profit during the year ended September 30, 2020 subsequent to our acquisition of the business . Selling, General and Administrative Expenses. Our Residential segment experienced a $16.8 million, or 35.9%, increase in selling, general and administrative expenses during the year ended September 30, 2020, compared to the year ended September 30, 2019. This increase was driven by increased compensation expense in connection with a growing business, including both incentive profit sharing for division management and increased headcount, as well as $2.3 million in selling, general and administrative expenses incurred at Aerial during the year ended September 30, 2020 subsequent to our acquisition of the business, including amortization of intangible assets . Selling, general and administrative expenses as a percentage of revenues in the Residential segment increased from 15.0% to 15.5% of segment revenue during the year ended September 30, 2020. 2019 Compared to 2018 Year Ended September 30, 2019 2018 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 313,336 100.0 % $ 285,711 100.0 % Cost of services 248,562 79.3 % 227,355 79.6 % Gross Profit 64,774 20.7 % 58,356 20.4 % Selling, general and administrative expenses 46,864 15.0 % 41,401 14.5 % (Gain)/Loss on sale of assets (17) — % 8 — % Operating Income 17,927 5.7 % 16,947 5.9 % Revenue. Our Residential segment’s revenues increased by $27.6 million, or 9.7%, during the year ended September 30, 2019, as compared to the year ended September 30, 2018. The increase was driven by increases in our single-family business, where revenues increased by $22.0 million, and our multi-family businesses, where revenues increased by $8.9 million for the year ended September 30, 2019, compared with the year ended September 30, 2018. This increase was partly offset by a $3.2 million decrease in our solar and service revenues for the year ended September 30, 2019, compared with the prior year. 27 Gross Profit. During the year ended September 30, 2019, our Residential segment experienced a $6.4 million, or 11.0%, increase in gross profit as compared to the year ended September 30, 2018. The increase in gross profit was driven primarily by higher volumes. Gross margin as a percentage of revenue increased from 20.4% to 20.7% during the year ended September 30, 2019, as compared with the year ended September 30, 2018, as we benefited from improved commodity prices and the increased scale of our operations. Selling, General and Administrative Expenses. Our Residential segment experienced a $5.5 million, or 13.2%, increase in selling, general and administrative expenses during the year ended September 30, 2019, compared to the year ended September 30, 2018. This increase was driven by increased compensation expense in connection with a growing business, including both incentive profit sharing for division management and increased headcount. Selling, general and administrative expenses as a percentage of revenues in the Residential segment increased from 14.5% to 15.0% of segment revenue during the year ended September 30, 2019. Infrastructure Solutions 2020 Compared to 2019 Year Ended September 30, 2020 2019 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 128,379 100.0 % $ 136,790 100.0 % Cost of services 93,358 72.7 % 105,863 77.4 % Gross Profit 35,021 27.3 % 30,927 22.6 % Selling, general and administrative expenses 20,418 15.9 % 18,664 13.6 % Contingent consideration — — % (277) (0.2) % Loss on sale of assets 35 — % 105 0.1 % Operating Income 14,568 11.3 % 12,435 9.1 % Revenue. Revenues in our Infrastructure Solutions segment decreased by $8.4 million during the year ended September 30, 2020, a decrease of 6.1% compared to the year ended September 30, 2019. The decrease in revenue was driven primarily by the timing of project schedules at certain of our large customers, compared to unusually strong demand in the prior year. We also experienced a decrease in demand for our motor repair services, as several of our large customers temporarily shut down facilities in response to the COVID-19 pandemic. Plant Power and Control Systems, L.L.C. ("PPCS"), a Birmingham, Alabama-based manufacturer and installer of custom engineered power distribution equipment, which we acquired in February 2020, contributed $12.6 million in revenue during the year ended September 30, 2020 subsequent to our acquisition of the business. Gross Profit . Our Infrastructure Solutions segment’s gross profit during the year ended September 30, 2020, increased by $4.1 million, as compared to the year ended September 30, 2019, primarily as a result of successful project execution. Gross profit as a percent of revenue increased to 27.3% for the year ended September 30, 2020, as our continued focus on procurement, engineering, and quality has resulted in a decrease in operating costs . Our newly acquired PPCS business contributed $3.4 million in gross profit during the year ended September 30, 2020 subsequent to our acquisition of the business . Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the year ended September 30, 2020, increased by $1.8 million compared to the year ended September 30, 2019, driven by $2.0 million of expense, including amortization of intangible assets, incurred at our newly acquired PPCS business. Expenses incurred at PPCS were partly offset by a decrease in travel and healthcare costs. The selling, general and administrative expenses as a percentage of revenue increased from 13.6% for the year ended September 30, 2019, to 15.9% for the year ended September 30, 2020. 