IES Holdings, Inc. Annual Report 2011

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2011Commission File Number 1-13783 Integrated Electrical Services, Inc.(Exact name of registrant as specified in its charter) Delaware 76-0542208(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)4801 Woodway Drive, Suite 200-E, Houston, Texas 77056(Address of principal executive offices and ZIP code)Registrant’s telephone number, including area code: (713) 860-1500Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, par value $0.01 per share NASDAQSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934. Yes ¨ No xIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ¨Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xIndicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities ExchangeAct of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.Yes x No ¨The aggregate market value of the voting stock of the Registrant on March 31, 2011 held by non-affiliates was approximately $20.6 million. OnDecember 16, 2011, there were 14,938,071 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCECertain information contained in the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on February 28, 2012 isincorporated by reference into Part III of this Form 10-K. Table of ContentsFORM 10-KINTEGRATED ELECTRICAL SERVICES, INC.Table of Contents Page PART I DEFINITIONS 3 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS 3 Item 1 BUSINESS 5 Item 1A RISK FACTORS 11 Item 1B UNRESOLVED STAFF COMMENTS 14 Item 2 PROPERTIES 14 Item 3 LEGAL PROCEEDINGS 15 Item 4 (REMOVED AND RESERVED) 15 PART II Item 5 MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES 15 Item 6 SELECTED FINANCIAL DATA 17 Item 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18 Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34 Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35 Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 74 Item 9A CONTROLS AND PROCEDURES 74 Item 9B OTHER INFORMATION 74 PART III Item 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 75 Item 11 EXECUTIVE COMPENSATION 76 Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 76 Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 77 Item 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 77 PART IV Item 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 78 SIGNATURES 81 EX-21.1 EX-23.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2 EX-101 2Table of ContentsPART IDEFINITIONSIn this Annual Report on Form 10-K, the words “IES”, the “Company”, the “Registrant”, “we”, “our”, “ours” and “us” refer to Integrated Electrical Services,Inc. and, except as otherwise specified herein, to our subsidiaries.DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K includes certain statements that may be deemed “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, all of which are based upon various estimates and assumptions that theCompany believes to be reasonable as of the date hereof. These statements involve risks and uncertainties that could cause the Company’s actual futureoutcomes to differ materially from those set forth in such statements. Such risks and uncertainties include, but are not limited to: • fluctuations in operating activity due to downturns in levels of construction, seasonality and differing regional economic conditions; • competition in the construction industry, both from third parties and former employees, which could result in the loss of one or more customers or lead tolower margins on new contracts; • a general reduction in the demand for our services; • a change in the mix of our customers, contracts and business; • our ability to successfully manage construction projects; • possibility of errors when estimating revenue and progress to date on percentage-of-completion contracts; • inaccurate estimates used when entering into fixed-priced contracts; • challenges integrating new types of work or new processes into our divisions; • the cost and availability of qualified labor; • accidents resulting from the physical hazards associated with our work and the potential for accidents; • success in transferring, renewing and obtaining electrical and construction licenses; • our ability to pass along increases in the cost of commodities used in our business, in particular, copper, aluminum, steel, fuel and certain plastics; • potential supply chain disruptions due to credit or liquidity problems faced by our suppliers; • loss of key personnel and effective transition of new management; • warranty losses or other latent defect claims in excess of our existing reserves and accruals; • warranty losses or other unexpected liabilities stemming from former divisions which we have sold or closed; • growth in latent defect litigation in states where we provide residential electrical work for home builders not otherwise covered by insurance; • limitations on the availability of sufficient credit or cash flow to fund our working capital needs; • difficulty in fulfilling the covenant terms of our credit facilities; • increased cost of surety bonds affecting margins on work and the potential for our surety providers to refuse bonding or require additional collateral attheir discretion; 3Table of Contents• increases in bad debt expense and days sales outstanding due to liquidity problems faced by our customers; • changes in the assumptions made regarding future events used to value our stock options and performance-based stock awards; • the recognition of potential goodwill, long-lived assets and other investment impairments; • uncertainties inherent in estimating future operating results, including revenues, operating income or cash flow; • disagreements with taxing authorities with regard to tax positions we have adopted; • the recognition of tax benefits related to uncertain tax positions; • complications associated with the incorporation of new accounting, control and operating procedures; • the financial impact of new or proposed accounting regulations; • the ability of our controlling shareholder to take action not aligned with other shareholders; • the possibility that certain tax benefits of our net operating losses may be restricted or reduced in a change in ownership; • credit and capital market conditions, including changes in interest rates that affect the cost of construction financing and mortgages, and the inability forsome of our customers to retain sufficient financing which could lead to project delays or cancellations; • the sale or disposition of the shares of our common stock held by our majority shareholder, which, under certain circumstances, would trigger change ofcontrol provisions in contracts such as employment agreements and financing and surety arrangements; and • Additional closures or sales of facilities in our Commercial & Industrial segment could result in significant future charges and a significant disruption ofour operations.You should understand that the foregoing, as well as other risk factors discussed in this document, including those listed in Part I, Item 1A of this report underthe heading “Risk Factors” could cause future outcomes to differ materially from those experienced previously or those expressed in such forward-lookingstatements. We undertake no obligation to publicly update or revise information concerning our restructuring efforts, borrowing availability, cash position orany forward-looking statements to reflect events or circumstances that may arise after the date of this report. Forward-looking statements are provided in thisForm 10-K pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of theestimates, assumptions, uncertainties and risks described herein. 4Table of ContentsItem 1. BusinessIntegrated Electrical Services, Inc., a Delaware corporation, is a leading national provider of electrical infrastructure services to the communications,residential, commercial and industrial industries. Originally established as IES in 1997, we provide services from 53 locations serving the continental48 states as of September 30, 2011. Our operations are organized into three business segments, based upon the nature of its products and services (morecomplete descriptions follow): • Communications – Nationwide provider of products and services for mission critical infrastructure, such as data centers, of large corporations. • Residential – Regional provider of electrical installation services for single-family housing and multi-family apartment complexes. • Commercial & Industrial – Provider of electrical design, construction, and maintenance services to the commercial and industrial markets invarious regional markets and nationwide in certain areas of expertise, such as the power infrastructure market.The table below describes the percentage of our total revenues attributable to each of our three segments over each of the last three years: Years Ended September 30, 2011 2010 2009 $ % $ % $ % (Dollars in thousands, Percentage of revenues) Communications $93,579 19.4% $79,344 17.2% $78,724 11.8% Residential 114,732 23.8% 116,012 25.2% 157,521 23.7% Commercial & Industrial 273,296 56.8% 265,277 57.6% 429,752 64.5% Total Consolidated $481,607 100.0% $460,633 100.0% $665,997 100.0% For additional financial information by segment, see Note 11, “Operating Segments” to the Consolidated Financial Statements, which is incorporated hereinby reference.Net Operating Loss Carry ForwardThe Company and certain of its subsidiaries have federal net operating loss carry forwards of approximately $435 million at September 30, 2011, includingapproximately $136 million resulting from the additional amortization of personal goodwill. For more information see Item 8, “Financial Statements andSupplementary” Data of this Form 10-K.Operating SegmentsCommunicationsBusiness DescriptionOriginally established in 1984, our Communications division is a leading provider of network infrastructure products and services for data centers and othermission critical environments. Services offered include the design, installation and maintenance of network infrastructure for the financial, medical,hospitality, government, hi-tech manufacturing, educational and information technology industries. We also provide the design and installation ofaudio/visual, telephone, fire, wireless and intrusion alarm systems as well as design/build, service and maintenance of data network systems. We performservices across the United States from our 7 offices and our Communications headquarters located in Tempe, Arizona allowing dedicated onsite maintenanceteams at our customer’s sites. In 2010, our Communications segment was separated from our Commercial & Industrial segment to form a new operatingsegment. The decision to report Communications as a separate segment was made as the Company changed its internal reporting structure and the segmentgained greater significance as a percentage of consolidated revenues, gross profit and operating income. Moreover, the Communications segment is aseparate and specific part of future strategic growth plans of the Company.Sales and MarketingWe primarily specialize in installations of communication systems, and site and national account support for the mission critical infrastructure of Fortune 500corporations. Our sales strategy relies on a concentrated business development effort, with centralized corporate marketing programs and direct end-customercommunications and relationships. Due to the mission critical nature of the facilities we service, our end customers significantly rely upon our pastperformance record, technical expertise and specialized 5Table of Contentsknowledge. Our long term strategy is to improve our position as a preferred mission critical solutions and services provider to large national corporations andstrategic local companies. Key elements of our long term strategy include continued investment in our employees’ technical expertise, expansion of ouronsite maintenance and recurring revenue model and improving our financial performance with a focus on risk adjusted returns on capital.CompetitionThe mission critical infrastructure services industry is highly competitive. We compete on quality service and/or price, and seek to emphasize our longhistory of delivering a high quality solution. Our competitors include a variety of nationwide, regional and local firms.ResidentialBusiness DescriptionOur Residential business provides electrical installation services for single-family housing and multi-family apartment complexes and CATV cablinginstallations for residential and light commercial applications. In addition to our core electrical construction work, the Residential segment is expanding itsofferings by providing services for the installation of residential solar power, smart meters, electric car charging stations and stand-by generators, both for newconstruction and existing residences. The division has 26 locations in Texas, and Sun-Belt, western and the Mid-Atlantic regions of the United States.Sales and MarketingDemand for our Residential services is highly dependent on the number of single-family and multi-family home starts in the markets we serve. Although weoperate in multiple states throughout the Sun-Belt, Mid-Atlantic and western regions of the United States, 66.5 % of our revenues are derived from servicesprovided in the state of Texas. Our sales efforts include a variety of strategies, including a concentrated focus on national homebuilders and multi-familydevelopers and a local sales strategy for single and multi-family housing projects. Our cable, solar and electric car charging station revenues are typicallygenerated through industry-specific third parties to which we act as a preferred provider of installation services.Our long term strategy is to continue to be the leading national provider of electrical services to the residential market. Although the key elements of ourlong term strategy include a continued focus on a maintaining a low and variable cost structure and cash generation, we have modified our strategy duringthe housing downturn by expanding into markets less exposed to national building cycles, such as solar panel and electric car charging installations.CompetitionOur competition primarily consists of small, privately owned contractors who have limited access to capital. We believe that we have a competitiveadvantage over these smaller competitors due to our long-standing customer relationships, financial capabilities, local market knowledge and competitivepricing.Commercial & IndustrialBusiness DescriptionOur electrical contracting division is one of the largest providers of electrical contracting services in the United States. The division offers a broad range ofelectrical design, construction, renovation, engineering and maintenance services to the commercial and industrial markets. The division has 18 locations inTexas, Nebraska, Colorado, Oregon and the Mid-Atlantic region.Services include the design of electrical systems within a building or complex, procurement and installation of wiring and connection to power sources, end-use equipment and fixtures, as well as contract maintenance. We focus on projects that require special expertise, such as design-and-build projects that utilizethe capabilities of our in-house experts, or projects which require specific market expertise, such as transmission and distribution and power generationfacilities. We also focus on service, maintenance and certain renovation and upgrade work, which tends to be either recurring or have lower sensitivity toeconomic cycles, or both. We provide services for a variety of projects, including: high-rise residential and office buildings, power plants, manufacturingfacilities, data centers, chemical plants, refineries, wind farms, solar facilities, municipal infrastructure and health care facilities and residential developments.Our utility services consist of overhead and underground installation and maintenance of electrical and other utilities transmission and distribution networks,installation and splicing of high-voltage transmission and distribution lines, substation construction and substation and right-of-way maintenance. Ourmaintenance services generally provide recurring revenues that are typically less affected by levels of construction activity. Service and maintenancerevenues are derived from service calls and routine maintenance contracts, which tend to be recurring and less sensitive to short term economic fluctuations. 6Table of ContentsSales and MarketingDemand for our Commercial & Industrial services is driven by construction and renovation activity levels, economic growth, and availability of banklending. Commercial construction starts began to slow in mid 2008, and with a more severe decline starting in 2009 and continuing through 2011 due to therecession and tightening of the credit markets. Certain of our industrial projects have longer cycle times than our typical Commercial & Industrial servicesand generally follow the economic trends with a lag. Our sales focus varies by location, but is primarily based upon regional and local relationships withgeneral contractors and a demonstrated expertise in certain industries, such as transmission and distribution.Our long term strategy has been modified over the past twelve months due to the downturn in the construction industry. Our long term strategy is to be thepreferred provider of electrical services in the markets where we have demonstrated expertise or are a local market leader. Key elements of our long termstrategy include leveraging our expertise in certain markets, such as transmission and distribution, expansion of our service and maintenance business andmaintaining our focus on our returns on risk adjusted capital.CompetitionThe electrical infrastructure services industry is generally highly competitive and includes a number of regional or small privately-held local firms. There arefew significant barriers to entry in the electrical infrastructure services industry, which limits our advantages when competing for projects. Industry expertise,project size, location and past performance will determine our bidding strategy, the level of involvement from competitors and our level of success inwinning awards. Our primary advantages vary by location, but mostly are based upon local individual relationships or a demonstrated industry expertise.Additionally, due to the size of many of our projects, our financial resources help us compete effectively against local competitors.Recent DevelopmentsWe are focused on return on capital and cash flow to maximize long-term shareholder value. As a result, we have increased our focus on a number ofinitiatives to return the Company to profitability. Included in these initiatives has been the closure or sale of a number of facilities within our Commercial &Industrial segment. During 2011, we initiated the sale or closure of all or portions of our Commercial & Industrial facilities in Arizona, Florida, Iowa,Louisiana, Massachusetts, Nevada and Texas. We continue to evaluate the performance of the remaining operations in our Commercial & Industrial segment,which continues to operate in a very challenging environment. If we were to elect to dispose of a substantial portion of our remaining Commercial &Industrial segment, the realized values of such actions would be substantially less than current book values, which would likely result in a material adverseimpact on our financial results.Safety CulturePerformance of our contracting and maintenance services exposes us to unique potential hazards associated specifically with the electrical contractingindustry. In light of these risks, we are resolute in our commitment to safety and maintaining a strong safety culture, which is reflected in our safety programand the significant reductions in loss time cases and OSHA recordable incidents over the past ten years. We employ eight full-time regional safety managers,under the supervision of our full-time Vice President of Safety. We have standardized safety policies, programs, procedures and personal protectionequipment throughout all operating locations, including programs to train new employees, which applies to employees new to the industry and those new toIES. To further emphasize our commitment to safety, we have also tied management incentives to their specific safety performance results.Business OperationsWe have 53 locations serving the continental 48 states. In addition to our corporate office, we have 8 locations within our Communications business, 26locations within our Residential business and 18 locations within our Commercial & Industrial business. This diversity helps to reduce our exposure tounfavorable economic developments in any given region.Access to BondingOur ability to post surety bonds provides us with an advantage over competitors that are smaller or have fewer financial resources. We believe that thestrength of our balance sheet, as well as a good relationship with our bonding provider, enhances our ability to obtain adequate financing and surety bonds.Industry OverviewSlowing economic conditions have lead to a sharp decrease in demand for residential housing since the middle of 2007, with commercial demand beginningto slow, thereafter, in 2008. A more severe decline was experienced during 2009 for commercial as well as industrial and multi-family construction.The 2010 and 2011 decline, while less severe, did not meet previous expectations for recovery. According to McGraw Hill Construction’s DodgeConstruction Outlook dated October 2011, new construction starts for 2012 are forecasted at $412 billion, which is flat with the 2011 new construction figureof $410 billion. This forecast remains well below peak activity in 2006 due to the slow recovery of jobs and consumer spending affecting the economicrecovery. 7Table of ContentsThe McGraw Hill Construction Outlook included the following information which we consider key points for the construction markets we compete within: • Single family housing is forecasted to increase approximately 10% in 2012, but the activity level may remain weak as the excess supply of homeforeclosures continue to depress the market. • Multifamily housing is forecasted to improve by approximately 18% in 2012, due to its more stable revenue stream, despite restrained financing.Restrictive home lending, high unemployment and anemic economic growth have created a level of uncertainty among prospective homebuyerssufficient to keep them on the sidelines; thus improving demand for multi-family housing. • Commercial construction is forecasted to increase approximately 8% in 2012. Warehouses and hotels are expected to improve the most in thissector during 2012. Activity levels for stores should remain weak by historical standards, as a significant portion of the growth in consumerspending were gasoline stations and e-commerce, two sectors that do not require any meaningful investment in retail commercial buildings. • Institutional building construction is forecasted to decrease 2% in 2012, retreating for the fourth straight year, due to the difficult fiscal climatefor states and localities. School construction should be dampened as K-12 enrollments are projected to grow by 5.9% for the 2010-2020 periods,while health care facilities will be tentative until a clearer picture develops with respect to health care legislation and Medicare funding issuesare dealt with by Congress. • Public works construction is forecasted to decline 5% in 2012, given the fading benefits of the federal stimulus together with the lower budgetsfrom state and local governmental entities. Spending cuts in the absence of a multi-year federal transportation bill will negatively impacthighways and bridge construction. • Electric utility construction activity is forecasted to drop 24% in 2012, falling for the fourth year in a row since the record high in 2008.Alternative power projects, such as wind and solar, are expected to decline as federal and state loan guarantees expire as a result of budgetconstraints from these entities. On a positive note the Nuclear Regulatory Commission is expect to issue final approvals for two new facilities inearly 2012. These projects are valued at $8.0 billion a piece.FMI 2012 U.S. Markets Construction Overview indicated communications construction should increase by approximately 5% in 2012 to approximately$20.0 billion. The trend towards data storage and retrieval on the “cloud” will increase the growth of the data center segment of this industry. Additionally,devices such as smart phones and laptops are requiring greater bandwidth and interconnectivity. Communications construction is technology-driven andprimarily limited by consumer demand.Looking well beyond the recent economic downturn and prolonged recovery, numerous factors could positively affect construction industry growth,including (i) population growth, which will increase the need for commercial, industrial and residential facilities, (ii) aging public infrastructure which mustbe replaced or repaired, and (iii) increased emphasis on environmental and energy efficiency, which may lead to both increased public and private spending.We believe these factors will continue to drive demand for the electrical infrastructure services we offer over the long-term.CustomersWe have a diverse customer base. During the twelve-month periods ended September 30, 2011, 2010 and 2009, no single customer accounted for more than10% of our revenues. We will continue our emphasis on developing and maintaining relationships with our customers by providing superior, high-qualityservice. Management at each of our segments is responsible for determining sales strategy and sales activities.BacklogBacklog is a measure of revenue that we expect to recognize from work that has yet to be performed on uncompleted contracts, and from work that has beencontracted but has not started. Backlog is not a guarantee of future revenues, as contractual commitments may change. As of September 30, 2011, our backlogwas approximately $174.5 million compared to $219.3 million as of September 30, 2010. This decline is primarily due to actions taken to close certainunprofitable operations in our Commercial & Industrial segment, which are more fully described in Item 7 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — The 2011 Restructuring Plan” of this Form 10-K. The Communications segment backlog was $26.6million, essentially unchanged form the prior year. The Residential segment experienced a 31.7% increase to $32.0 million as of September 30, 2011 ascompared to fiscal 2010, as multi-family housing starts have increased. We do not include single-family housing or time and material work as a component ofour Residential backlog. The Commercial & Industrial segment backlog not associated with the wind-down of operations described in the 2011Restructuring Plan, declined modestly year-over-year, due to competitive market pressures, project selection delays and project cancellations. We do notinclude service or time and material work as a component of our Commercial & Industrial backlog. 8Table of ContentsEmployeesAt September 30, 2011, we had 2,724 employees. We are not a party to any collective bargaining agreements with our employees. We believe that ourrelationship with our employees is strong.CompetitionThe markets in which we operate are highly competitive. Many of the industries in which we operate are highly fragmented and are served by many small,owner-operated private companies. There are also several large private regional companies and a small number of large public companies in our industries. Inaddition, there are relatively few barriers to entry into some of the industries in which we operate and, as a result, any organization that has adequate financialresources and access to technical expertise may become a competitor. We believe that our strengths such as our safety performance, technical expertise andexperience, financial and operational resources, nationwide presence, and industry reputation put us in a strong position. There can be no assurance, however,that our competitors will not develop the expertise, experience and resources to provide services that are superior in both price and quality to our services, orthat we will be able to maintain or enhance our competitive position.Regulations • Our operations are subject to various federal, state and local laws and regulations, including: • licensing requirements applicable to electricians; • building and electrical codes; • regulations relating to worker safety and protection of the environment; • regulations relating to consumer protection, including those governing residential service agreements; and • qualifications of our business legal structure in the jurisdictions where we do business.Many state and local regulations governing electricians require permits and licenses to be held by individuals. In some cases, a required permit or licenseheld by a single individual may be sufficient to authorize specified activities for all our electricians who work in the state or county that issued the permit orlicense. It is our policy to ensure that, where possible, any permits or licenses that may be material to our operations in a particular geographic area are heldby multiple employees within that area.We believe we have all licenses required to conduct our operations and are in compliance with applicable regulatory requirements. Failure to comply withapplicable regulations could result in substantial fines or revocation of our operating licenses or an inability to perform government work.Risk Management and InsuranceThe primary risks in our operations include bodily injury, property damage and construction defects. We maintain automobile, general liability andconstruction defect insurance for third party health, bodily injury and property damage and workers’ compensation coverage, which we consider appropriateto insure against these risks. Our third-party insurance is subject to deductibles for which we establish reserves.Seasonality and Quarterly FluctuationsResults of operations from our Residential segment are more seasonal, depending on weather trends, with typically higher revenues generated during springand summer and lower revenues during fall and winter. The Communications and Commercial & Industrial segments of our business are less subject toseasonal trends, as work generally is performed inside structures protected from the weather. Our service and maintenance business is generally not affectedby seasonality. In addition, the construction industry has historically been highly cyclical. Our volume of business may be adversely affected by declines inconstruction projects resulting from adverse regional or national economic conditions. Quarterly results may also be materially affected by the timing of newconstruction projects. Accordingly, operating results for any fiscal period are not necessarily indicative of results that may be achieved for any subsequentfiscal period.Available InformationGeneral information about us can be found on our website at www.ies-co.com under “Investor Relations.” We file our interim and annual financial reports, aswell as other reports required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the United States Securities and ExchangeCommission (the “SEC”). 9Table of ContentsOur annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports areavailable free of charge through our website as soon as it is reasonably practicable after we file them with, or furnish them to, the SEC. You may also contactour Investor Relations department and they will provide you with a copy of these reports. The materials that we file with the SEC are also available free ofcharge through the SEC website at www.sec.gov. You may also read and copy these materials at the SEC’s Public Reference Room at 100 F Street, NE.,Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1–800–SEC–0330.We have adopted a Code of Ethics for Financial Executives, a Code of Business Conduct and Ethics for directors, officers and employees (the LegalCompliance and Corporate Policy Manual), and established Corporate Governance Guidelines and adopted charters outlining the duties of our Audit, HumanResources and Compensation and Nominating/Governance Committees, copies of which may be found on our website. Paper copies of these documents arealso available free of charge upon written request to us. We have designated an “audit committee financial expert” as that term is defined by the SEC. Furtherinformation about this designee may be found in the Proxy Statement for the Annual Meeting of Stockholders of the Company. 10Table of ContentsItem 1A. Risk FactorsYou should consider carefully the risks described below, as well as the other information included in this document before making an investment decision.Our business, results of operations or financial condition could be materially and adversely affected by any of these risks, and the value of your investmentmay decrease due to any of these risks.Existence of a controlling shareholder.A majority of our outstanding common stock is owned by Tontine Capital Partners, L.P. and its affiliates (collectively, “Tontine”). On July 21, 2011, Tontine,filed an amended Schedule 13D indicating its ownership level of 57.4%. As a result, Tontine can control most of our affairs, including the election ofdirectors who in turn appoint executive management and control any action requiring the approval of shareholders, including the adoption of amendments toour corporate charter and approval of any potential merger or sale of all or substantially all assets, divisions, or the Company itself. This control also givesTontine the ability to bring matters to a shareholder vote that may not be in the best interest of our other stakeholders. Additionally, Tontine is in thebusiness of investing in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us or act assuppliers or customers of the Company.We may incur significant charges or be adversely impacted by the closure or sale of additional facilities.We have increased our focus on a number of initiatives to return the Company to profitability. Included in these initiatives has been the closure or sale of anumber of facilities within our Commercial & Industrial segment. During 2011, we initiated the sale or closure of all or portions of our Commercial &Industrial facilities in Arizona, Florida, Iowa, Louisiana, Massachusetts, Nevada and Texas. We continue to evaluate the performance of the remainingoperations in our Commercial & Industrial segment, which continues to operate in a very challenging environment. If we were to elect to dispose of asubstantial portion of our remaining Commercial & Industrial segment, the realized values of such actions would be substantially less than current bookvalues, which would likely result in a material adverse impact on our financial results.Availability of net operating losses may be reduced by a change in ownership.A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability of net operating losses for federal and state incometax purposes. Should Tontine sell or exchange all or a portion of its position in IES, a change in ownership could occur. In addition a change in ownershipcould occur resulting from the purchase of common stock by an existing or a new 5% shareholder as defined by Internal Revenue Code Section 382.Currently, we have approximately $286.5 million of federal net operating losses that are available to use to offset taxable income, exclusive of net operatinglosses from the amortization of additional tax goodwill. In addition, we have approximately $12.6 million of net operating loss not currently available due tothe limitation imposed by Internal Revenue Code Section 382, exclusive of net operating losses from the amortization of additional tax goodwill, and will beavailable to offset taxable income in future periods. Should a change in ownership occur, all net operating losses incurred prior to the change in ownershipwould be subject to limitation imposed by Internal Revenue Code Section 382 and this would substantially reduce the amount of net operating loss currentlyavailable to offset taxable income.To service our indebtedness and to fund working capital, we will require a significant amount of cash. Our ability to generate cash depends on manyfactors that are beyond our control.Our ability to make payments on and to refinance our indebtedness and to fund working capital requirements will depend on our ability to generate cash inthe future. This is subject to our operational performance, as well as general economic, financial, competitive, legislative, regulatory and other factors that arebeyond our control.We cannot provide assurance that our business will generate sufficient cash flow from operations or asset sales and, that future borrowings will be available tous under our credit facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all ora portion of our indebtedness, on or before maturity. We cannot provide assurance that we will be able to refinance any of our indebtedness on commerciallyreasonable terms, or at all. Our inability to refinance our debt on commercially reasonable terms could have a material adverse effect on our business.The highly competitive nature of our industries could affect our profitability by reducing our profit margins.The industries in which we compete are highly fragmented and are served by many small, owner-operated private companies. There are also several largeprivate regional companies and a small number of large public companies from which we face competition in these industries. In the future, we could alsoface competition from new competitors entering these markets because certain segments, such as our electrical contracting services, have a relatively lowbarrier for entry while other segments such as our services for mission critical infrastructure have attractive dynamics. Some of our competitors offer a greaterrange of services, including mechanical construction, facilities management, plumbing and heating, ventilation and air conditioning services. Competitionin our markets depends on a number of factors, including price. Some of our competitors may have lower overhead cost structures and may, therefore, be ableto provide services comparable to ours at lower rates than we do. If we are unable to offer our services at competitive prices or if we have to reduce our pricesto remain competitive, our profitability would be impaired. 11Table of ContentsBacklog may not be realized or may not result in profits.Customers often have no obligation under our contracts to assign or release work to us, and many contracts may be terminated on short notice. Reductions inbacklog due to cancellation of one or more contracts by a customer or for other reasons could significantly reduce the revenue and profit we actually receivefrom contracts included in backlog. In the event of a project cancellation, we may be reimbursed for certain costs but typically have no contractual right tothe total revenues reflected in our backlog.Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profits.As discussed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and inthe notes to our Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” hereof, a significant portion of ourrevenues are recognized using the percentage-of-completion method of accounting, utilizing the cost-to-cost method. This method is used becausemanagement considers expended costs to be the best available measure of progress on these contracts. The percentage-of-completion accounting practice weuse results in our recognizing contract revenues and earnings ratably over the contract term in proportion to our incurrence of contract costs. The earnings orlosses recognized on individual contracts are based on estimates of contract revenues, costs and profitability. Contract losses are recognized in full whendetermined to be probable and reasonably estimable and contract profit estimates are adjusted based on ongoing reviews of contract profitability. Further, aportion of our contracts contain various cost and performance incentives. Penalties are recorded when known or finalized, which generally occurs during thelatter stages of the contract. In addition, we record cost recovery claims when we believe recovery is probable and the amounts can be reasonably estimated.Actual collection of claims could differ from estimated amounts and could result in a reduction or elimination of previously recognized earnings. In certaincircumstances, it is possible that such adjustments could be significant.The availability and cost of surety bonds affect our ability to enter into new contracts and our margins on those engagements.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 underthe terms of a contract and that we will pay subcontractors and vendors. We obtain surety bonds from one primary surety provider; however, there is nocommitment from this provider to guarantee our ability to issue bonds for projects as they are required. Our ability to access this bonding capacity is at thesole discretion of our surety provider.Due to seasonality and differing regional economic conditions, our results may fluctuate from period to period.Our business is subject to seasonal variations in operations and demand that affect the construction business, particularly in the Residential andCommercial & Industrial segments. Untimely weather delay from rain, heat, ice, cold or snow can not only delay our work but can negatively impact ourschedules and profitability by delaying the work of other trades on a construction site. Our quarterly results may also be affected by regional economicconditions that affect the construction market. Accordingly, our performance in any particular quarter may not be indicative of the results that can beexpected for any other quarter or for the entire year. Additionally, cost increases in construction materials such as steel, aluminum, copper and lumber canalter the rate of new construction.The estimates we use in placing bids could be materially incorrect. The use of incorrect estimates could result in losses on a fixed price contract. Theselosses could be material to our business.We currently generate, and expect to continue to generate, more than half of our revenues under fixed price contracts. The cost of fuel, labor and materials,including copper wire, may vary significantly from the costs we originally estimate. Variations from estimated contract costs along with other risks inherentin performing fixed price contracts may result in actual revenue and gross profits for a project differing from those we originally estimated and could result inlosses on projects. Depending upon the size of a particular project, variations from estimated contract costs can have a significant impact on our operatingresults.Commodity costs may fluctuate materially and we may not be able to pass on all cost increases during the term of a contract.We enter into many contracts at fixed prices and if the cost associated with commodities such as copper, aluminum, steel, fuel and certain plastics increase,losses may be incurred.We may be unsuccessful at integrating companies that we may acquire.We may engage in acquisitions and dispositions of operations, assets and investments from time to time in the future. If we are unable to successfullyintegrate newly acquired assets or operations or make untimely or unfavorable dispositions of operations or investments, it could negatively impact themarket value of our common stock. Additionally, any future acquisition or disposition 12Table of Contentsmay result in significant changes in the composition of our assets and liabilities, and as a result, our financial condition, results of operations and the marketvalue of our common stock following any such acquisition or disposition may be affected by factors different from those currently affecting our financialcondition, results of operations and trading price of our common stock.We may experience difficulties in managing our billings and collections.Our billings under fixed price contracts are generally based upon achieving certain milestones and will be accepted by the customer once we demonstratethose milestones have been met. If we are unable to demonstrate compliance with billing requests, or if we fail to issue a project billing, our likelihood ofcollection could be delayed or impaired, which, if experienced across several large projects, could have a materially adverse effect on our results ofoperations.We have restrictions and covenants under our credit facility.We may not be able to remain in compliance with the covenants in our credit facility. A failure to fulfill the terms and requirements of our credit facility mayresult in a default under one or more of our material agreements, which could have a material adverse effect on our ability to conduct our operations and ourfinancial condition.Our reported operating results could be adversely affected as a result of goodwill impairment write-offs.When we acquire a business, we record an asset called “goodwill” if the amount we pay for the business, including liabilities assumed, is in excess of the fairvalue of the assets of the business we acquire. Accounting principles generally accepted in the United States of America (“GAAP”) requires that goodwillattributable to each of our reporting units be tested at least annually. The testing includes comparing the fair value of each reporting unit with its carryingvalue. Fair value is determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the methodologiesinclude estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples foreach of the reportable units. On an ongoing basis, we expect to perform impairment tests at least annually as of September 30. Impairment adjustments, if any,are required to be recognized as operating expenses. We cannot assure that we will not have future impairment adjustments to our recorded goodwill.The vendors who make up our supply chain may be adversely affected by the current operating environment and credit market conditions.We are dependent upon the vendors within our supply chain to maintain a steady supply of inventory, parts and materials. Many of our divisions aredependent upon a limited number of suppliers, and significant supply disruptions could adversely affect our operations. Under recent market conditions,including both the construction slowdown and the tightening credit market, it is possible that one or more of our suppliers will be unable to meet the terms ofour operating agreements due to financial hardships, liquidity issues or other reasons related to the prolonged market recovery.Our operations are subject to numerous physical hazards associated with the construction of electrical systems. If an accident occurs, it could result inan adverse effect on our business.Hazards related to our industry include, but are not limited to, electrocutions, fires, machinery-caused injuries, mechanical failures and transportationaccidents. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment, and may result in suspensionof operations. Our insurance does not cover all types or amounts of liabilities. Our third-party insurance is subject to deductibles for which we establishreserves. No assurance can be given that our insurance or our provisions for incurred claims and incurred but not reported claims will be adequate to cover alllosses or liabilities we may incur in our operations; nor can we provide assurance that we will be able to maintain adequate insurance at reasonable rates.Our internal controls over financial reporting and our disclosure controls and procedures may not prevent all possible errors that could occur.Internal controls over financial reporting and disclosure controls and procedures, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objective will be met.On a quarterly basis, we evaluate our internal controls over financial reporting and our disclosure controls and procedures, which include a review of theobjectives, design, implementation and effectiveness of the controls and the information generated for use in our periodic reports. In the course of ourcontrols evaluation, we sought (and seek) to identify data errors, control problems and to confirm that appropriate corrective action, including processimprovements, are being undertaken. This type of evaluation is conducted on a quarterly basis so that the conclusions concerning the effectiveness of ourcontrols can be reported in our periodic reports.A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will besatisfied. Internal controls over financial reporting and disclosure controls and procedures are designed to give reasonable assurance that they are effectiveand achieve their objectives. We cannot provide absolute assurance that all possible 13Table of Contentsfuture control issues have been detected. These inherent limitations include the possibility that our judgments can be faulty, and that isolated breakdownscan occur because of human error or mistake. The design of our system of controls is based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed absolutely in achieving our stated goals under all potential future or unforeseeableconditions. Because of the inherent limitations in a cost-effect control system, misstatements due to error could occur without being detected.We have adopted tax positions that a taxing authority may view differently. If a taxing authority differs with our tax positions, our results may beadversely affected.Our effective tax rate and cash paid for taxes are impacted by the tax positions that we have adopted. Taxing authorities may not always agree with thepositions we have taken. We have established reserves for tax positions that we have determined to be less likely than not to be sustained by taxingauthorities. However, there can be no assurance that our results of operations will not be adversely affected in the event that disagreement over our taxpositions does arise.Litigation and claims can cause unexpected losses.In the construction business there are frequently claims and litigation. There are also inherent claims and litigation risk associated with the number of peoplethat work on construction sites and the fleet of vehicles on the road everyday. Claims are sometimes made and lawsuits filed for amounts in excess of theirvalue or in excess of the amounts for which they are eventually resolved. Claims and litigation normally follow a predictable course of time to resolution.However, there may be periods of time in which a disproportionate amount of our claims and litigation are concluded in the same quarter or year. If multiplematters are resolved during a given period, then the cumulative effect of these matters may be higher than the ordinary level in any one reporting period.Latent defect claims could expand.Latent defect litigation is normal for residential home builders in some parts of the country; however, such litigation is increasing in certain states where weperform work. Also, in recent years, latent defect litigation has expanded to aspects of the commercial market. Should we experience similar increases in ourlatent defect claims and litigation, additional pressure may be placed on the profitability of the Residential and Commercial & Industrial segments of ourbusiness.The loss of a group or several key personnel, either at the corporate or operating level, could adversely affect our business.The loss of key personnel or the inability to hire and retain qualified employees could have an adverse effect on our business, financial condition and resultsof operations. Our operations depend on the continued efforts of our executive officers, senior management and management personnel at our divisions. Wecannot guarantee that any member of management at the corporate or subsidiary level will continue in their capacity for any particular period of time. Wehave employment agreements in place with our executives and many of our key senior leadership; however, such employment agreements cannot guaranteethat we will not lose key employees, nor prevent them from competing against us, which is often dependent on state and local employment laws. If we lose agroup of key personnel or even one key person at a division, we may not be able to recruit suitable replacements at comparable salaries or at all, which couldadversely affect our operations. Additionally, we do not maintain key man life insurance for members of our management.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesEquipmentWe operate a fleet of approximately 1,000 owned and leased trucks, vans, trailers, support vehicles and specialty equipment. We believe these vehicles areadequate for our current operations.FacilitiesAt September 30, 2011, we maintained branch offices, warehouses, sales facilities and administrative offices at 53 locations. Substantially all of our facilitiesare leased. We lease our corporate office located in Houston, Texas. We believe that our properties are adequate for our present needs, and that suitableadditional or replacement space will be available as required. 14Table of ContentsItem 3. Legal ProceedingsFor further information regarding legal proceedings, see Note 16, “Commitments and Contingencies — Legal Matters” to the Consolidated FinancialStatements, which is incorporated herein by reference.Item 4. (Removed and Reserved)Item 5. Market for Registrant’s Common Equity; Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock trades on the NASDAQ Global Select Market under the ticker symbol “IESC.” The following table sets forth the daily high and low closeprice for our common stock as reported on NASDAQ for each of the four quarters of the years ended September 30, 2011 and 2010. High Low Year Ended September 30, 2011 First Quarter $3.80 $3.14 Second Quarter $4.38 $3.41 Third Quarter $3.50 $3.11 Fourth Quarter $3.36 $1.88 Year Ended September 30, 2010 First Quarter $7.66 $5.85 Second Quarter $5.93 $4.65 Third Quarter $6.39 $3.43 Fourth Quarter $3.84 $3.10 As of December 16, 2011, the closing market price of our common stock was $2.00 per share and there were approximately 370 holders of record.We have never paid cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. We expect that we willutilize all available earnings generated by our operations and borrowings under our credit facility for the development and operation of our business, to retireexisting debt, or to repurchase our common stock. Any future determination as to the payment of dividends will be made at the discretion of our Board ofDirectors and will depend upon our operating results, financial condition, capital requirements, general business conditions and other factors that the Boardof Directors deems relevant. Our debt instruments restrict us from paying cash dividends and also place limitations on our ability to repurchase our commonstock. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.On December 12, 2007, our Board of Directors authorized the repurchase of up to one million shares of our common stock, and the Company established aRule 10b5-1 plan to facilitate this repurchase. This share repurchase program was authorized through, and terminated in December 2009. During the yearended September 30, 2009, we repurchased 301,418 common shares under the share repurchase program at an average price of $13.36 per share.Five-Year Stock Performance GraphThe following performance graph compares the Company’s cumulative total stockholder return on its common stock with the cumulative total return of(i) the Russell 2000, (ii) the peer group stock index (the “Peer Group”), which was selected in good faith by the Company and comprised of the followingpublicly traded companies: Mastec, Inc., Willbros Group, Inc., Comfort Systems USA Inc., Dycom Industries, Inc., Matrix Service Company, Pike ElectricCorp., Insituform Technologies, Powell Industries, MYR Group, Inc., Team, Inc., Primoris Services Corp., Englobal Corp. and Furmanite Corp. Thecumulative total return computations set forth in the following performance graph assume (i) the investment of $100 in each of the Company’s commonstock, the Russell 2000, and the Peer Group on September 30, 2006, and (ii) that all dividends have been reinvested. Shareholder returns over the periodindicated should not be considered indicative of future shareholder returns.The information contained in the following performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall suchinformation be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act,except to the extent the Company specifically incorporates it by reference into such filing. 15Table of ContentsCOMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Integrated Electrical Services, Inc., the Russell 2000 Indexand a Peer Group*$100 invested on 9/30/06 in stock or index, including reinvestment of dividends.Fiscal year ending September 30. Years ended September 30, 2006 2007 2008 2009 2010 2011 Integrated Electrical Services, Inc. $100.00 161.99 111.07 50.92 23.78 12.81 Russell 2000 $100.00 112.34 96.07 86.90 98.50 95.02 Peer Group $100.00 151.23 129.99 96.82 78.30 91.98 16Table of ContentsItem 6. Selected Financial DataThe following selected consolidated historical financial information for IES should be read in conjunction with the audited historical Consolidated FinancialStatements of Integrated Electrical Services, Inc. and subsidiaries, and the notes thereto, set forth in Item 8 “Financial Statements and Supplementary Data”to this Form 10-K. Years Ended September 30, 2011 2010 2009 2008 2007 (In Thousands, Except Share Information) Continuing Operations: Revenues $481,607 $460,633 $665,997 $818,287 $890,351 Cost of services 445,585 404,140 556,469 686,358 745,429 Gross profit 36,022 56,493 109,528 131,929 144,922 Selling, general and administrative expenses 69,365 84,920 108,328 119,160 136,969 Gain on sale of Assets (6,583) (174) (465) (114) (46) Asset impairment 4,804 — — — — Restructuring charges 3,784 763 7,407 4,598 824 (Loss) Income from Operations (35,348) (29,016) (5,742) 8,285 7,175 Other (income) expense: Interest expense, net 2,209 3,271 4,094 6,529 5,835 Other expense (income), net (10) (109) 1,608 (888) (336) Interest and other expense, net 2,199 3,162 5,702 5,641 5,499 (Loss) income from operations before income taxes (37,547) (32,178) (11,444) 2,644 1,676 Provision (benefit) for income taxes 146 (31) 495 2,436 2,276 Net (loss) income from continuing operations $(37,693) $(32,147) $(11,939) $208 $(600) Discontinued Operations: Income (loss) from discontinued operations — — 187 (616) (4,977) Provision (benefit) for income taxes — — 68 (221) (1,165) Net income (loss) discontinued operations — — 119 (395) (3,812) Net (loss) $(37,693) $(32,147) $(11,820) $(187) $(4,412) Basic (loss) earnings per share: Continuing operations $(2.60) $(2.23) $(0.83) $0.01 $(0.04) Discontinued operations $— $— $0.01 $(0.02) $(0.25) Total $(2.60) $(2.23) $(0.82) $(0.01) $(0.29) Diluted (loss) earnings per share: Continuing operations $(2.60) $(2.23) $(0.83) $0.01 $(0.04) Discontinued operations $— $— $0.01 $(0.02) $(0.25) Total $(2.60) $(2.23) $(0.82) $(0.01) $(0.29) Shares used to calculate loss per share Basic 14,493,747 14,409,368 14,331,614 14,938,619 15,058,972 Diluted 14,493,747 14,409,368 14,331,614 15,025,023 15,058,972 17Table of Contents Years Ended September 30, 2011 2010 2009 2008 2007 (In Thousands, Except Share Information) Balance Sheet Data: Cash and cash equivalents $35,577 $32,924 $64,174 $64,709 $69,676 Working capital 62,837 83,240 121,611 127,129 157,690 Total assets 180,266 205,105 268,425 320,538 353,422 Total debt 10,498 11,256 28,687 29,644 45,776 Total stockholders’ equity 64,810 101,581 132,593 146,235 153,925 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, set forth inItem 8”Financial Statements and Supplementary Data” of this Form 10-K. For additional information, see “Disclosure Regarding Forward LookingStatements” in Part I of this Form 10-K.GeneralCritical Accounting PoliciesThe discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have beenprepared in accordance with GAAP. The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the Consolidated Financial Statementsare published and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting ourConsolidated Financial Statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimatesare based on our beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect tosuch estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from thoseestimates.Accordingly, we have identified the accounting principles, which we believe are most critical to our reported financial status by considering accountingpolicies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related torevenue recognition, the assessment of goodwill and asset impairment, our allowance for doubtful accounts receivable, the recording of our insuranceliabilities and estimation of the valuation allowance for deferred tax assets. These accounting policies, as well as others, are described in Note 2, “Summary ofSignificant Accounting Policies” of our Consolidated Financial Statements, set forth in Item 8 “Financial Statements and Supplementary Data” of thisForm 10-K, 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 thosecontracts with the customer. Although the terms of our contracts vary considerably, most are made on either a fixed price or unit price basis in which we agreeto do the work for a fixed amount for the entire project (fixed price) or for units of work performed (unit price). We also perform services on a cost-plus or timeand 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 mayvary from the costs we originally estimated. Variations from estimated contract costs along with other risks inherent in performing fixed price and unit pricecontracts may result in actual revenue and gross profits or interim projected revenue and gross profits for a project differing from those we originallyestimated and could result in losses on projects. Depending on the size of a particular project, variations from estimated project costs could have a significantimpact 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 serviceagreements which are renewable annually. We recognize revenue on service, time and material work when services are performed. Work performed under aconstruction contract generally provides that the customers accept completion of progress to date and compensate us for services rendered, measured in termsof units installed, hours expended or some other measure of progress. Revenues from construction contracts are recognized on the percentage-of-completionmethod. The percentage-of-completion method for construction contracts is measured principally by the percentage of costs incurred and accrued to date foreach contract to the estimated total costs for each contract at completion. We generally consider contracts substantially complete upon departure from thework site and acceptance by the customer. Contract costs include all direct material and labor costs and those indirect costs related to contract performance,such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs, profitability andfinal 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 aredetermined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined.The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billedthat management believes will be billed and collected within the next twelve months. The current liability “Billings in excess of costs and estimated earningson uncompleted contracts” represents billings in excess of revenues recognized. 18Table of ContentsCosts and estimated earnings in excess of billings on uncompleted contracts are amounts considered recoverable from customers based on different measuresof performance, including achievement of specific milestones, completion of specified units or completion of the contract. Also included in this asset, fromtime to time, are claims and unapproved change orders, which include amounts that we are in the process of collecting from our customers or agencies forchanges in contract specifications or design, contract change orders in dispute or unapproved as to scope and price, or other related causes of unanticipatedadditional contract costs. Claims and unapproved change orders are recorded at estimated realizable value when collection is probable and can be reasonablyestimated. 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.Valuation of Intangibles and Long-Lived Assets. We evaluate goodwill for potential impairment at least annually at year end, however, if impairmentindicators exist, we will evaluate as needed. Included in this evaluation are certain assumptions and estimates to determine the fair values of reporting unitssuch 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 operationsor financial position. We recorded goodwill impairment during the year ended September 30, 2011, of $0.1 million. We did not record goodwill impairmentduring the years ended September 30, 2010 and 2009.We assess impairment indicators related to long-lived assets and intangible assets at least annually at year end. 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 fairvalue of asset groups, including estimates about future cash flows and discount rates, among others. Changes in these assumptions and estimates couldmaterially impact our results of operations or financial projections. We recorded long-lived or intangible asset impairment during the year endedSeptember 30, 2011, of $0.1 million; primarily attributable to real estate we are offering to sell. The write down was made to reduce the carrying value of theproperty to its current expected fair value. We did not record long-lived or intangible asset impairment during the years ended September 30, 2010 and 2009.Current and Non-Current Accounts and Notes Receivable and Provision for Doubtful Accounts. We provide an allowance for doubtful accounts forunknown collection issues, in addition to reserves for specific accounts receivable where collection is considered doubtful. Inherent in the assessment of theallowance for doubtful accounts are certain judgments and estimates including, among others, our customers’ access to capital, our customers’ willingness topay, general economic conditions, and the ongoing relationships with our customers. In addition to these factors, the method of accounting for constructioncontracts 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. Theanalysis management utilizes to assess collectability of our receivables includes detailed review of older balances, analysis of days sales outstanding wherewe include in the calculation, in addition to accounts receivable balances net of any allowance for doubtful accounts, the level of costs in excess of billingsnetted 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 ofbillings, to revenues. These analyses provide an indication of those amounts billed ahead or behind the recognition of revenue on our construction contractsand 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, employment practices andemployee-related health care claims, subject to deductibles. Our general liability program provides coverage for bodily injury and property damage. Lossesup 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. Theaccruals are derived from actuarial studies, known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the bestestimate of the ultimate expected loss. We believe such accruals to be adequate; however, insurance liabilities are difficult to assess and estimate due tounknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents incurred but notreported and the effectiveness of our safety program. Therefore, if actual experience differs from the assumptions used in the actuarial valuation, adjustmentsto 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 isuncertain. We perform this evaluation at least annually at the end of each fiscal year. The estimation of required valuation allowances includes estimates offuture taxable income. In assessing the realizability of deferred tax assets at September 30, 2011, we considered that it was more likely than not that some orall of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected futuretaxable income and tax planning strategies in making this assessment.Income Taxes. GAAP specifies the methodology by which a company must identify, recognize, measure and disclose in its financial statements the effects ofany uncertain tax return reporting positions that it has taken or expects to take. GAAP requires financial statement reporting of the expected future taxconsequences of uncertain tax return reporting positions on the presumption that all relevant tax authorities possess full knowledge of those tax reportingpositions, 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. 