28 2019 Compared to 2018 Year Ended September 30, 2019 2018 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 136,790 100.0 % $ 97,163 100.0 % Cost of services 105,863 77.4 % 75,337 77.5 % Gross Profit 30,927 22.6 % 21,826 22.5 % Selling, general and administrative expenses 18,664 13.6 % 18,293 18.8 % Contingent consideration (277) (0.2) % 288 0.3 % Loss on sale of assets 105 0.1 % 18 — % Operating Income 12,435 9.1 % 3,227 3.3 % Revenue. R evenues in our Infrastructure Solutions segment increased by $39.6 million during the year ended September 30, 2019, an increase of 40.8% compared to the year ended September 30, 2018. The increase in revenue relates primarily to our generator enclosure business, driven by increased demand for enclosures to be used at data centers. We also experienced an increase in demand for our motor repair services. Gross Profit. Our Infrastructure Solutions segment’s gross profit during the year ended September 30, 2019, increased by $9.1 million, as compared to the year ended September 30, 2018, primarily as a result of increased volumes. Gross profit as a percent of revenue slightly increased to 22.6% for the year ended September 30, 2019. Selling, General and Administrative Expenses. Our Infrastructure Solutions segment’s selling, general and administrative expenses during the year ended September 30, 2019, increased by $0.4 million compared to the year ended September 30, 2018. However, the selling, general and administrative expenses as a percentage of revenue decreased from 18.8% for the year ended September 30, 2018, to 13.6% for the year ended September 30, 2019. Through a focus on controlling costs, we were able to scale our business effectively without adding significant selling, general and administrative expense. Commercial & Industrial 2020 Compared to 2019 Year Ended September 30, 2020 2019 $ % $ % (Dollars in thousands, Percentage of revenues) Revenue $ 255,546 100.0 % $ 305,624 100.0 % Cost of services 234,492 91.8 % 275,722 90.2 % Gross Profit 21,054 8.2 % 29,902 9.8 % Selling, general and administrative expenses 32,128 12.6 % 27,815 9.1 % Goodwill impairment expense 6,976 2.7 % — — % Contingent consideration (11) — % — — % Gain on sale of assets (45) — % (30) — % Operating income (17,994) (7.0) % 2,117 0.7 % Revenue. Revenues in our Commercial & Industrial segment decreased $50.1 million, or 16.4%, during the year ended September 30, 2020, compared to the year ended September 30, 2019. The decrease was largely driven by lower demand for large, industrial projects, particularly in the agricultural and food processing sectors. We also experienced a reduction in demand for time-and-material work. The market for this segment’s services remains highly competitive, and disruptions caused by the COVID-19 pandemic have resulted in some delays in the awarding of new projects, as well as the progress of certain existing projects. Gross Profit . Our Commercial & Industrial segment’s gross profit during the year ended September 30, 2020 decreased by $8.8 million, or 29.6%, as compared to the year ended September 30, 2019. This was driven primarily by a decrease in volume as discussed above, and certain project inefficiencies. As a percentage of revenue, gross profit decreased from 9.8% for the year ended September 29 30, 2019, to 8.2% for the year ended September 30, 2020, as a result of certain project inefficiencies, as well as a less efficient absorption of branch level overheads in connection with lower volumes. Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the year ended September 30, 2020, increased $4.3 million, or 15.5%, compared to the year ended September 30, 2019. The increased expense for the year ended September 30, 2020 includes a reserve for doubtful accounts related to a commercial dispute, as well as an increase in legal fees. Additionally, we have invested in our procurement process and incurred costs in connection with changes to our organization structure, with the goal of improving gross margins in the future. Selling, general and administrative expenses as a percentage of revenue increased to 12.6% from 9.1%, reflecting the impact of the decreased scale of our operations. Goodwill Impairment Expense . Throughout 2020, our Commercial & Industrial segment continued to experience operating losses. Although the business has maintained a focus on operational improvements and cost reductions, its performance continued to be affected by the ongoing COVID-19 pandemic and other market factors. During the third and fourth fiscal quarter, we had expected to see operational and market improvements, as government restrictions and “stay at home” orders began to expire. However, the continuing impact of COVID-19 and the resulting increase in economic uncertainty has continued to impact customer decisions on awarding of new work. In this increasingly competitive and uncertain environment, demand for new construction in market sectors such as retail, office, and hospitality has declined, and our backlog has decreased. As a result of these developments, and continuing operational difficulties we experienced in the fourth fiscal quarter, we concluded in performing our annual goodwill impairment assessment that the fair value of our Commercial & Industrial reporting unit was less than its carrying amount, which resulted in the recognition of a non-cash goodwill impairment charge of $7.0 million for the year ended September 30, 2020. 