19Table of ContentsThe 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 willbe sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. The second step is a measurement processwhereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in thefinancial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimatesettlement.The Financial Accounting Standards Board, (“FASB”) has issued standards on business combinations and accounting and reporting of non-controllinginterests in consolidated financial statements. Beginning October 1, 2009, with the adoption of the updates, reductions in the valuation allowance andcontingent tax liabilities attributable to all periods, if any should occur, are recorded as an adjustment to income tax expense.We are currently not under federal audit by the Internal Revenue Service. The tax years ended September 30, 2008 and forward are subject to audit as areprior tax years, to the extent of unutilized net operating losses generated in those years.We anticipate that approximately $0.1 million in liabilities for unrecognized tax benefits, including accrued interest, may be reversed in the next twelvemonths. This reversal is predominately due to the expiration of the statues of limitation for unrecognized tax benefits and the settlement of a state audit.New Accounting Pronouncements. Newly adopted accounting policies are described in Note 2 “Summary of Significant Accounting Policies — NewAccounting Pronouncements” of our Consolidated Financial Statements, set forth in Item 8 “Financial Statements and Supplementary Data” of thisForm 10-K, and at relevant sections in this discussion and analysis.Strategic ActionsSale of Non-Strategic Manufacturing FacilityOn November 30, 2010, a subsidiary of the Company sold substantially all the assets and certain liabilities of a non-strategic manufacturing facility engagedin manufacturing and selling fabricated metal buildings housing electrical equipment, such as switchgears, motor starters and control systems, to SiemensEnergy, Inc. As part of this transaction, Siemens Energy, Inc. also acquired certain real property where the fabrication facilities are located from anothersubsidiary of the Company. The purchase price of $10.1 million was adjusted to reflect working capital variances. The transaction was completed onDecember 10, 2010 at which time we recognized a gain of $6.8 million.Sale of Non-Core Electrical Distribution FacilityOn February 28, 2011, Key Electrical Supply, Inc, a wholly owned subsidiary of the Company, sold substantially all the assets and certain liabilities of a non-core electrical distribution facility engaged in distributing wiring, lighting, electrical distribution, power control and generators for residential andcommercial applications to Elliot Electric Supply, Inc. The purchase price of $6.7 million was adjusted to reflect working capital variances. The loss on thistransaction was immaterial.The 2007 Restructuring PlanDuring the 2008 fiscal year, we completed the restructuring of our operations from the previous geographic structure into three major lines of business:Commercial, Industrial and Residential. This operational restructuring (the “2007 Restructuring Plan”) was part of our long-term strategic plan to reduce ourcost structure, reposition the business to better serve our customers and strengthen financial controls. The 2007 Restructuring Plan consolidated certainleadership roles and administrative support functions and eliminated redundant functions that were previously performed at 27 division locations. Werecorded a total of $5.6 million of restructuring charges for the 2007 Restructuring Plan. As part of the restructuring charges, we recognized $0.2 million and$2.7 million in severance costs at our Residential and Commercial & Industrial segments, respectively. In addition to the severance costs described above, weincurred other charges of approximately $2.6 million predominately for consulting services associated with the 2007 Restructuring Plan and wrote off$0.1 million of leasehold improvements at an operating location that we closed.The 2009 Restructuring PlanIn the first quarter of our 2009 fiscal year, we began a new restructuring program (the “2009 Restructuring Plan”) that was designed to consolidate operationswithin our three segments. The 2009 Restructuring Plan was the next level of our business optimization strategy. Our plan was to streamline local project andsupport operations, which were managed through regional operating centers, and to capitalize on the investments we had made over the past year to furtherleverage our resources. We accelerated our trade name amortization during the 2009 fiscal year recording a charge of $1.6 million that has been identifiedwithin the “Restructuring Charges” caption in our Consolidated Statements of Operations. 20Table of ContentsIn addition, as a result of the continuing significant effects of the recession, during the third quarter of fiscal year 2009, we implemented a more expansivecost reduction program, by further reducing administrative personnel, primarily in the corporate office, and consolidating our Commercial and Industrialadministrative functions into one service center.In connection with the 2009 Restructuring Plan, we incurred pre-tax restructuring charges, including severance benefits and facility consolidations andclosings, of $0.8 million and $7.4 million, respectively during the years ended September 30, 2010 and 2009. Costs incurred related to our Communicationssegment were $0.0 million and $0.1 million for the years ended September 30, 2010 and 2009, respectively. Costs incurred related to our Residential segmentwere $0.0 million and $2.7 million for the years ended September 30, 2010 and 2009, respectively. Costs incurred related to our Commercial & Industrialsegment were $0.7 million and $3.2 million for the years ended September 30, 2010 and 2009, respectively. Costs related to our Corporate office were $0.1million and $1.4 million for the years ended September 30, 2010 and 2009, respectively.The 2011 Restructuring PlanIn the second quarter of our 2011 fiscal year, we began a new restructuring program (the “2011 Restructuring Plan”) that was designed to consolidateoperations within our Commercial & Industrial business. Pursuant to the 2011 Restructuring Plan, we will either sell or close certain underperformingfacilities within our Commercial & Industrial operations. The 2011 Restructuring Plan is a key element of our commitment to return the Company toprofitability.The facilities directly affected by the 2011 Restructuring Plan are in several locations throughout the country, including Arizona, Florida, Iowa, Louisiana,Massachusetts, Nevada and Texas. These facilities were selected due to current business prospects and the extended time frame needed to return the facilitiesto a profitable position. We expect that closure costs could range from $4.5 million to $5.5 million in the aggregate. Restructuring expenses in respect of the2011 Restructuring Plan totaling $3.8 million for the year ended September 30, 2011 were comprised of severance costs, lease terminations, and externalconsulting and management services. Closure costs associated with the 2011 Restructuring Plan include equipment and facility lease termination expenses,incremental management consulting expenses and severance costs for employees. The Company is in the process of winding down these facilities. As theCompany concludes the wind-down and closure process for each of these facilities, their respective results of operations will be reclassified and presentedwithin future statements of operations as “Discontinued Operations.” US GAAP does not permit an earlier reclassification. At September 30, 2011, theestimated costs to complete the 51 projects remaining at these facilities totaled approximately $9.0 million; of which all but approximately $1.0 million hasbeen subcontracted to other electrical contractors.Results of OperationsWe report our operating results across three operating segments: Communications, Residential and Commercial & Industrial. Expenses associated with ourCorporate office are classified as a fourth segment. The following table presents selected historical results of operations of IES and subsidiaries. Years Ended September 30, 2011 2010 2009 $ % $ % $ % (Dollars in thousands, Percentage of revenues) Revenues $481,607 100.0% $460,633 100.0% $665,997 100.0% Cost of services 445,585 92.5% 404,140 87.7% 556,469 83.6% Gross profit 36,022 7.5% 56,493 12.3% 109,528 16.4% Selling, general and administrative expenses 69,365 14.4% 84,920 18.4% 108,328 16.3% Gain on sale of assets (6,583) (1.4)% (174) — % (465) (0.1)% Asset impairment 4,804 1.0% — — % — — % Restructuring charges 3,784 0.8% 763 0.2% 7,407 1.1% Loss from operations (35,348) (7.3)% (29,016) (6.3)% (5,742) (0.9)% Interest and other expense, net 2,199 0.5% 3,162 0.7% 5,702 0.9% Loss from operations before income taxes (37,547) (7.8)% (32,178) (7.0)% (11,444) (1.8)% Provision (benefit) for income taxes 146 — % (31) — % 495 0.1% Net loss from continuing operations (37,693) (7.8)% (32,147) (7.0)% (11,939) (1.9)% Net income from discontinued operations — — % — — % 119 — % Net loss $(37,693) (7.8)% $(32,147) (7.0)% $(11,820) (1.9)% 21Table of ContentsYEAR ENDED SEPTEMBER 30, 2011 COMPARED TO YEAR ENDED SEPTEMBER 30, 2010Revenues Years Ended September 30, 2011 2010 $ % $ % (Dollars in thousands, Percentage of revenues) Communications $93,579 19.4% $79,344 17.2% Residential 114,732 23.8% 116,012 25.2% Commercial & Industrial 273,296 56.8% 265,277 57.6% Total Consolidated $481,607 100.0% $460,633 100.0% Consolidated revenues for the year ended September 30, 2011 were $21.0 million greater than the year ended September 30, 2010, an increase of 4.6%.Our Communications segment revenues increased $14.2 million during the year ended September 30, 2011, a 17.9% increase compared to the year endedSeptember 30, 2010. This increase is due to an increase in data center projects and more business from our national account activity. The increase is offset bya $3.8 million decrease in our eastern region revenues. The eastern region revenues are mainly comprised of local, lower margin, communications projects.Our Residential segment revenues decreased $1.3 million during the year ended September 30, 2011, a decrease of 1.1% as compared to the year endedSeptember 30, 2010. Approximately $4.4 million of this decrease is primarily attributable to the sale of a non core electrical distribution facility in February2011. Despite the nationwide decline in demand for single-family homes, particularly in markets such as Southern California, Arizona, Nevada, Texas andGeorgia, our multi-family revenues increased; partially offsetting the declines in single-family revenues.Revenues in our Commercial & Industrial segment increased $8.0 million during the year ended September 30, 2011, an increase of 3.0% compared to theyear ended September 30, 2010. Our Industrial locations experienced revenue increases while our Commercial locations were essentially unchanged as therate of decline for most industry sectors have begun to stabilize. However, numerous projects in all sectors remain subject to, delays or cancelation with littleadvance notice. In many of our local Commercial markets, we also continue to experience increased competition from residential contractors, who have beenaffected by the housing slowdown, for less specialized retail work with lower barriers to entry. Revenues associated with the wind-down facilities described inthe 2011 Restructuring Plan totaled $44.3 million, a decrease of $18.7 million during the year ended September 30, 2011, compared to the year endedSeptember 30, 2010.Gross Profit Years Ended September 30, 2011 2010 $ % $ % (Dollars in thousands, Percentage of revenues) Communications $12,613 13.5% $13,853 17.5% Residential 18,738 16.3% 23,542 20.3% Commercial & Industrial 4,671 1.7% 19,098 7.2% Total Consolidated $36,022 7.5% $56,493 12.3% The $20.5 million decrease in our consolidated gross profit for the year ended September 30, 2011, as compared to the year ended September 30, 2010, wasprimarily the result of lower margins on contracts and operating difficulties encountered by our Commercial & Industrial segment. Our overall gross profitpercentage decreased to 7.5% during the year ended September 30, 2011 as compared to 12.3% during the year ended September 30, 2010, primarily due tolower margin construction projects and operating difficulties encountered by our Commercial & Industrial segment, including the performance of our wind-down facilities. 22Table of ContentsOur Communications segment’s gross profit during the year ended September 30, 2011 decreased $1.2 million, as compared to the year ended September 30,2010. The decrease in gross profit is attributed to a $2.3 million decrease in gross profit in its eastern region.During the year ended September 30, 2011, our Residential segment experienced a $4.8 million reduction in gross profit as compared to the year endedSeptember 30, 2010. Gross margin percentage in the Residential segment decreased to 16.3% during the year ended September 30, 2011. We attribute muchof the decline in Residential’s gross margin to increased costs of materials creating lower margins in both single-family and multi-family construction.Our Commercial & Industrial segment’s gross profit during the year ended September 30, 2011 decreased $14.5 million, as compared to the year endedSeptember 30, 2010. Commercial & Industrial’s gross margin percentage decreased during the year ended September 30, 2011, primarily due to lower marginconstruction projects and operating difficulties in several locations. The majority of the operational difficulties were concentrated in the wind-downoperations which are part of the 2011 Restructuring Plan or in projects outside of our historical areas of expertise. The negative gross margins associated withthe wind-down operations described in the Company’s 2011 Restructuring Plan resulted in approximately $8.9 million of negative gross margin during theyear ended September 30, 2011, compared to essentially a zero margin during the during the year ended September 30, 2010. The negative gross marginsrecorded for the wind-down operations described in the Company’s 2011 Restructuring Plan are primarily due to higher costs associated with eithersubcontracting or assigning certain contracts to other electrical subcontractors together with the extensive operating difficulties relating to labor productivityfollowing the notice of the potential sale or closure of these facilities. 23Table of ContentsSelling, General and Administrative Expenses Years Ended September 30, 2011 2010 $ % $ % (Dollars in thousands, Percentage of revenues) Communications $10,629 11.4% $7,983 10.1% Residential 18,437 16.1% 23,685 20.4% Commercial & Industrial 26,836 9.8% 39,083 14.7% Corporate 13,463 — 14,169 — Total Consolidated $69,365 14.4% $84,920 18.4% Selling, general and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily ofcompensation and benefits related to corporate and division management, occupancy and utilities, training, professional services, information technologycosts, consulting fees, travel and certain types of depreciation and amortization. We allocate certain corporate selling, general and administrative costs acrossour segments as we believe this more accurately reflects the costs associated with operating each segment.During the year ended September 30, 2011, our selling, general and administrative expenses were $69.4 million, a decrease of $15.6 million, or 18.4%, ascompared to the year ended September 30, 2010. Included in year ended September 30, 2011 is $2.9 million of accelerated amortization attributable to thediscontinuance of certain software and $1.3 million of severance attributable to the former CEO’s departure.Our Communications segment’s selling, general and administrative expenses increased $2.6 million during the year ended September 30, 2011 compared tothe year ended September 30, 2010. Selling, general and administrative expenses as a percentage of revenues in the Communication segment increased to11.4% of segment revenue during the year ended September 30, 2011. The increase in selling, general and administrative expenses is primarily due to higherexpenses associated with our growth initiative relating to the expansion of facilities in Southern California and to a lesser extent, incentive awards forachieving specific performance goals.Our Residential segment experienced a $5.4 million reduction in selling, general and administrative expenses during the year ended September 30, 2011compared to the year ended September 30, 2010. Selling, general and administrative expenses as a percentage of revenues in the Residential segmentdeclined to 16.1% of segment revenue during the year ended September 30, 2011. We attribute much of the decline in Residential selling, general andadministrative expenses to lower management and incentive compensation expense.Our Commercial & Industrial segment’s selling, general and administrative expenses during the year ended September 30, 2011 decreased $12.2 millioncompared to the year ended September 30, 2010. Selling, general and administrative expenses as a percentage of revenues in the Commercial & Industrialsegment declined to 9.8% of segment revenue during the year ended September 30, 2011. In the year ended September 30, 2010, we recorded $3.7 million inbad debt expense related to a long term receivable associated with the Centerpoint project in Arizona and during the year ended September 30, 2011, werecovered $2.9 million related to this long-term receivable. This accounted for $6.6 million of the variance between periods. During the year endedSeptember 30, 2011 the selling, general and administrative expenses associated with the wind-down facilities were $6.3 million before the recovered $2.9million related to the long-term receivable. The Company’s 2011 Restructuring Plan accounted for a $3.3 million decline in selling, general andadministrative expenses, primarily due to the decrease in personnel and facilities associated with the wind-down of these operations.Restructuring ChargesThe following table presents the elements of costs incurred for both the 2011 and 2009 Restructuring Plans. The fiscal 2010 period includes only the costsattributable to the 2009 Restructuring Plan. Years Ended September 30, 2011 2010 (In thousands) Severance compensation $1,455 $644 Consulting and other charges 1,530 119 Lease termination costs 799 — Total restructuring charges $3,784 $763 24Table of ContentsInterest and Other Expense, net Years Ended September 30, 2011 2010 (In thousands) Interest expense $1,939 $3,198 Deferred financing charges 338 315 Total interest expense 2,277 3,513 Interest income (68) (242) Other (income) expense, net (10) (109) Total interest and other expense, net $2,199 $3,162 During the year ended September 30, 2011, we incurred interest expense of $1.9 million primarily comprised of the Tontine Term Loan (as defined in“Working Capital” below) and the Insurance Financing Agreements (as defined in “Working Capital” below), an average letter of credit balance of$12.7 million under the Revolving Credit Facility (as defined in “Working Capital” below) and an average unused line of credit balance of $47.3 million.This compares to interest expense of $3.2 million for the year ended September 30, 2010, on a debt balance primarily comprised of the Tontine Term Loanand the Insurance Financing Agreements, an average letter of credit balance of $21.1 million under the Revolving Credit Facility and an average unused lineof credit balance of $38.9 million.For the years ended September 30, 2011 and 2010, we earned interest income of $0.1 million and $0.2 million, respectively, on the average Cash and CashEquivalents balances of $29.9 million and $43.4 million, respectively.Provision for Income TaxesOur provision for income taxes increased from a benefit of $0.0 million for the year ended September 30, 2010 to an expense of $0.1 million for the yearended September 30, 2011. The increase is mainly attributable to a decrease in the reversal of unrecognized tax benefits, resulting in a $0.1 million increasein the income tax expense. We provided a valuation allowance for the federal tax benefit resulting from the loss of operations for the years endedSeptember 30, 2011 and 2010, respectively. As a result, we did not recognize any net benefit for federal taxes for the years ended September 30, 2011 and2010.YEAR ENDED SEPTEMBER 30, 2010 COMPARED TO YEAR ENDED SEPTEMBER 30, 2009Revenues Years Ended September 30, 2010 2009 $ % $ % (Dollars in thousands, Percentage of revenues) Communications $79,344 17.2% $78,724 11.8% Residential 116,012 25.2% 157,521 23.7% Commercial & Industrial 265,277 57.6% 429,752 64.5% Total Consolidated $460,633 100.0% $665,997 100.0% Consolidated revenues for the year ended September 30, 2010 were $205.4 million less than the year ended September 30, 2009, a decline of 30.8%. Each ofour business segments experienced declines in construction activity during the period, primarily due to the very challenging economic environment where anationwide decline in construction activity is continuing.Our Communications segment revenues increased $0.6 million during the year ended September 30, 2010; a 0.8% increase compared to the year endedSeptember 30, 2009. This increase is due to an increase in data center projects and more business from our national accounts. 