2019 Compared to 2018 Year Ended September 30, 2019 2018 $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $ 305,624 100.0 % $ 274,299 100.0 % Cost of services 275,722 90.2 % 244,656 89.2 % Gross profit 29,902 9.8 % 29,643 10.8 % Selling, general and administrative expenses 27,815 9.1 % 27,031 9.9 % Contingent consideration — — % (100) — % Gain on sale of assets (30) — % (37) — % Operating income (loss) 2,117 0.7 % 2,749 1.0 % Revenue. Revenues in our Commercial & Industrial segment increased $31.3 million, or 11.4%, during the year ended September 30, 2019, compared to the year ended September 30, 2018. The increase in revenue over this period was driven by an increase in large agricultural and other projects in the Midwest. Gross Profit. Our Commercial & Industrial segment’s gross profit during the year ended September 30, 2019 increased by $0.3 million, or 0.9%, as compared to the year ended September 30, 2018. We benefited from higher volumes; however, these benefits were offset by certain project inefficiencies during the second half of the year. As a percentage of revenue, gross profit decreased from 10.8% for the year ended September 30, 2018, to 9.8% for the year ended September 30, 2019, as a result of these project inefficiencies. Selling, General and Administrative Expenses. Our Commercial & Industrial segment’s selling, general and administrative expenses during the year ended September 30, 2019, increased $0.8 million, or 2.9%, compared to the year ended September 30, 2018, but decreased from 9.9% as a percentage of revenue for the year ended September 30, 2018 to 9.1% for the year ended September 30, 2019, as we benefited from the increased scale of our operations and a focus on controlling costs. 30 INTEREST AND OTHER EXPENSE, NET Year Ended September 30, 2020 2019 2018 (In thousands) Interest expense $ 625 $ 1,539 $ 1,658 Deferred financing charges 152 318 288 Total interest expense 777 1,857 1,946 Other (income) expense, net 12 (148) (340) Total interest and other expense, net 789 1,709 1,606 During the year ended September 30, 2020, we incurred interest expense of $0.8 million primarily comprised of interest expense from our revolving credit facility with Wells Fargo Bank, N.A. (“Wells Fargo”) and fees on an average letter of credit balance of $6.9 million under our revolving credit facility and an average unused line of credit balance of $89.6 million. This compares to interest expense of $1.9 million for the year ended September 30, 2019, primarily comprised of interest expense from our revolving credit facility with Wells Fargo and fees on an average letter of credit balance of $6.6 million under our revolving credit facility and an average unused line of credit balance of $73.7 million. For the year ended September 30, 2018, we incurred interest expense of $1.9 million on a debt balance primarily comprised of our revolving credit facility with Wells Fargo and fees on an average letter of credit balance of $6.6 million under our revolving credit facility, and an average unused line of credit balance of $63.2 million. PROVISION FOR INCOME TAXES For the year ended September 30, 2020, we recorded income tax expense of $8.7 million. Income tax expense was partly offset by a $3.2 million benefit related to the recognition of previously unrecognized tax benefits as well as a $3.3 million benefit related to the release of valuation allowance on certain state net operating loss carryforwards. For the year ended September 30, 2019, we recorded income tax expense of $6.7 million. Income tax expense was partly offset by a $4.0 million benefit related to the recognition of previously unrecognized tax benefits. For the year ended September 30, 2018, we recorded income tax expense of $38.2 million. Income tax expense was partly offset by a $1.9 million benefit related to the recognition of previously unrecognized tax benefits. Our income tax expense included a charge of $31.3 million to re-measure our deferred tax assets and liabilities to reflect the impact from the enactment of the Tax Cuts and Jobs Act on December 22, 2017. WORKING CAPITAL During the year ended September 30, 2020, working capital exclusive of cash decreased by $8.6 million from September 30, 2019, reflecting a $40.4 million increase in current assets excluding cash and a $49.0 million increase in current liabilities during the period. During the year ended September 30, 2020, our current assets exclusive of cash increased to $317.9 million, as compared to $277.5 million as of September 30, 2019. The increase primarily relates to a $26.7 million increase in accounts receivable and an $11.7 million increase in retainage, in connection with growth in our business. Days sales outstanding decreased to 61 as of September 30, 2020, from 62 as of September 30, 2019. While the rate of collections may vary, our typically secured position, resulting from our ability in general to secure liens against our customers’ overdue receivables, offers some protection that collection will occur eventually to the extent that our security retains value. During the year ended September 30, 2020, our total current liabilities increased by $49.0 million to $242.4 million, compared to $193.5 million as of September 30, 2019, primarily related to an increase in accounts payable and accrued liabilities, and a $15.2 million increase in billings in excess of costs and estimated earnings in connection with the growth of our business. Surety Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a surety. These bonds provide a guarantee to the customer that we will perform under the terms of our contract and that we will pay our 31 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 September 30, 2020, the estimated cost to complete our bonded projects was approximately $92.9 million. We believe the bonding capacity currently provided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2020, we had cash and cash equivalents of $53.6 million and $94.3 million of availability under our revolving credit facility. We anticipate that the combination of cash on hand, cash flows from operations and available capacity under our revolving credit facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements and capital expenditures for property and equipment through the next twelve months. Our ability to generate cash flow is dependent on many factors, including demand for our services, the availability of projects at margins acceptable to us, the ultimate collectability of our receivables, and our ability to borrow on our revolving credit facility or raise funds in the capital markets, if needed. The Revolving Credit Facility We maintain a $100 million revolving credit facility that matures on September 30, 2024 pursuant to an agreement with Wells Fargo (as amended, the “Amended Credit Agreement”). Borrowings under the credit facility may not exceed a “borrowing base” that is determined monthly by Wells Fargo based on available collateral, primarily certain accounts receivables, inventories, and equipment. Under the terms of the Amended Credit Agreement, amounts outstanding bear interest at a per annum rate equal to a Daily Three Month LIBOR (as defined in the Amended Credit Agreement and subject to replacement with a new benchmark as set forth therein), plus an interest rate margin, which is determined quarterly, based on the following thresholds: Level Thresholds Interest Rate Margin I If Liquidity is less than 35% of the Maximum Revolver Amount at any time during the period 1.75 percentage points II If Liquidity is greater than or equal to 35% of the Maximum Revolver Amount at all times during the period and less than 50% of the Maximum Revolver Amount at any time during the period 1.50 percentage points III If Liquidity is greater than or equal to 50% of the Maximum Revolver Amount at all times during the period 1.25 percentage points In addition, we are charged monthly in arrears for (1) an unused commitment fee of 0.25% per annum, (2) a collateral monitoring fee of $5 thousand per quarter, (3) a letter of credit fee based on the then-applicable interest rate margin (4) appraisal fees, costs and expenses and (5) certain other fees and charges as specified in the Amended Credit Agreement. The Amended Credit Agreement contains customary affirmative, negative and financial covenants, as well as customary events of default. As of September 30, 2020, 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 32 • minimum Liquidity (as defined in the Amended Credit Agreement) of at least twenty percent (20%) of the Maximum Revolver Amount (as defined in the Amended Credit Agreement), or $20 million; with, for purposes of this covenant, at least fifty percent (50%) of our Liquidity comprised of Excess Availability (as defined in the Amended Credit Agreement). At September 30, 2020, our Liquidity was $147.9 million and our Excess Availability was $94.3 million (or greater than 50% of minimum Liquidity), and our Fixed Charge Coverage Ratio was 8.3:1.0. 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 (as defined in the Amended Credit Agreement) consisting of certain Pass-Through Tax Liabilities (as defined in the Amended Credit Agreement), divided by (ii) the sum of our cash interest (other than interest paid-in-kind, amortization of financing fees, and other non-cash interest expense) and principal debt payments (other than repayment of principal on advances under the credit facility and including cash payments with respect to capital leases), any management, consulting, monitoring, and advisory fees paid to an affiliate, and all Restricted Junior Payments (other than Pass-Through Tax Liabilities) and other cash distributions; provided, that if we make an acquisition consented to by Wells Fargo, the components of the Fixed Charge Coverage Ratio will be calculated for such fiscal period after giving pro forma effect to the acquisition assuming that such transaction has occurred on the first day of such period (including pro forma adjustments arising out of events which are directly attributable to such acquisition, are factually supportable, and are expected to have a continuing impact, in each case to be reasonably agreed to by Wells Fargo). As defined in the Amended Credit Agreement, EBITDA is calculated as consolidated net income (or loss), less extraordinary gains, interest income, non-operating income and income tax benefits and decreases in any change in LIFO reserves, plus stock compensation expense, non-cash extraordinary losses (including, but not limited to, a non-cash impairment charge or write-down), Interest Expense, income taxes, depreciation and amortization, and increases in any change in LIFO reserves for such period, determined on a consolidated basis in accordance with GAAP. If in the future our Liquidity falls below $20 million (or Excess Availability falls below 50% of our minimum Liquidity), our Fixed Charge Coverage Ratio is less than 1.1:1.0, or if we otherwise fail to perform or otherwise comply with certain of our covenants or other agreements under the Amended Credit Agreement, it would result in an event of default under the Amended Credit Agreement, which could result in some or all of any indebtedness we may take on becoming immediately due and payable. At September 30, 2020, we