25Table of ContentsOur Residential segment revenues decreased $41.5 million during the year ended September 30, 2010, a decrease of 26.3% as compared to the year endedSeptember 30, 2009. This decrease is primarily attributable to the decline in multi-family housing construction, primarily due to the deferral of certainprojects as they await financing or were cancelled altogether. Despite the nationwide decline in demand for single-family homes, particularly in markets suchas Southern California, Arizona, Nevada, Texas and Georgia, our single-family revenues increased slightly to partially offset the declines in multi-familyrevenues.Revenues in our Commercial & Industrial segment decreased $164.5 million during the year ended September 30, 2010; a 38.3% decline compared to theyear ended September 30, 2009. Many of our Commercial & Industrial operating locations experienced revenue shortfalls, as most industry sectors havecontinued to reduce, delay or cancel proposed construction projects. We also experienced increased competition from residential contractors who have beenaffected by the housing slowdown for less specialized retail work with lower barriers to entry.Gross Profit Years Ended September 30, 2010 2009 $ % $ % (Dollars in thousands, Percentage of revenues) Communications $13,853 17.5% $11,856 15.1% Residential 23,542 20.3% 36,778 23.3% Commercial & Industrial 19,098 7.2% 60,894 14.2% Total Consolidated $56,493 12.3% $109,528 16.4% The $53.0 million decrease in our consolidated gross profit for the year ended September 30, 2010, as compared to the year ended September 30, 2009, wasprimarily the result of lower consolidated revenues, as discussed above. Our overall gross profit percentage decreased to 12.3% during the year endedSeptember 30, 2010 as compared to 16.4% during the year ended September 30, 2009, primarily due to lower margin construction projects and increases incosts of materials and labor.Our Communications segment’s gross profit during the year ended September 30, 2010 increased $2.0 million, as compared to the year ended September 30,2009. The increase in gross profit is attributed to better execution on projects, an increase in higher margin service work and a reduction in overhead costsfrom the consolidation of administrative functions to one location.During the year ended September 30, 2010, our Residential segment experienced a $13.3 million reduction in gross profit as compared to the year endedSeptember 30, 2009. Gross margin percentage in the Residential segment decreased to 20.3% during the year ended September 30, 2010. We attribute muchof the decline in Residential’s gross margin to a decrease in higher margin, multi-family construction projects and increases in costs of materials.Our Commercial & Industrial segment’s gross profit during the year ended September 30, 2010 decreased $41.7 million, as compared to the year endedSeptember 30, 2009. Commercial & Industrial’s gross margin percentage decreased during the year ended September 30, 2010, primarily due to lower marginconstruction projects and operating difficulties in the Florida, Iowa and Maryland.Selling, General and Administrative Expenses Years Ended September 30, 2010 2009 $ % $ % (Dollars in thousands, Percentage of revenues) Communications $7,983 10.1% $6,643 8.4% Residential 23,685 20.4% 33,519 21.3% Commercial & Industrial 39,083 14.7% 51,943 12.1% Corporate 14,169 — 16,223 — Total Consolidated $84,920 18.4% $108,328 16.3% Selling, general and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily ofcompensation and benefits related to corporate and division management, occupancy and utilities, training, professional services, information technologycosts, consulting fees, travel and certain types of depreciation and amortization. 26Table of ContentsDuring the year ended September 30, 2010, our selling, general and administrative expenses were $84.9 million, a decrease of $23.4 million, or 21.6%, ascompared to the year ended September 30, 2009. The reduction in 2010 expenses was primarily due to decreases of $20.1 million in employment expenses asa result of our ongoing cost reduction efforts, $4.8 million in accounting, legal and other professional fees and $1.7 million in occupancy costs offset byincreases of $3.7 million for the reserve established on our Centerpoint long-term receivable and $1.3 million of bad debt expense.Our Communications segment’s selling, general and administrative expenses increased $1.3 million during the year ended September 30, 2010 compared tothe year ended September 30, 2009. Selling, general and administrative expenses as a percentage of revenues in the Communication segment increased to10.1% of segment revenue during the year ended September 30, 2010. The increase in selling, general and administrative expenses is primarily due to higherexpenses associated with incentive awards for achieving specific performance goals.Our Residential segment experienced a $9.8 million reduction in selling, general and administrative expenses during the year ended September 30, 2010compared to the year ended September 30, 2009. Selling, general and administrative expenses as a percentage of revenues in the Residential segmentdeclined to 20.4% of segment revenue during the year ended September 30, 2010. We attribute much of the decline in Residential selling, general andadministrative expenses to lower management and incentive compensation expense as the decline in business volume for single-family when compared tothe same period in the past year.Our Commercial & Industrial segment’s selling, general and administrative expenses during the year ended September 30, 2010 decreased $12.9 millioncompared to the year ended September 30, 2009. Selling, general and administrative expenses as a percentage of revenues in the Commercial & Industrialsegment increased to 14.7% of segment revenue during the year ended September 30, 2010. In the year ended September 30, 2010, we recorded $3.7 millionin bad debt expense related to a long term receivable associated with the Centerpoint project in Arizona. The remaining decline in selling, general andadministrative expenses is primarily due to the Company’s cost reduction efforts, associated with reduced management and administrative personnel andfacilities.Restructuring ChargesIn conjunction with our 2009 Restructuring Plan we recognized the following costs during the years ended September 30, 2010 and 2009: Years Ended September 30, 2010 2009 (In thousands) Severance compensation $644 $4,353 Consulting and other charges 119 612 Acceleration of trademark amortization — 1,608 Lease termination costs — 549 Non-cash asset write-offs — 285 Total restructuring charges $763 $7,407 Interest and Other Expense, net Years Ended September 30, 2010 2009 (In thousands) Interest expense $3,198 $4,263 Deferred financing charges 315 263 Total interest expense 3,513 4,526 Interest income (242) (432) Other (income) expense, net (109) 1,608 Total interest and other expense, net $3,162 $5,702 During the year ended September 30, 2010, we incurred interest expense of $3.1 million on an average debt balance of $19.9 million, primarily comprised ofthe Tontine Term Loan (as defined in “Working Capital” below) and the Insurance Financing Agreements (as defined in “Working Capital” below), anaverage letter of credit balance of $21.1 million under the Revolving Credit Facility (as 27Table of Contentsdefined in “Working Capital” below) and an average unused line of credit balance of $38.9 million. This compares to interest expense of $4.2 million for theyear ended September 30, 2009, on an average debt balance of $29.0 million primarily comprised of the Tontine Term Loan and the Insurance FinancingAgreements, an average letter of credit balance of $28.9 million under the Revolving Credit Facility and an average unused line of credit balance of $31.1million.For the fiscal years ended September 30, 2010 and 2009, we earned interest income of $0.2 million and $0.4 million, respectively, on the average Cash andCash Equivalents balances of $43.4 million and $60.8 million, respectively.During the year ended September 30, 2010, other income of $0.1 million included $0.2 million related to income from cash deposits netted against $0.1million impairment of our investment in EPV Solar, Inc. (“EPV”), formerly Energy Photovoltaics, Inc. During the year ended September 30, 2009, otherexpense of $1.6 million included a $2.9 million impairment of our investment in EPV. This was partially offset by adjustments to our Executive Savings Plan(as defined in Note 15 “Employee Benefit Plans” of our Consolidated Financial Statements) balance totaling $0.8 million. The remaining $0.3 millionprimarily relates to other income received throughout the year ended September 30, 2009 in the Commercial & Industrial segment.Provision for Income TaxesOur provision for income taxes decreased from an expense of $0.5 million for the year ended September 30, 2009, to a benefit of $0.0 million for the yearended September 30, 2010. The decrease is mainly attributable to an increase in loss from operations, which reduced state income taxes expense by $0.3million. In addition we recognized an increase in the reversal of unrecognized tax benefits, resulting in a $0.2 million decrease in the income tax expense. Weprovided a valuation allowance for the federal tax benefit resulting from the loss of operations for the years ended September 30, 2010 and 2009,respectively. As a result, we did not recognize any net benefit for federal taxes for the years ended September 30, 2010 and 2009.Income (Loss) from Discontinued OperationsAs discussed earlier in this report, we completed the shut-down seven underperforming subsidiaries prior to the beginning of fiscal 2010. Such incomestatement amounts are classified as discontinued operations. In June 2007, we shut-down our Mid-States Electric division, located in Jackson, Tennessee.Mid-States’ operating equipment was either transferred to other IES divisions or sold to third parties. All project work was completed prior to closing Mid-States. Mid-States was part of our Commercial & Industrial segment prior to being classified as discontinued. In August 2008, we shut-down our Haymakerdivision, located in Birmingham, Alabama. All project work was completed prior to closing Haymaker. Haymaker was part of our Commercial & Industrialsegment prior to being classified as discontinued. The discontinued operations disclosures include only those identified subsidiaries qualifying fordiscontinued operations treatment for the periods presented. Years Ended September 30, 2011 2010 2009 (In thousands) Revenues $— $— $21 Gross profit (loss) $— $— $114 Pre-tax income (loss) $— $— $187 Working CapitalDuring the year ended September 30, 2011, working capital decreased by $20.4 million from September 30, 2010, reflecting a $7.8 million decrease incurrent assets and a $12.6 million increase in current liabilities during the period.During the year ended September 30, 2011, our current assets decreased by $7.8 million, or 4.6%, to $161.1 million, as compared to $169.0 million as ofSeptember 30, 2010. Cash and cash equivalents increased by $2.7 million during the year ended September 30, 2011 as compared to September 30, 2010.The Current trade accounts receivables, net, decreased by $2.5 million at September 30, 2011, as compared to September 30, 2010. Days sales outstanding(“DSOs”) decreased to 70 days as of September 30, 2011 from 83 days as of September 30, 2010. The improvement was driven predominantly by increasedcollection efforts. While the rate of collections may vary, our secured position, resulting from our ability to secure liens against our customers’ over duereceivables, reasonably assures that collection will occur eventually to the extent that our security retains value. In light of the volatility of the currentfinancial markets, we closely monitor the collectability of our receivables. We also experienced a $0.9 million increase in retainage and a $2.0 milliondecrease in costs in excess of billings during the year ended September 30, 2011 compared to September 30, 2010.During the year ended September 30, 2011, our total current liabilities increased by $12.6 million to $98.3 million, compared to $85.7 million as ofSeptember 30, 2010. During the year ended September 30, 2011 accounts payable and accrued expenses increased $12.1 million. Billings in excess of costsincreased by $1.1 million during the year ended September 30, 2011 compared to 28Table of ContentsSeptember 30, 2010. Finally, current maturities of long-term debt decreased by $0.6 million during the year ended September 30, 2011 compared toSeptember 30, 2010 primarily due to the payments of Insurance Financing Agreements existing at September 30, 2010 with no new subsequent financingoutstanding at September 30, 2011.We are focused on return on capital and cash flow to maximize long-term shareholder value. As a result, we have increased our focus on a number ofinitiatives to return the Company to profitability. Included in these initiatives has been the closure or sale of a number of facilities within our Commercial &Industrial segment. During 2011, we initiated the sale or closure of all or portions of our Commercial & Industrial facilities in Arizona, Florida, Iowa,Louisiana, Massachusetts, Nevada and Texas. We continue to evaluate the performance of the remaining operations in our Commercial & Industrial segment,which continues to operate in a very challenging environment. If we were to elect to dispose of a substantial portion of our remaining Commercial &Industrial segment, the realized values of such actions would be substantially less than current book values, which would likely result in a material adverseimpact on our financial results.SuretyMany customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a surety. These bondsprovide 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 toperform under the terms of our contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide servicesunder 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 anyreimbursements 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 ourrelationships with our sureties will allow us to provide surety bonds as they are required. However, current market conditions, as well as changes in oursureties’ 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 bondsfor our work, our alternatives would include posting other forms of collateral for project performance, such as letters of credit or cash, seeking bondingcapacity 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 isrequired 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 anothercontractor.As of September 30, 2011, the estimated cost to complete our bonded projects was approximately $87.5 million. We believe the bonding capacity presentlyprovided by our sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of September 30, 2011,we utilized $4.0 million of cash (as is included in “Other Non-Current Assets” in our Consolidated Balance Sheet) as collateral for certain of our previousbonding programs.The Revolving Credit FacilityOn May 12, 2006, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”), for a revolving credit facility (the “RevolvingCredit Facility”) with Bank of America, N.A. and certain other lenders. On May 7, 2008, we renegotiated the terms of our Revolving Credit Facility andentered into an amended agreement with the same financial institutions. On April 30, 2010, we renegotiated the terms of, and entered into an amendment to,the Loan and Security Agreement, pursuant to which the maturity date was extended to May 12, 2012. In connection with the amendment, we incurred anamendment fee of $0.2 million.On December 15, 2011, we renegotiated the terms of, and entered into an amendment to, the Loan and Security Agreement without incurring terminationcharges. Under the terms of the amended Revolving Credit Facility, the size of the facility was reduced to $40.0 million and the maturity date was extendedto November 12, 2012. Further, we were required to cash collateralize all of our letters of credit issued by the banks. The cash collateral is added to theborrowing base calculation at 100% through out the term of the agreement. The Revolving Credit Facility requires that we maintain a fixed charge coverageratio of not less than 1.0:1.0 at any time that our aggregate amount of unrestricted cash on hand plus availability is less than $25.0 million and, thereafter,until such time as our aggregate amount of unrestricted cash on hand plus availability has been at least $25.0 million for a period of 60 consecutive days.Additionally, if there are any loans outstanding on or after the April 30, 2012, the Company’s EBITDA for the period from October 2011 through March2012, may not exceed a negative $2.5 million and we will be required to have a cumulative fixed charge coverage ratio of at least 1.0:1.0 at all timesbeginning April 1, 2012 to maintain any borrowings under the agreement. The measurement period for this additional test for borrowings begins with themonthly operating results for April 2012 and adds the monthly operating results for each month thereafter to determine the cumulative test during such timeas revolving loans are outstanding. Failure to meet this performance test will result in an immediate event of default. The amended agreement also calls forcost of borrowings of 4.0% over LIBOR per annum. Cost for letters of credit are the same as borrowings and also include a 25 basis point “fronting fee.” Allother terms and conditions remain unchanged. In connection with the amendment, we incurred an amendment fee of $0.1 million which, together withunamortized balance of the prior amendment is being amortized using the straight line method through November 12, 2012. 29Table of ContentsThe Revolving Credit Facility is guaranteed by our subsidiaries and secured by first priority liens on substantially all of our subsidiaries’ existing and futureacquired assets, exclusive of collateral provided to our surety providers. The Revolving Credit Facility contains customary affirmative, negative andfinancial covenants. The Revolving Credit Facility also restricts us from paying cash dividends and places limitations on our ability to repurchase ourcommon stock.Borrowings under the Revolving Credit Facility may not exceed a “borrowing base” that is determined monthly by our lenders based on available collateral,primarily certain accounts receivables and cash collateral supporting our letters of credit. None of our inventories qualified for borrowing availability after wesold the inventory attributable to our Key Electrical Supply company in February 2011. Under the terms of the Revolving Credit Facility in effect as ofSeptember 30, 2011, interest for loans and letter of credit fees is based on our Total Liquidity, which is calculated for any given period as the sum of averagedaily availability for such period plus average daily unrestricted cash on hand for such period as follows: Total Liquidity Annual Interest Rate for Loans Annual Interest Rate for Letters of CreditGreater than or equal to $60 million LIBOR plus 3.00% or Base Rate plus 1.00% 3.00% plus 0.25% fronting feeGreater than $40 million and less than $60 million LIBOR plus 3.25% or Base Rate plus 1.25% 3.25% plus 0.25% fronting feeLess than or equal to $40 million LIBOR plus 3.50% or Base Rate plus 1.50% 3.50% plus 0.25% fronting feeAt September 30, 2011, we had $19.1 million available to us under the Revolving Credit Facility, based on a borrowing base of $19.1 million, $8.8 millionin outstanding letters of credit and no outstanding borrowings.As of September 30, 2011, we were subject to the financial covenant under the Revolving Credit Facility requiring that we maintain a fixed charge coverageratio of not less than 1.0:1.0 at any time that our aggregate amount of unrestricted cash on hand plus availability is less than $25.0 million and, thereafter,until such time as our aggregate amount of unrestricted cash on hand plus availability has been at least $25.0 million for a period of 60 consecutive days. Asof September 30, 2011, our Total Liquidity was in excess of $25.0 million; had our Total Liquidity been less than $25.0 million at September 30, 2011, wewould not have met the required 1.0:1.0 fixed charge coverage ratio test.At September 30, 2011, our Total Liquidity was $54.7 million. For the year ended September 30, 2011, we paid no interest for loans under the RevolvingCredit Facility and a weighted average interest rate, including fronting fees, of 3.29% for letters of credit. In addition, we are charged monthly in arrears for(1) an unused commitment fee of 0.50%, and (2) certain other fees and charges as specified in the Loan and Security Agreement, as amended.While we expect to meet our financial covenants, in the event that we are not able to meet the financial covenant of our amended Revolving Credit Facilityin the future and are unsuccessful in obtaining a waiver from our lenders, the Company expects to have adequate cash on hand to provide sufficient cash forongoing operations.The Tontine Term LoanOn December 12, 2007, we entered into a $25.0 million senior subordinated loan agreement (the “Tontine Term Loan”) with Tontine Capital Partners, L.P., arelated party. The Tontine Term Loan bears interest at 11.0% per annum and is due on May 15, 2013. Interest is payable quarterly in cash or in-kind at ouroption. Any interest paid in-kind will bear interest at 11.0% in addition to the loan principal. On April 30, 2010, we prepaid $15.0 million of principal on theTontine Term Loan. On May 1, 2010, Tontine assigned the Tontine Term Loan to TCP Overseas Master Fund II, L.P. We may repay the Tontine Term Loan atany time prior to the maturity date at par, plus accrued interest without penalty. The Tontine Term Loan is subordinated to our Revolving Credit Facility. TheTontine Term Loan is an unsecured obligation of the Company and its subsidiary borrowers. The Tontine Term Loan contains no financial covenants orrestrictions on dividends or distributions to stockholders.Capital LeaseThe Company leases certain equipment under agreements, which are classified as capital leases and included in property, plant and equipment. Accumulatedamortization of this equipment for the years ended September 30, 2011, 2010 and 2009 was $0.2 million, $0.1 million and $0.0 million, respectively, whichamounts are included in depreciation expense in the accompanying statements of operations. 