had $5.7 million in outstanding letters of credit with Wells Fargo and $12 thousand of outstanding borrowings. Investments From time to time, the Company may invest in non-controlling positions in the debt or equity securities of other businesses. Our Board of Directors has approved an investment policy that permits the Company to invest our cash in liquid and marketable securities that include equities and fixed income securities, subject to size limits on investments individually and in the aggregate. Equity securities may include unrestricted, publicly traded stock that is listed on a major exchange or a national, over-the-counter market and that is appropriate for our portfolio objectives, and fixed income securities are required to have an investment grade credit quality at the time of purchase. Operating Activities Our cash flow from operations is not only influenced by cyclicality, demand for our services, operating margins and the type of services we provide, but can also be influenced by working capital needs such as the timing of our receivable collections. Working capital needs are generally lower during our fiscal first and second quarters due to the seasonality that we experience in many regions of the country; however, a seasonal decline in working capital may be offset by needs associated with higher growth or acquisitions. Operating activities provided net cash of $76.7 million during the year ended September 30, 2020, as compared to $38.7 million of net cash provided in the year ended September 30, 2019. The increase in operating cash flow resulted primarily from an increase in earnings, as well as a $9.0 million benefit from the deferral of payroll taxes as permitted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and a decrease in working capital. Operating activities provided net cash of $38.7 million during the year ended September 30, 2019, as compared to $12.2 million of net cash provided in the year ended September 30, 2018. The increase in operating cash flow resulted primarily from an increase in earnings, partly offset by an increase in working capital in support of our growth. In particular, increased accounts receivable resulted in cash outflows of $35.3 million, offset by cash inflows of $22.5 million driven by increased accounts payable and accrued liabilities. 33 Investing Activities In the year ended September 30, 2020, net cash used in investing activities was $33.6 million, as compared to $5.7 million of net cash used in investing activities in the year ended September 30, 2019. Investing activities for the year ended September 30, 2020 include $4.7 million of capital expenditures and $29.0 million for the acquisition of businesses. In the year ended September 30, 2019, net cash used in investing activities was $5.7 million, as compared to $11.9 million of net cash used in investing activities in the year ended September 30, 2018. Investing activities for the year ended September 30, 2019, include $6.3 million of capital expenditures. Financing Activities Net cash used in financing activities was $8.5 million in the year ended September 30, 2020, compared to $40.3 million used in the year ended September 30, 2019. For the year ended September 30, 2020, we used $7.7 million to repurchase our shares under our stock repurchase program, as well as to satisfy statutory withholding requirements upon the vesting of employee stock compensation. Net cash used in financing activities was $40.3 million in the year ended September 30, 2019, compared to $2.4 million used in the year ended September 30, 2018. For the year ended September 30, 2019, we used $119.5 million to repay a portion of our revolving credit facility, partly offset by $89.3 million of additional borrowings. We also used $9.8 million to repurchase our shares under our stock repurchase program, as well as to satisfy statutory withholding requirements upon the vesting of employee stock compensation. CONTROLLING SHAREHOLDER Tontine is the Company’s controlling shareholder, owning approximately 56 percent of the Company’s outstanding common stock, based on an amended Schedule 13D filed by Tontine with the SEC on October 9, 2020. Accordingly, Tontine has the ability to exercise significant control over our affairs, including the election of directors and most actions requiring the approval of shareholders. We are a party to a sublease agreement with Tontine Associates for corporate office space in Greenwich, Connecticut. The sublease extends through February 27, 2023, with monthly payments due in the amount of approximately $8 thousand. The lease has terms at market rates, and payments by the Company are at a rate consistent with that paid 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 December 31, 2017. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS As is common in our industry, we have entered into certain off-balance sheet arrangements that expose us to increased risk. Our significant off-balance sheet transactions include letter of credit obligations, firm commitments for materials and surety guarantees. Some of our customers and vendors 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, 34 we would be required to reimburse our creditor for the letter of credit. At September 30, 2020, $0.2 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 September 30, 2020, $5.5 million of our outstanding letters of credit were to collateralize our insurance programs. From time to time, we may enter into firm purchase commitments for materials such as copper wire and aluminum wire, among others, which we expect to use in the ordinary course of business. These commitments are typically for terms less than one year and require us to buy minimum quantities of materials at specified intervals at a fixed price over the term. As of September 30, 2020, we did not have any significant open purchase commitments. Many of our customers require us to post performance and payment bonds issued by a surety. Those bonds guarantee the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. In the event that we fail to perform under a contract or pay subcontractors and vendors, the customer may demand the surety to pay or perform under our bond. Our relationship with our sureties is such that we will indemnify the sureties for any expenses they incur in connection with any of the bonds they issue on our behalf and may be required to post collateral to support the bonds. To date, we have not incurred any material costs to indemnify our sureties for expenses they incurred on our behalf. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the Consolidated Financial Statements, and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our Consolidated Financial Statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from those estimates. Accordingly, we have identified the accounting principles which we believe are most critical to our reported financial status by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to revenue recognition, accounting for business combinations, the assessment of goodwill and asset impairment, our allowance for doubtful accounts receivable, the recording of our insurance liabilities and estimation of the valuation allowance for deferred tax assets, and unrecognized tax benefits. These accounting policies, as well as others, are described in Note 2, “Summary of Significant Accounting Policies” in the notes to our Consolidated Financial Statements and at relevant sections in this discussion and analysis. Revenue Recognition. We enter into contracts principally on the basis of competitive bids. We frequently negotiate the final terms and prices of those contracts with the customer. Although the terms of our contracts vary considerably, approximately 91% of our revenues are based on either a fixed price or unit price basis in which we agree to do the work for a fixed amount for the entire project (fixed price) or for units of work performed (unit price). Approximately 9% of our revenues are earned from contracts where we are paid on a time and materials basis. Our most significant cost drivers are the cost of labor, the cost of materials and the cost of casualty and health insurance. These costs may vary from the costs we originally estimated. Variations from estimated contract costs along with other risks inherent in performing fixed price and unit price contracts may result in actual revenue and gross profits or interim projected revenue and gross profits for a project differing from those we originally estimated and could result in losses on projects. Depending on the size of a particular project, variations from estimated project costs could have a significant impact on our operating results for any fiscal quarter or year. We complete most of our projects within one year. We frequently provide service and maintenance work under open-ended, unit price master service agreements which are renewable annually. We recognize revenue on service, time and material work when services are performed. Work performed under a construction contract generally provides that the customers accept completion of progress to date and compensate us for services rendered, measured in terms of units installed, hours expended or some other measure of progress. Revenues from construction contracts are recognized on the percentage-of-completion method. Revenues recognized on a percentage-of-completion basis, all of which are fixed price or cost plus arrangements, comprised approximately 63% of our total revenue for the year ended September 30, 2020. 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 35 include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs, profitability and final contract settlements may result in revisions to costs and income, and the effects of such revisions are recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined. We generally do not incur significant costs related to obtaining or fulfilling a contract prior to the start of a project. When significant 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. Claims and unapproved change orders are recorded at estimated realizable value when collection is probable and can be reasonably estimated. We do not recognize profits on construction costs incurred in connection with claims. Claims made by us involve negotiation and, in certain cases, litigation. Such litigation costs are expensed as incurred. Business Combinations . In accounting for business combinations, certain assumptions and estimates are employed in determining the fair value of assets acquired, evaluating the fair value of liabilities assumed, as well as in determining the allocation of goodwill to the appropriate reporting unit. These estimates may be affected by factors such as changing market conditions affecting the industries in which we operate. The most significant assumptions requiring judgment involve identifying and estimating the fair value of intangible assets and the associated useful lives for establishing amortization periods. To finalize purchase accounting for significant intangible assets and liabilities, we utilize the services of independent valuation specialists to assist in the determination of the fair value. Valuation of Intangibles and Long-Lived Assets. We evaluate goodwill for potential impairment at least annually at year end; however, if impairment indicators exist, we will evaluate as needed. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is greater than its carrying value. If we determine that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we perform an impairment test by calculating the fair value of the reporting unit and comparing this calculated fair value with the carrying value of the reporting unit. We estimate the fair value of the reporting unit based on the market approach and income approach. Included in this evaluation are certain assumptions and estimates to determine the fair values of reporting units such as estimates of future cash flows and discount rates, as well as assumptions and estimates related to the valuation of other identified intangible assets. Changes in these assumptions and estimates or significant changes to the market value of our common stock could materially impact our results of operations or financial position. We recorded a goodwill impairment of $7.0 million during the year ended September 30, 2020. We did not record goodwill impairment during the years ended September 30, 2019 or 2018. Each reporting period, we assess impairment indicators related to long-lived assets and intangible assets. If we determine impairment indicators exist, we conduct an evaluation to determine whether any impairment has occurred. This evaluation includes certain assumptions and estimates to determine fair value of asset groups, including estimates about future cash flows and discount rates, among others. Changes in these assumptions and estimates could materially impact our results of operations or financial projections. No impairment charges related to amortizable assets were recorded in the years ended September 30, 2020, 2019 or 2018. Current and Non-Current Accounts Receivable and Provision for Doubtful Accounts. We provide an allowance for doubtful accounts for unknown collection issues, in addition to reserves for specific accounts receivable where collection is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, our customers’ access to capital, our customers’ willingness to pay, general economic conditions, and the ongoing relationships with our customers. In addition to these factors, the method of accounting for construction contracts requires the review and analysis of not only the net receivables, but also the amount of billings in excess of costs and costs in excess of billings. The analysis management utilizes to assess collectability of our receivables includes detailed review of older balances, analysis of days sales outstanding where we include in the calculation, in addition to accounts receivable balances net of any allowance for doubtful accounts, the level of costs in excess of billings netted against billings in excess of costs and the ratio of accounts receivable, net of any allowance for doubtful accounts plus the level of costs in excess of billings, to revenues. These analyses provide an indication of those amounts billed ahead of or behind the recognition of revenue on our construction contracts and are important to consider in understanding the operational cash flows related to our revenue cycle. Risk Management. We are insured for workers’ compensation, automobile liability, general liability, construction defects, pollution, employment practices and employee-related health care claims, subject to deductibles. Our general liability program provides 36 coverage for bodily injury and property damage. Losses up to the deductible amounts are accrued based upon our estimates of the liability for claims incurred and an estimate of claims incurred but not reported. The accruals are derived from actuarial studies, known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of the ultimate expected loss. We believe such accruals to be adequate; however, insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents incurred but not reported and the effectiveness of our safety program. Therefore, if actual experience differs from the assumptions used in the actuarial valuation, adjustments to the reserve may be required and would be recorded in the period that the experience becomes known. Valuation Allowance for Deferred Tax Assets. We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. The estimation of required valuation allowances includes estimates of future taxable income. In assessing the realizability of deferred tax assets at September 30, 2020, 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 within the applicable NOL carryforward periods to realize $33.8 million of its deferred tax assets. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. An inability to generate sufficient taxable income in future periods to realize our deferred tax assets may lead to a future need for a valuation allowance and a corresponding reduction in GAAP net income. In addition, any further reduction in the federal statutory tax rate in the future could also cause a reduction in the economic benefit of the NOL available to us and a corresponding charge to reduce the book value of the deferred tax asset recorded on our 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, 2017 and forward are subject to federal audit as are prior tax years, to the extent of unutilized net operating losses generated in those years. We anticipate that approximately $3.1 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.