30Table of ContentsLiquidity and Capital ResourcesAs of September 30, 2011, we had cash and cash equivalents of $35.6 million, working capital of $62.8 million, $8.8 million of letters of credit outstandingand $19.1 million of available capacity under our Revolving Credit Facility. We anticipate that the combination of cash on hand, cash flows and availablecapacity under our Revolving Credit Facility will provide sufficient cash to enable us to meet our working capital needs, debt service requirements andcapital expenditures for property and equipment through the next twelve months. Our ability to generate cash flow is dependent on many factors, includingdemand for our services, the availability of projects at margins acceptable to us, the ultimate collectability of our receivables, and our ability to borrow onour amended Revolving Credit Facility, if needed. We were not required to test our covenants under our Revolving Credit Facility in the period as our TotalLiquidity was greater than the minimum under our Resolving Credit Facility. Had we been required to test our covenants, we would have failed atSeptember 30, 2011.We continue to closely monitor the financial markets and general national and global economic conditions. To date, we have experienced no loss or lack ofaccess to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not beimpacted in the future by adverse conditions in the financial markets.Operating ActivitiesOur cash flow from operations is not only influenced by cyclicality, demand for our services, operating margins and the type of services we provide, but canalso be influenced by working capital needs such as the timing of our receivable collections. Working capital needs are generally lower during our fiscal firstand second quarters due to the seasonality that we experience in many regions of the country.Operating activities used net cash of $11.9 million during the year ended September 30, 2011, as compared to $13.2 million of net cash used in the yearended September 30, 2010. The decrease in the use of cash from operating activities in the year ended September 30, 2011 was due to the increase in cashflow generated by higher balances in accounts payables and accrued expenses of $16.8 million, together with cash provided from the $2.9 million settlementof the Centerpoint project. The Centerpoint project was classified as a fully reserved long-term receivable. These items more than offset the increased 2011net loss of $37.7 million as compared to the $32.1 million net loss generated in the year ended September 30, 2010.Operating activities used net cash of $13.2 million during the year ended September 30, 2010, as compared to $11.3 million of net cash provided in the yearended September 30, 2009. The decrease in operating cash flows in the year ended September 30, 2010 was due to the year to date net loss of $32.1 millionand the $8.7 million decrease of our accounts payable and accrued expenses related to the overall reduction in revenues along with the associated decrease inpurchased materials compared to the year ended September 30, 2009. These decreases were partially offset by increased collections of accounts receivableand retainage of $17.8 million during the year ended September 30, 2010 and non-cash charges for bad debt expense of $7.4 million, which includes $3.7million for the reserve established on our Centerpoint receivable and $3.7 million of bad debt expense.Investing ActivitiesIn the year ended September 30, 2011, net cash from investing activities provided $15.3 million as compared to $0.2 million of net cash used in investingactivities in the year ended September 30, 2010. Investing activities in the year ended September 30, 2011 included $16.8 million from the sale of facilities,$1.2 million of proceeds from the sale of equipment; partially offset by $2.7 million used for capital expenditures. Investing activities in the year endedSeptember 30, 2010 included $0.9 million used for capital expenditures, partially offset by $0.3 million from the sale of equipment and $0.4 million from adistribution from an investmentIn the year ended September 30, 2010, we used net cash from investing activities of $0.2 million as compared to $5.9 million of net cash used in investingactivities in the year ended September 30, 2009. Investing activities in the year ended September 30, 2010 included $0.9 million used for capitalexpenditures partially offset by a cash distribution from an investment of $0.4 million and $0.3 million of proceeds from the sale of equipment. Investingactivities in the year ended September 30, 2009 included $4.7 million used for capital expenditures, partially offset by $0.9 million of proceeds from the saleof equipment. In addition, investing activities in the year ended September 30, 2009 included $2.2 million used for investments in unconsolidated affiliates.Financing ActivitiesFinancing activities used net cash of $0.8 million in the year ended September 30, 2011 compared to $17.9 million used in the year ended September 30,2010. Financing activities in the year ended September 30, 2011 included $0.8 million used for payments of debt. Financing activities in the year endedSeptember 30, 2010 included $18.2 million used for repayments of debt netted against $0.8 million provided by new financing.Financing activities used net cash of $17.9 million in the year ended September 30, 2010 compared to $6.0 million used in the year ended September 30,2009. Financing activities in the year ended September 30, 2010 included $18.2 million used for payments of debt, of which $15.0 million was used as aprepayment to Tontine, $0.3 million was used for debt issuance costs and $0.2 million was used for the acquisition of treasury stock netted against $0.8million provided by new insurance financing. Financing activities in the year ended September 30, 2009 included $4.3 million used for the purchase oftreasury stock and $2.4 million used for repayments of debt netted against $0.8 million provided by new financing. 31Table of ContentsBonding CapacityAt September 30, 2011, we had adequate surety bonding capacity under our surety agreements. Our ability to access this bonding capacity is at the solediscretion of our surety providers. As of September 30, 2011, the expected cumulative cost to complete for projects covered by our surety providers was$87.5 million. We believe we have adequate remaining available bonding capacity to meet our current needs, subject to the sole discretion of our suretyproviders. For additional information, please refer to Note 16 “Commitments and Contingencies – Surety” of our Consolidated Financial Statements, set forthin Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.Controlling ShareholderOn October 3, 2011, the Company entered into an amended and restated letter agreement with James M. Lindstrom, to memorialize Mr. Lindstrom’sappointment, effective October 3, 2011, as Chief Executive Officer and President of the Company. Mr. Lindstrom previously served in such capacities on aninterim basis since June 2011 and has served as Chairman of the Company’s Board of Directors since February 2011. Mr. Lindstrom was an employee ofTontine from 2006 until October 2011. In his capacity as Chief Executive Officer and President, Mr. Lindstrom has the ability to affect the composition of theCompany’s management and influence the business operations of the Company or extraordinary transactions outside the normal course of the Company’sbusiness.On July 21, 2011, Tontine, filed an amended Schedule 13D indicating its ownership level of 57.4% of the Company’s outstanding common stock. AlthoughTontine has not indicated any plans to alter its ownership level, should Tontine reconsider its investment plans and sell its controlling interest in theCompany, a change in ownership would occur. A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability of netoperating losses for federal and state income tax purposes. Furthermore, a change in control would trigger the change of control provisions in a number of ourmaterial agreements, including our Revolving Credit Facility, bonding agreements with our sureties and employment contracts with certain officers andemployees of the Company. On April 30, 2010, we prepaid $15.0 million of the original $25.0 million principal outstanding on the Tontine Term Loan;accordingly $10.0 million remains outstanding under the Tontine Term Loan.Off-Balance Sheet Arrangements and Contractual ObligationsAs is common in our industry, we have entered into certain off-balance sheet arrangements that expose us to increased risk. Our significant off-balance sheettransactions include commitments associated with non-cancelable operating leases, letter of credit obligations, firm commitments for materials and suretyguarantees.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 thevehicles 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 terminatea 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 thefair 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 byus to subcontractors and vendors. If our customer has reasonable cause to effect payment under a letter of credit, we would be required to reimburse ourcreditor for the letter of credit. At September 30, 2011, $0.6 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, 2011, $8.2 million ofour 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 usein the ordinary course of business. These commitments are typically for terms less than one year and require us to buy minimum quantities of materials atspecified intervals at a fixed price over the term. As of September 30, 2011, 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 underthe 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 andvendors, 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 suretiesfor 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 suretiesfor expenses they incurred on our behalf. 32Table of ContentsAs of September 30, 2011, our future contractual obligations due by September 30 of each of the following fiscal years include (in thousands) (1): Less than1 Year 1 to 3Years 3 to 5Years More than5 Years Total Long-term debt obligations $— $10,000 $— $— $10,000 Operating lease obligations $5,577 $4,843 $1,498 $942 $12,860 Capital lease obligations $209 $289 $— $— $498 Total $5,786 $15,132 $1,498 $942 $23,358 (1)The tabular amounts exclude the interest obligations that will be created if the debt and capital lease obligations are outstanding for the periodspresented.Our other commitments expire by September 30 of each of the following fiscal years (in thousands): Less than1 Year 1 to 3Years 3 to 5Years More than5 Years Total Standby letters of credit $6,466 $2,346 $— $— $8,812 Other commitments $— $— $— $— $— Total $6,466 $2,346 $— $— $8,812 OutlookWe anticipate that the combination of cash on hand, cash flows and available capacity under our Revolving Credit Facility will provide sufficient cash toenable 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 capital expenditures will range from $1.0 to $1.5 million for the fiscal year ending on September 30, 2012. Our ability to generate cashflow is dependent on our successful finalization of our restructuring efforts and many other factors, including demand for our products and services, theavailability of projects at margins acceptable to us, the ultimate collectability of our receivables and our ability to borrow on our amended Revolving CreditFacility. For additional information see “Disclosure Regarding Forward-Looking Statements” in Part I of this Form 10-K. 33Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskManagement is actively involved in monitoring exposure to market risk and continues to develop and utilize appropriate risk management techniques. Ourexposure to significant market risks includes fluctuations in commodity prices for copper, aluminum, steel and fuel. Commodity price risks may have animpact on our results of operations due to the fixed price nature of many of our contracts. We are also exposed to interest rate risk with respect to ouroutstanding debt obligations on the Revolving Credit Facility. For additional information see “Disclosure Regarding Forward-Looking Statements” in Part Iof this Form 10-K.Commodity RiskOur exposure to significant market risks includes fluctuations in commodity prices for copper, aluminum, steel and fuel. Commodity price risks may have animpact on our results of operations due to fixed nature of many of our contracts. During 2011 and 2010, commodity prices were volatile, and we experiencedoverall increases in prices of copper, aluminum, steel and fuel. Over the long-term, we expect to be able to pass along a portion of these costs to ourcustomers, as market conditions in the construction industry will allow.Interest Rate RiskWe are also exposed to interest rate risk, with respect to our outstanding revolving debt obligations as well as our letters of credit.The following table presents principal or notional amounts and related interest rates by fiscal year of maturity for our debt obligations at September 30, 2011(Dollar amounts in thousands): 2012 2013 2014 2015 2016 Thereafter Total Debt Obligations—Fixed Rate: Tontine Term Loan (11%) $— $10,000 $— $— $— $— $10,000 Capital Lease (22%) $209 $260 $24 — — — 493 Fair Value of Debt: Fixed Rate $279 $10,874 $17 $— $— $— $11,170 34Table of ContentsItem 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 36 Consolidated Balance Sheets 37 Consolidated Statements of Operations 38 Consolidated Statements of Stockholders’ Equity 39 Consolidated Statements of Cash Flows 40 Notes to Consolidated Financial Statements 42 35Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders ofIntegrated Electrical Services, Inc.We have audited the accompanying consolidated balance sheets of Integrated Electrical Services, Inc. and subsidiaries (“the Company”) as of September 30,2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period endedSeptember 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engagedto perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated ElectricalServices, Inc. and subsidiaries at September 30, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three yearsin the period ended September 30, 2011, in conformity with U.S. generally accepted accounting principles./s/ ERNST & YOUNG LLPHouston, TexasDecember 19, 2011 36Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIESConsolidated Balance Sheets(In Thousands, Except Share Information) Years Ended September 30, 2011 2010 ASSETS CURRENT ASSETS: Cash and cash equivalents $35,577 $32,924 Accounts receivable: Trade, net of allowance of $2,645 and $3,360, respectively 85,728 88,252 Retainage 17,944 17,083 Inventories 8,443 12,682 Costs and estimated earnings in excess of billings on uncompleted contracts 10,592 12,566 Prepaid expenses and other current assets 2,840 5,449 Total current assets 161,124 168,956 LONG-TERM RECEIVABLE, net of allowance of $59 and $4,069, respectively 200 440 PROPERTY AND EQUIPMENT, net 8,016 19,846 GOODWILL 3,839 3,981 OTHER NON-CURRENT ASSETS, net 7,087 11,882 Total assets $180,266 $205,105 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $209 $808 Accounts payable and accrued expenses 79,858 67,799 Billings in excess of costs and estimated earnings on uncompleted contracts 18,220 17,109 Total current liabilities 98,287 85,716 LONG-TERM DEBT, net of current maturities 10,289 10,448 LONG-TERM DEFERRED TAX LIABILITY 284 1,046 OTHER NON-CURRENT LIABILITIES 6,596 6,314 Total liabilities 115,456 103,524 STOCKHOLDERS’ EQUITY: Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued and outstanding — — Common stock, $0.01 par value, 100,000,000 shares authorized; 15,407,802 and 15,407,802 shares issued and14,938,071 and 14,773,904 outstanding, respectively 154 154 Treasury stock, at cost, 451,329 and 633,898 shares, respectively (5,595) (13,677) Additional paid-in capital 164,262 171,510 Accumulated other comprehensive income — (88) Retained deficit (94,011) (56,318) Total stockholders’ equity 64,810 101,581 Total liabilities and stockholders’ equity $180,266 $205,105 The accompanying notes are an integral part of these Consolidated Financial Statements. 37Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIESConsolidated Statements of Operations(In Thousands, Except Share Information) Years Ended September 30, 2011 2010 2009 Revenues $481,607 $460,633 $665,997 Cost of services 445,585 404,140 556,469 Gross profit 36,022 56,493 109,528 Selling, general and administrative expenses 69,365 84,920 108,328 Gain on sale of assets (6,583) (174) (465) Asset Impairment 4,804 — — Restructuring charges 3,784 763 7,407 Loss from operations (35,348) (29,016) (5,742) Interest and other (income) expense: Interest expense 2,277 3,513 4,526 Interest income (68) (242) (432) Other (income) expense, net (10) (109) 1,608 Interest and other expense, net 2,199 3,162 5,702 Loss from operations before income taxes (37,547) (32,178) (11,444) Provision (benefit) for income taxes 146 (31) 495 Net loss from continuing operations $(37,693) $(32,147) $(11,939) Discontinued operations (Note 4 “Strategic Actions”) Income (loss) from discontinued operations — — 187 Provision (benefit) for income taxes — — 68 Net income (loss) from discontinued operations — — 119 Net loss $(37,693) $(32,147) $(11,820) Basic loss per share: Continuing operations $(2.60) $(2.23) $(0.83) Discontinued operations $— $— $0.01 Total $(2.60) $(2.23) $(0.82) Diluted loss per share: Continuing operations $(2.60) $(2.23) $(0.83) Discontinued operations $— $— $0.01 Total $(2.60) $(2.23) $(0.82) Shares used in the computation of loss per share (Note 6 “Per Share Information”): Basic 14,493,747 14,409,368 14,331,614 Diluted 14,493,747 14,409,368 14,331,614 The accompanying notes are an integral part of these Consolidated Financial Statements. 38Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity(In Thousands, Except Share Information) Total Common Stock Treasury Stock Accum Retained Stockholders’ Shares Amount Shares Amount APIC OCI (Loss) Deficit Equity BALANCE, September 30, 2008 15,407,802 $154 (654,023) $(11,591) $170,023 $— $(12,351) $146,235 Restricted stock grant — — 199,200 1,821 (1,821) — — — Forfeiture of restricted stock — — (120) (2) 2 — — — Acquisition of treasury stock — — (335,118) (4,325) — — — (4,325) Non-cash compensation — — — — 2,528 — — 2,528 Unrealized loss on marketable securities, netof tax — — — — — (70) — (70) Net loss — — — — — — (11,820) (11,820) BALANCE, September 30, 2009 15,407,802 $154 (790,061) $(14,097) $170,732 $(70) $(24,171) $132,548 Restricted stock grant — — 221,486 807 (807) — — — Forfeiture of restricted stock — — (38,000) (217) 217 — — — Acquisition of treasury stock — — (27,323) (170) (2) — — (172) Non-cash compensation — — — — 1,370 — — 1,370 Unrealized loss on marketable securities, netof tax — — — — — (18) — (18) Net loss — — — — — — (32,147) (32,147) BALANCE, September 30, 2010 15,407,802 $154 (633,898) $(13,677) $171,510 $(88) $(56,318) $101,581 Restricted stock grant — — 333,616 4,595 (4,595) — — — Forfeiture of restricted stock — — (130,258) (450) 450 — — — Acquisition of treasury stock — — (20,789) 3,937 (4,009) — — (72) Non-cash compensation — — — — 906 — — 906 Unrealized loss on marketable securities, netof tax — — — — — 88 — 88 Net loss — — — — — — (37,693) (37,693) BALANCE ,September 30, 2011 15,407,802 $154 (451,329) $(5,595) $164,262 $— $(94,011) $64,810 The accompanying notes are an integral part of these Consolidated Financial Statements. 39Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows(In Thousands) Years Ended September 30, 2011 2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(37,693) $(32,147) $(11,820) Adjustments to reconcile net loss to net cash provided by operating activities: Net income (loss) from discontinued operations — — (119) Bad debt expense (715) 7,440 2,539 Deferred financing cost amortization 338 314 263 Depreciation and amortization 6,356 5,291 8,258 Gain on sale of business units (6,657) — — Loss (gain) on sale of assets 88 (174) (465) Non-cash compensation expense 906 1,370 2,520 Impairment of investment 4,804 150 2,850 Paid in kind interest — — 678 Equity in losses of investment — — 13 Goodwill adjustment – utilization of deferred tax assets — — 911 Deferred income tax (107) (1,244) (1,924) Changes in operating assets and liabilities Accounts receivable (2,761) 17,768 29,567 Inventories (537) (2,527) 2,701 Costs and estimated earnings in excess of billings 1,592 988 1,189 Prepaid expenses and other current assets 1,206 1,820 1,096 Other non-current assets 3,092 1,463 6,598 Accounts payable and accrued expenses 16,777 (8,679) (23,547) Billings in excess of costs and estimated earnings 1,111 (4,033) (12,546) Other non-current liabilities 348 (966) 910 Net cash (used in) provided by continuing operations (11,852) (13,166) 9,672 Net cash provided by discontinued operations — — 1,635 Net cash (used in) provided by operating activities (11,852) (13,166) 11,307 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,688) (924) (4,740) Proceeds from sales of property and equipment 1,268 328 935 Proceeds from sales of facilities 16,763 — — Investment in unconsolidated affiliates — — (2,150) Distribution from unconsolidated affiliates — 393 — Net cash provided by (used in) continuing operations 15,343 (203) (5,955) Net cash provided by discontinued operations — — 65 Net cash provided by (used in) investing activities 15,343 (203) (5,890) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of debt — 753 792 Repayments of debt (766) (18,184) (2,427) Purchase of treasury stock (72) (172) (4,317) Payments for debt issuance costs — (278) — Net cash used in financing activities (838) (17,881) (5,952) NET INCREASE (DECREASE) IN CASH EQUIVALENTS 2,653 (31,250) (535) CASH AND CASH EQUIVALENTS, beginning of period 32,924 64,174 64,709 CASH AND CASH EQUIVALENTS, end of period $35,577 $32,924 $64,174 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $2,293 $3,899 $3,590 Cash paid for income taxes $340 $263 $1,411 Assets acquired under capital lease $68 $— $774 Supplemental Cash Flow InformationAs part of our 2009 restructuring plan, during the year ended September 30, 2009, we accelerated amortization of $1,609 related to trade names no longer inuse. This is captured in depreciation and amortization above.During the year ended September 30, 2009, we financed $691 of office equipment through a capital lease obligation.The accompanying notes are an integral part of these Consolidated Financial Statements. 40Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts)1. BUSINESSDescription of the BusinessIntegrated Electrical Services, Inc., a Delaware corporation, was founded in June 1997 to establish a leading national provider of electrical services, focusingprimarily on the communications, residential, commercial and industrial service and maintenance markets. We provide services from 53 locations serving thecontinental United States. The Company is organized into three business segments; Communications, Residential and Commercial & Industrial. The words“IES”, the “Company”, “we”, “our”, and “us” refer to Integrated Electrical Services, Inc. and, except as otherwise specified herein, to our wholly-ownedsubsidiaries.Our Communications division is a leading provider of network infrastructure products and services for data centers and other mission critical environments.Services offered include the design, installation and maintenance of network infrastructure for the financial, medical, hospitality, government, hi-techmanufacturing, educational and information technology industries. We also provide the design and installation of audio/visual, telephone, fire, wireless andintrusion alarm systems as well as design/build, service and maintenance of data network systems. We perform services across the United States from our 7offices and our Communications headquarters located in Tempe, Arizona allowing dedicated onsite maintenance teams at our customer’s sites.Our Residential division provides electrical installation services for single-family housing and multi-family apartment complexes and CATV cablinginstallations for residential and light commercial applications. In addition to our core electrical construction work, the Residential segment is expanding itsofferings by providing services for the installation of residential solar power, smart meters, electric car charging stations and stand-by generators, both for newconstruction and existing residences. The division has 26 locations in Texas and the Sun-Belt, western and the Mid-Atlantic regions of the United States.Our Commercial & Industrial division is one of the largest providers of electrical contracting services in the United States The division offers a broad range ofelectrical design, construction, renovation, engineering and maintenance services to the commercial and industrial markets. The division has 18 locations inTexas, Nebraska, Colorado, Oregon and the Mid-Atlantic region. Services include the design of electrical systems within a building or complex, procurementand installation of wiring and connection to power sources, end-use equipment and fixtures, as well as contract maintenance. We focus on projects thatrequire special expertise, such as design-and-build projects that utilize the capabilities of our in-house experts, or projects which require specific marketexpertise, such as transmission and distribution and power generation facilities. We also focus on service, maintenance and certain renovation and upgradework, which tends to be either recurring or have lower sensitivity to economic cycles, or both. We provide services for a variety of projects, including: high-rise residential and office buildings, power plants, manufacturing facilities, data centers, chemical plants, refineries, wind farms, solar facilities, municipalinfrastructure and health care facilities and residential developments. Our utility services consist of overhead and underground installation and maintenanceof electrical and other utilities transmission and distribution networks, installation and splicing of high-voltage transmission and distribution lines,substation construction and substation and right-of-way maintenance. Our maintenance services generally provide recurring revenues that are typically lessaffected by levels of construction activity. Service and maintenance revenues are derived from service calls and routine maintenance contracts, which tend tobe recurring and less sensitive to short term economic fluctuations.Controlling ShareholderAt September 30, 2011, Tontine Capital Partners, L.P. and its affiliates (collectively, “Tontine”), was the controlling shareholder of the Company’s commonstock. Accordingly, Tontine has the ability to exercise significant control of our affairs, including the election of directors and any action requiring theapproval of shareholders, including the approval of any potential merger or sale of all or substantially all assets or divisions of the Company, or the Companyitself. In its most recent Schedule 13D, Tontine stated that it has no current plans to make any material change in the Company’s business or corporatestructure. For a more complete discussion on our relationship with Tontine, please refer to Note 3 “Controlling Shareholder” in the notes to theseConsolidated Financial Statements.Sale of Non-Strategic Manufacturing FacilityOn November 30, 2010, a subsidiary of the Company sold substantially all the assets and certain liabilities of a non-strategic manufacturing facility engagedin manufacturing and selling fabricated metal buildings housing electrical equipment, such as switchgears, motor starters and control systems, to SiemensEnergy, Inc. As part of this transaction, Siemens Energy, Inc. also acquired certain real property where the fabrication facilities are located from anothersubsidiary of the Company. The purchase price of $10,086 was adjusted to reflect working capital variances. The transaction was completed on December 10,2010 at which time we recognized a gain of $6,763. 41Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Sale of Non-Core Electrical Distribution FacilityOn February 28, 2011, Key Electrical Supply, Inc, a wholly owned subsidiary of the Company, sold substantially all the assets and certain liabilities of a non-core electrical distribution facility engaged in distributing wiring, lighting, electrical distribution, power control and generators for residential andcommercial applications to Elliot Electric Supply, Inc. The purchase price of $6,676 was adjusted to reflect working capital variances. The loss on thistransaction was immaterial.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of ConsolidationThe accompanying consolidated financial statements include the accounts of IES and its wholly-owned subsidiaries. All significant intercompany accountsand transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation have beenincluded and are of a normal recurring nature.Asset ImpairmentThe Company recorded a pretax non-cash asset impairment charge of $3,551 related to certain internally-developed capitalized software, $968 for ourinvestment in EnerTech Capital Partners II L.P. (“EnerTech”), $142 for goodwill and $143 related to real estate held by the Company. The Company ceaseduse of the internally-developed software in 2011. As a result, the software has a fair value of zero. The non-cash impairments related to the investment inEnerTech and the real estate are to adjust the carrying value to their estimated current market values.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires theuse of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the dateof the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Estimates are primarily used in our revenue recognition of construction in progress, fair value assumptions in analyzing goodwill, investments, intangibleassets and long-lived asset impairments and adjustments, allowance for doubtful accounts receivable, stock-based compensation, reserves for legal matters,assumptions regarding estimated costs to exit certain divisions, realizability of deferred tax assets, and self-insured claims liabilities and related reserves.Cash and Cash EquivalentsWe consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.InventoriesInventories generally consist of parts and supplies held for use in the ordinary course of business and are valued at the lower of cost or market generally usingthe historical average cost or first-in, first-out (FIFO) method. Where shipping and handling costs are borne by us, these charges are included in inventory andcharged to cost of services upon use in construction or the providing of services.Securities and Equity InvestmentsOur investments are accounted for using either the cost or equity method of accounting, as appropriate. Each period, we evaluate whether an event or changein circumstances has occurred that may indicate an investment has been impaired. If, upon further investigation of such events, we determine the investmenthas suffered a decline in value that is other than temporary, we write down the investment to its estimated fair value.Certain securities are classified as available-for-sale. These investments are recorded at fair value and are classified as other non-current assets in theaccompanying Consolidated Balance Sheets as of September 30, 2011. The changes in fair values, net of applicable taxes, are recorded as unrealized gains(losses) as a component of accumulated other comprehensive income (loss) in stockholders’ equity. 42Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Long-Term ReceivablesFrom time to time, we enter into payment plans with certain customers over periods in excess of one year. We classify these receivables as long-termreceivables. Additionally, we provide an allowance for doubtful accounts for specific long-term receivables where collection is considered doubtful.In March 2009, in connection with a construction project entering bankruptcy, we transferred $3,992 of trade accounts receivable to long-term receivable andinitiated breach of contract and mechanics’ lien foreclosure actions against the project’s general contractor and owner, respectively. At the same time, wereserved the costs in excess of billings of $278 associated with this receivable. In March 2010, given the significant uncertainty associated with its ultimatecollectability we reserved the remaining balance of $3,714, but continued to pursue collection through the bankruptcy court proceeding. In February 2011,we entered into a $2,850 settlement in connection with the breach of contract and mechanics’ lien foreclosure actions related to the receivable. The $2,850recovery was recorded in the accompanying consolidated statements of operations as a component of selling, general, and administrative expenses.Property and EquipmentAdditions of property and equipment are recorded at cost, and depreciation is computed using the straight-line method over the estimated useful life of therelated asset. Leasehold improvements are capitalized and depreciated over the lesser of the life of the lease or the estimated useful life of the asset.Depreciation and amortization expense was $6,356, $5,291 and $8,258, respectively, for the years ended September 30, 2011, 2010 and 2009.Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the usefullives of existing property and equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the capitalized cost andrelated accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations in the caption(gain) loss on sale of assets.GoodwillGoodwill attributable to each reporting unit is tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value isdetermined using discounted cash flows. These impairment tests are required to be performed at least annually. Significant estimates used in themethodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital for each of the reportableunits. On an ongoing basis (absent any impairment indicators), we perform an impairment test annually using a measurement date of September 30.Below are the carrying amounts of goodwill attributable to each reportable segment with goodwill balances: Years Ended September 30, 2011 2010 Communications $— $— Residential 3,839 3,839 Commercial & Industrial — 142 $3,839 $3,981 For the years ended September 30, 2011, 2010 and 2009, we recorded goodwill impairment of $142, $0, and $0, respectively. The impairment recorded in2011 was attributable to our Commercial & Industrial segment. Based upon the results of our annual impairment analysis, the fair value of our Residentialreporting unit significantly exceeded the book value, and warrants no impairment. 43Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Debt Issuance CostsDebt issuance costs are included in other noncurrent assets and are amortized to interest expense over the scheduled maturity of the debt. Amortizationexpense of debt issuance costs was $338, $314 and $263, respectively, for the years ended September 30, 2011, 2010 and 2009. At September 30, 2011,remaining unamortized capitalized debt issuance costs were $80.Revenue RecognitionWe recognize revenue on construction contracts using the percentage of completion method. Construction contracts generally provide that customers acceptcompletion of progress to date and compensate us for services rendered measured in terms of units installed, hours expended or some other measure ofprogress. We recognize revenue on both signed contracts and change orders. A discussion of our treatment of claims and unapproved change orders isdescribed later in this section. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred and accrued todate for each contract to the estimated total cost for each contract at completion. We generally consider contracts to be substantially complete upon departurefrom the work site and acceptance by the customer. Contract costs include all direct material, labor and insurance costs and those indirect costs related tocontract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contractcosts and profitability and final contract settlements may result in revisions to costs and income and the effects of these revisions are recognized in the periodin which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses aredetermined. The balances billed but not paid by customers pursuant to retainage provisions in construction contracts will be due upon completion of thecontracts and acceptance by the customer. Based on our experience with similar contracts in recent years, the retention balance at each balance sheet date willbe collected within the subsequent fiscal year.Certain divisions in the Residential segment use the completed contract method of accounting because the duration of their contracts is short in nature. Werecognize revenue on completed contracts when the construction is complete and billable to the customer. Provisions for estimated losses on these contractsare recorded in the period such losses are determined.Service work consists of time and materials projects that are billed at either contractual or current standard rates. Revenues from service work are recognizedwhen services are performed.The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billedwhich management believes will be billed and collected within the next twelve months. The current liability “Billings in excess of costs and estimatedearnings on uncompleted contracts” represents billings in excess of revenues recognized. Costs and estimated earnings in excess of billings on uncompletedcontracts are amounts considered recoverable from customers based on different measures of performance, including achievement of specific milestones,completion of specified units or at the completion of the contract. Also included in this asset, from time to time, are claims and unapproved change orderswhich are amounts we are in the process of collecting from our customers or agencies for changes in contract specifications or design, contract change ordersin dispute or unapproved as to scope and price, or other related causes of unanticipated additional contract costs. Claims are limited to costs incurred and arerecorded at estimated realizable value when collection is probable and can be reasonably estimated. We do not recognize profits on construction costsincurred in connection with claims. Claims made by us involve negotiation and, in certain cases, litigation. Such litigation costs are expensed as incurred. Asof September 30, 2011, 2010 and 2009, there were no material revenues recorded associated with any claims.Accounts Receivable and Allowance for Doubtful AccountsWe record accounts receivable for all amounts billed and not collected. Generally, we do not charge interest on outstanding accounts receivable; however,from time to time we may believe it necessary to charge interest on a case by case basis. Additionally, we provide an allowance for doubtful accounts forspecific accounts receivable where collection is considered doubtful as well as for general unknown collection issues based on historical trends. Accountsreceivable not determined to be collectible are written off as deemed necessary in the period such determination is made. As is common in the constructionindustry, some of these receivables are in litigation or require us to exercise our contractual lien rights in order to collect. These receivables are primarilyassociated with a few divisions within our Commercial & Industrial segment. Certain other receivables are slow-pay in nature and require us to exercise ourcontractual or lien rights. We believe that our allowance for doubtful accounts is sufficient to cover uncollectible receivables as of September 30, 2011. 44Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Comprehensive IncomeComprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to stockholders.AdvertisingAdvertising and marketing expense for the years ended September 30, 2011, 2010 and 2009 was approximately $512, $1,547, and $1,895, respectively.Advertising costs are charged to expense as incurred and are included in the “Selling, general and administrative expenses” line item on the ConsolidatedStatements of Operations.Income TaxesWe follow the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recorded for thefuture income tax consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities, and are measuredusing enacted tax rates and laws.We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation at leastannually at the end of each fiscal year. The estimation of required valuation allowances includes estimates of future taxable income. In assessing therealizability of deferred tax assets at September 30, 2011, we considered whether it was more likely than not that some portion or all of the deferred tax assetswould not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in whichthose temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and taxplanning strategies in making this assessment. If actual future taxable income is different from the estimates, our results could be affected. We havedetermined to fully reserve against such an occurrence. Prior to October 1, 2009, to the extent that we realize benefits from the usage of our pre-emergencedeferred tax assets; such benefits first reduced goodwill, then other long-term intangible assets, then additional paid-in capital. Beginning October 1, 2009,with the adoption of new standards, reductions in the valuation allowance attributable to all periods, if any should occur, will be recorded as an adjustment toour income tax expense. We believe the impact of the new standards will be significant in the period in which we determine that a reduction in the valuationallowance is warranted.On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. Internal Revenue Code Section 382 limits the utilizationof net operating losses that existed as of the change in ownership in tax periods subsequent to the change in ownership. As such, our net operating lossutilization after the change date will be subject to Internal Revenue Code Section 382 limitations for federal income taxes and some state income taxes. Wehave provided valuation allowances on all net operating losses where it is determined it is more likely than not that they will expire without being utilized.Risk-ManagementWe retain the risk for workers’ compensation, employer’s liability, automobile liability, general liability and employee group health claims, resulting fromuninsured deductibles per accident or occurrence which are subject to annual aggregate limits. Our general liability program provides coverage for bodilyinjury and property damage. Losses up to the deductible amounts are accrued based upon our known claims incurred and an estimate of claims incurred butnot reported. For the year ended September 30, 2011, we compiled our historical data pertaining to the insurance experiences and actuarially developed theultimate loss associated with our insurance programs. We believe that the actuarial valuation provides the best estimate of the ultimate losses to be expectedunder these programs.The undiscounted ultimate losses of all insurance reserves at September 30, 2011 and 2010, was $8,353 and $7,082, respectively. Based on historicalpayment patterns, we expect payments of undiscounted ultimate losses to be made as follows: Year Ended September 30: 2012 $3,666 2013 1,711 2014 1,005 2015 590 2016 378 Thereafter 1,003 Total $8,353 45Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) We elect to discount the ultimate losses above to present value using an approximate risk-free rate over the average life of our insurance claims. For the yearsended September 30, 2011 and 2010, the discount rate used was 1.0 percent and 1.3 percent, respectively. The decrease in discount rate is driven by theprolonged decline in interest rates and a decrease in the average life of our associated claims. The present value of all insurance reserves for the employeegroup health claims, workers’ compensation, auto and general liability recorded at September 30, 2011 and 2010 was $7,040 and $6,916, respectively. Ouremployee group health claims are anticipated to be resolved within the year ended September 30, 2012.We had letters of credit of $8,182 outstanding at September 30, 2011 to collateralize our high deductable insurance obligations.Realization of Long-Lived and Intangible AssetsWe evaluate the recoverability of property and equipment, intangible assets and other long-lived assets at least annually, or as facts and circumstancesindicate that any of those assets might be impaired. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset arecompared to the asset’s carrying amount to determine if an impairment of such property has occurred. The effect of any impairment would be to expense thedifference between the fair value of such property and its carrying value. Estimated fair values are determined based on expected future cash flows discountedat a rate we believe incorporates the time value of money, the expectations about future cash flows and an appropriate risk premium.At September 30, 2011, 2010 and 2009, we performed evaluations of our long-lived assets. These evaluations resulted in impairment charges as describedabove under “Asset Impairment” and “Goodwill.”Risk ConcentrationFinancial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash deposits and accounts receivable. We grantcredit, usually without collateral, to our customers, who are generally contractors and homebuilders throughout the United States. Consequently, we aresubject to potential credit risk related to changes in business and economic factors throughout the United States within the construction and homebuildingmarket. However, we are entitled to payment for work performed and have certain lien rights in that work. Further, management believes that its contractacceptance, billing and collection policies are adequate to manage potential credit risk. We routinely maintain cash balances in financial institutions inexcess of federally insured limits. We periodically assess the financial condition of these institutions where these funds are held and believe the credit risk isminimal. As a result of recent credit market turmoil we maintain the majority of our cash and cash equivalents in money market mutual funds.No single customer accounted for more than 10% of our revenues for the years ended September 30, 2011, 2010 and 2009.Fair Value of Financial InstrumentsOur financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, investments, accounts payable, a line of credit, a notepayable issued to finance an insurance policy, and a $10,000 senior subordinated loan agreement (the “Tontine Term Loan”). We believe that the carryingvalue of financial instruments, with the exception of the Tontine Term Loan and our cost method investment in EnerTech, in the accompanyingConsolidated Balance Sheets, approximates their fair value due to their short-term nature. We estimate that the fair value of the Tontine Term Loan is$10,649 based on comparable debt instruments at September 30, 2011. For additional information, please refer to Note 8, “Debt – The Tontine Term Loan” ofthis report.We estimate that the fair value of our investment in EnerTech is $1,003 at September 30, 2011. For additional information, please refer to Note 7, “Detail ofCertain Balance Sheet Accounts – Securities and Equity Investments – Investment in EnerTech.Stock-Based CompensationWe measure and record compensation expense for all share-based payment awards based on the fair value of the awards granted, net of estimated forfeitures,at the date of grant. We calculate the fair value of stock options using a binomial option pricing model. The fair value of restricted stock awards is determinedbased on the number of shares granted and the closing price of IES’s common stock on the date of grant. Forfeitures are estimated at the time of grant andrevised as deemed necessary. The resulting compensation expense from discretionary awards is recognized on a straight-line basis over the requisite serviceperiod, which is generally the vesting period, while compensation expense from performance based awards is recognized using the graded vesting methodover the requisite service period. The cash flows resulting from the tax deductions in excess of the compensation expense recognized for options andrestricted stock (excess tax benefit) are classified as financing cash flows. 46Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Deferred Compensation PlansThe Company maintains a rabbi trust to fund certain deferred compensation plans. The securities held by the trust are classified as trading securities. Theinvestments are recorded at fair value and are classified as other non-current assets in the accompanying Consolidated Balance Sheets as of September 30,2011 and 2010. The changes in fair values are recorded as unrealized gains (losses) as a component of other income (expense) in the Consolidated Statementsof Operations.The corresponding deferred compensation liability is included in other non-current liabilities on the Consolidated Balance Sheets and changes in thisobligation are recognized as adjustments to compensation expense in the period in which they are determined.3. CONTROLLING SHAREHOLDEROn April 30, 2010, we prepaid $15,000 of the original $25,000 principal outstanding on the Tontine Term Loan., and $10,000 remains outstanding on theTontine Term Loan.Although Tontine has not indicated any plans to alter its ownership level, should Tontine reconsider its investment plans and sell its controlling interest inthe Company, a change in ownership would occur. A change in ownership, as defined by Internal Revenue Code Section 382, could reduce the availability ofnet operating losses for federal and state income tax purposes. Furthermore, a change in control would trigger the change of control provisions in a number ofour material agreements, including our $40,000 Revolving Credit Facility, bonding agreements with our sureties and certain employment contracts withcertain officers and employees of the Company.4. STRATEGIC ACTIONSWe are focused on return on capital and cash flow to maximize long-term shareholder value. As a result, we have increased our focus on a number ofinitiatives to return the Company to profitability. Included in these initiatives has been the closure or sale of a number of facilities within our Commercial &Industrial segment. During 2011, we initiated the sale or closure of all or portions of our Commercial & Industrial facilities in Arizona, Florida, Iowa,Louisiana, Massachusetts, Nevada and Texas. We continue to evaluate the performance of the remaining operations in our Commercial & Industrial segment,which continues to operate in a very challenging environment. If we were to elect to dispose of a substantial portion of our remaining Commercial &Industrial segment, the realized values of such actions would be substantially less than current book values, which would likely result in a material adverseimpact on our financial results.The 2009 Restructuring PlanIn the first quarter of our 2009 fiscal year, we began a restructuring program (the “2009 Restructuring Plan”) that was designed to consolidate operationswithin our three segments. The 2009 Restructuring Plan was the next level of our business optimization strategy. Our plan was to streamline local project andsupport operations, which were managed through regional operating centers, and to capitalize on the investments we had made over the past year to furtherleverage our resources. We accelerated our trade name amortization during the 2009 fiscal year recording a charge of $1,609 that has been identified withinthe “Restructuring Charges” caption in our Consolidated Statements of Operations.In addition, as a result of the continuing significant effects of the recession, during the third quarter of fiscal year 2009, we implemented a more expansivecost reduction program, by further reducing administrative personnel, primarily in the corporate office, and consolidating our Commercial & Industrialadministrative functions into one service center. We recorded at total of $8,170 in restructuring charges for the 2009 Restructuring Plan. As part of therestructuring charges, we recognized $154, $2,662, $3.917 and $1,437 in severance and facility closing charges within our Communications, Residential,Commercial & Industrial and Corporate segments, respectively.The 2011 Restructuring PlanIn the second quarter of our 2011 fiscal year, we began a new restructuring program (the “2011 Restructuring Plan”) that was designed to consolidateoperations within our Commercial & Industrial business. Pursuant to the 2011 Restructuring Plan, during the next six to twelve months, we will either sell orclose certain underperforming facilities within our Commercial & Industrial operations. The 2011 Restructuring Plan is a key element of our commitment toreturn the Company to profitability. 47Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) The facilities directly affected by the 2011 Restructuring Plan are in several locations throughout the country, including Arizona, Florida, Iowa,Massachusetts, Louisiana, Nevada and Texas. These facilities were selected due to current business prospects and the extended time frame needed to returnthe facilities to a profitable position. We expect that closure costs could range from $4,500 to $5,500 in the aggregate. Closure costs associated with the 2011Restructuring Plan include equipment and facility lease termination expenses, incremental management consulting expenses and severance costs foremployees. The Company is in the process of winding down these facilities. As part of our restructuring charges within our Commercial & Industrial segmentwe recognized $1,455 in severance costs, $1,530 in consulting services, and $799 in costs related to lease terminations.The following table summarizes the activities related to our restructuring activities by component: SeveranceCharges ConsultingCharges Lease Termination& Other Charges Total Restructuring charges incurred 1,455 1,530 799 3,784 Cash payments made (374) (1,194) (9) (1,577) Restructuring liability at September 30, 2011 $1,081 $336 $790 $2,207 5. PROPERTY AND EQUIPMENTProperty and equipment consists of the following: EstimatedUsefulLives Years Ended September 30, in Years 2011 2010 Land N/A $1,795 $2,797 Buildings 5-20 3,030 6,066 Transportation equipment 3-5 1,695 2,807 Machinery and equipment 3-10 3,077 4,556 Leasehold improvements 5-10 1,703 2,267 Information systems 2-8 8,939 20,631 Furniture and fixtures 5-7 1,942 2,590 $22,181 $41,714 Less—Accumulated depreciation and amortization (14,165) (21,868) Property and equipment, net $8,016 $19,846 6. PER SHARE INFORMATIONBasic earnings per share is calculated as income (loss) available to common stockholders, divided by the weighted average number of common sharesoutstanding during the period. If the effect is dilutive, participating securities are included in the computation of basic earnings per share. Our participatingsecurities do not have a contractual obligation to share in the losses in any given period. As a result, these participating securities will not be allocated anylosses in the periods of net losses, but will be allocated income in the periods of net income using the two-class method. 48Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) The following table reconciles the components of the basic and diluted earnings (loss) per share for the years ended September 30, 2011, 2010 and 2009, (inthousands, except share information): Years Ended September 30, 2011 2010 2009 Numerator: Net income (loss) from continuing operations attributable tocommon shareholders $(37,693) $(32,147) $(11,939) Net income (loss) from continuing operations attributable torestricted shareholders — — — Net income (loss) from continuing operations $(37,693) $(32,147) $(11,939) Net income (loss) from discontinued operations attributable tocommon shareholders $— $— $117 Net income (loss) from discontinued operations attributable torestricted shareholders — — 2 Net income (loss) from discontinued operations $— $— $119 Net income (loss) attributable to common shareholders $(37,693) $(32,147) $(11,820) Net income (loss) attributable to restricted shareholders — — — Net income (loss) $(37,693) $(32,147) $(11,820) Denominator: Weighted average common shares outstanding — basic 14,493,747 14,409,368 14,331,614 Effect of dilutive stock options and non-vested restricted stock — — — Weighted average common and common equivalent sharesoutstanding — diluted 14,493,747 14,409,368 14,331,614 Basic earnings (loss) per share: Basic earnings (loss) per share from continuing operations $(2.60) $(2.23) $(0.83) Basic earnings (loss) per share from discontinued operations $— $— $0.01 Basic loss per share $(2.60) $(2.23) $(0.82) Diluted earnings (loss) per share: Diluted earnings (loss) per share from continuing operations $(2.60) $(2.23) $(0.83) Diluted earnings (loss) per share from discontinued operations $— $— $0.01 Diluted loss per share $(2.60) $(2.23) $(0.82) For the years ended September 30, 2011, 2010 and 2009, 20,000, 158,500 and 158,500 stock options, respectively, were excluded from the computation offully diluted earnings per share because the exercise prices of the options were greater than the average price of our common stock. For the years endedSeptember 30, 2011, 2010 and 2009, 376,200, 348,086 and 230,176 shares, respectively, of restricted stock were excluded from the computation of fullydiluted earnings per share because we reported a loss from continuing operations.7. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTSActivity in our allowance for doubtful accounts on accounts and long-term receivables consists of the following: Years Ended September 30, 2011 2010 Balance at beginning of period $7,429 $3,574 Additions to costs and expenses 1,071 7,440 Deductions for uncollectible receivables written off, net of recoveries (5,795) (3,585) Balance at end of period $2,705 $7,429 49Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Accounts payable and accrued expenses consist of the following: Years Ended September 30, 2011 2010 Accounts payable, trade $49,556 $38,395 Accrued compensation and benefits 10,584 10,271 Accrued insurance liabilities 7,040 6,915 Other accrued expenses 12,678 12,218 $79,858 $67,799 Contracts in progress are as follows: Years Ended September 30, 2011 2010 Costs incurred on contracts in progress $335,204 $362,594 Estimated earnings 21,942 47,656 357,146 410,250 Less—Billings to date (364,774) (414,793) Net contracts in progress $(7,628) $(4,543) Costs and estimated earnings in excess of billings on uncompleted contracts 10,592 12,566 Less—Billings in excess of costs and estimated earnings on uncompleted contracts (18,220) (17,109) Net contracts in progress $(7,628) $(4,543) Other non-current assets are comprised of the following: Years Ended September 30, 2011 2010 Deposits $3,986 $6,587 Deferred tax assets 1,040 1,677 Executive Savings Plan assets 477 889 Securities and equity investments 1,003 2,065 Other 581 664 Total $7,087 $11,882 Securities and Equity InvestmentsInvestment in EPV SolarWe assessed the fair market value of our investment in EPV after its restructuring in 2009 and determined that it was below its carrying value. Accordingly,we recorded a $2,850 other-than-temporary impairment loss for the year ended September 30, 2009. The total impairment loss is reflected in our ConsolidatedStatements of Operations as a component of Other Expense and reduced the carrying value of our investment from $3,000 to $150 at September 30, 2009.On February 24, 2010, EPV filed for Chapter 11 bankruptcy protection. On August 20, 2010, the United States Bankruptcy Court District of New Jerseyauthorized and approved the sale of substantially all of EPV’s assets free and clear of liens, claims, encumbrances and interests to a third-party solar company.As this sale cancelled our claims to our convertible note receivable, we recorded an impairment loss of $150 during the year ended September 30, 2010,which reduced its carrying value to $0. 50Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Investment in EnerTechIn April 2000, we committed to invest up to $5,000 in EnerTech through September 30, 2011, we have fulfilled our $5,000 investment under thiscommitment. As our investment is 2% of the overall ownership in EnerTech at September 30, 2011 and 2010, we account for this investment using the costmethod of accounting. EnerTech’s investment portfolio from time to time results in unrealized losses reflecting a possible, other-than-temporary, impairmentof our investment. The carrying value of our investment in EnerTech at September 30, 2011 and 2010 was $1,003 and $2,005, respectively. Our results ofoperations for the year ended September 30, 2011 includes a write down of $967 attributable to our investment in EnerTech.The following table presents the reconciliation of the carrying value and unrealized gains (losses) to the fair value of the investment in EnerTech as ofSeptember 30, 2011 and 2010: Years Ended September 30, 2011 2010 Carrying value $1,003 $2,005 Unrealized gains (losses) — (179) Fair value $1,003 $1,826 At each reporting date, the Company performs evaluations of impairment for securities to determine if the unrealized losses are other-than-temporary. Forequity securities, this evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has beenless than cost, the financial condition and near term prospects of the issuer and management’s ability and intent to hold the securities until fair valuerecovers. The assessment of the ability and intent to hold these securities to recovery focuses on liquidity needs, asset and liability management objectivesand securities portfolio objectives. Based on the results of this evaluation, we believe the unrealized losses at September 30, 2011 is other than temporary,and have adjusted the carrying value accordingly. As of September 30, 2011 and 2010, the carrying value of these investments was $1,003 and $2,005,respectively. See Note 15, “Fair Value Measurements” for related disclosures relative to fair value measurements.On December 31, 2010, EnerTech’s general partner, with the consent of the fund’s investors, extended the fund through December 31, 2011. The fund willterminate on this date unless extended by the fund’s valuation committee. The fund may be extended for another one-year period through December 31, 2012with the consent of the fund’s valuation committee.Arbinet CorporationOn May 15, 2006, we received a distribution from the investment in EnerTech of 32,967 shares in Arbinet Corporation. We sold these shares in fiscal 2011;accordingly, the amount of unrealized holding losses included in other comprehensive income at September 30, 2011 and 2010 is $0 and $88, respectively.8. DEBTDebt consists of the following: Years Ended September 30, 2011 2010 Tontine Term Loan, due May 15, 2013, bearing interest at 11.00% $10,000 $10,000 Insurance Financing Agreements — 653 Capital leases and other 498 603 Total debt 10,498 11,256 Less — Short-term debt and current maturities of long-term debt (209) (808) Total long-term debt $10,289 $10,448 51Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Future payments on debt at September 30, 2011 are as follows: Capital Leases Term Debt Total 2012 $320 $— $320 2013 319 10,000 10,319 2014 26 — 26 2015 — — — 2016 — — — Thereafter — — — Less: Imputed Interest (167) — (167) Total $498 $10,000 $10,498 For the years ended September 30, 2011, 2010 and 2009, we incurred interest expense of $2,277, $3,513 and $4,526, respectively.The Revolving Credit FacilityOn May 12, 2006, we entered into a Loan and Security Agreement (the “Loan and Security Agreement”), for a revolving credit facility (the “RevolvingCredit Facility”) with Bank of America, N.A. and certain other lenders. On May 7, 2008, we renegotiated the terms of our Revolving Credit Facility andentered into an amended agreement with the same financial institutions. On April 30, 2010, we renegotiated the terms of, and entered into an amendment tothe Loan and Security Agreement pursuant to which the maturity date was extended to May 31, 2012. In connection with the amendment, we incurred anamendment fee of $200, which is being amortized over 24 months.On December 15, 2011, we renegotiated the terms of, and entered into an amendment to, the Loan and Security Agreement without incurring terminationcharges. Under the terms of the amended Revolving Credit Facility, the size of the facility was reduced to $40,000 and the maturity date was extended toNovember 12, 2012. Further, we were required to cash collateralize all of our letters of credit issued by the banks. The cash collateral is added to theborrowing base calculation at 100% through out the term of the agreement. The Revolving Credit Facility requires that we maintain a fixed charge coverageratio of not less than 1.0:1.0 at any time that our aggregate amount of unrestricted cash on hand plus availability is less than $25,000 and, thereafter, untilsuch time as our aggregate amount of unrestricted cash on hand plus availability has been at least $25,000 for a period of 60 consecutive days. Additionally,if there are any loans outstanding on or after the April 30, 2012, the Company’s EBITDA for the period from October 2011 through March 2012, may notexceed a negative $2,500 and we will be required to have a cumulative fixed charge coverage ratio of at least 1.0:1.0 at all times beginning April 1, 2012 tomaintain any borrowings under the agreement. The measurement period for this additional test for borrowings begins with the monthly operating results forApril 2012 and adds the monthly operating results for each month thereafter to determine the cumulative test during such time as revolving loans areoutstanding. Failure to meet this performance test will result in an immediate event of default. The amended Agreement also calls for cost of borrowings of4.0% over LIBOR per annum. Cost for letters of credit are the same as borrowings and also include a 25 basis point “fronting fee.” All other terms andconditions remain unchanged. In connection with the amendment, we incurred an amendment fee of $60 which, together with unamortized balance of theprior amendment is being amortized using the straight line method through November 12, 2012.The Revolving Credit Facility is guaranteed by our subsidiaries and secured by first priority liens on substantially all of our subsidiaries’ existing and futureacquired assets, exclusive of collateral provided to our surety providers. The Revolving Credit Facility contains customary affirmative, negative andfinancial covenants. The Revolving Credit Facility also restricts us from paying cash dividends and places limitations on our ability to repurchase ourcommon stock.Borrowings under the Revolving Credit Facility may not exceed a “borrowing base” that is determined monthly by our lenders based on available collateral,primarily certain accounts receivables and inventories. Under the terms of the Revolving Credit Facility in effect as of September 30, 2011, interest for loansand letter of credit fees is based on our Total Liquidity, which is calculated for any given period as the sum of average daily availability for such period plusaverage daily unrestricted cash on hand for such period as follows: 52Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Total Liquidity Annual Interest Rate for Loans Annual Interest Rate forLetters of CreditGreater than or equal to $60,000 LIBOR plus 3.00% or Base Rate plus 1.00% 3.00% plus 0.25% fronting feeGreater than $40,000 and less than $60,000 LIBOR plus 3.25% or Base Rate plus 1.25% 3.25% plus 0.25% fronting feeLess than or equal to $40,000 LIBOR plus 3.50% or Base Rate plus 1.50% 3.50% plus 0.25% fronting feeAt September 30, 2011, we had $19,121 available to us under the Revolving Credit Facility, $8,812 in outstanding letters of credit and no outstandingborrowings.At September 30, 2011, our Total Liquidity was $54,698. For the year ended September 30, 2011, we paid no interest for loans under the Revolving CreditFacility and had a weighted average interest rate, including fronting fees, of 3.55% for letters of credit. In addition, we are charged monthly in arrears (1) anunused commitment fee of 0.50%, and (2) certain other fees and charges as specified in the Loan and Security Agreement, as amended.As of September 30, 2011, we were subject to the financial covenant under the Revolving Credit Facility requiring that we maintain a fixed charge coverageratio of not less than 1.0:1.0 at any time that our aggregate amount of unrestricted cash on hand plus availability is less than $25,000 and, thereafter, untilsuch time as our aggregate amount of unrestricted cash on hand plus availability has been at least $25,000 for a period of 60 consecutive days. As ofSeptember 30, 2011, our Total Liquidity was in excess of $25,000. Had our Total Liquidity been less than $25,000 at September 30, 2011, we would nothave met the 1.0:1.0 fixed charge coverage ratio test, had it been applicable.While we expect to meet our financial covenants, in the event that we are not able to meet the covenants of our amended Revolving Credit Facility in thefuture and are unsuccessful in obtaining a waiver from our lenders, the Company expects to have adequate cash on hand to fully collateralize our outstandingletters of credit and to provide sufficient cash for ongoing operations.The Tontine Term LoanOn December 12, 2007, we entered into the Tontine Term Loan, a $25,000 senior subordinated loan agreement, with Tontine. The Tontine Term Loan bearsinterest at 11.0% per annum and is due on May 15, 2013. Interest is payable quarterly in cash or in-kind at our option. Any interest paid in-kind will bearinterest at 11.0% in addition to the loan principal. On April 30, 2010, we prepaid $15,000 of principal on the Tontine Term Loan. On May 1, 2010, Tontineassigned the Tontine Term Loan to TCP Overseas Master Fund II, L.P. We may repay the Tontine Term Loan at any time prior to the maturity date at par, plusaccrued interest without penalty. The Tontine Term Loan is subordinated to the Revolving Credit Facility. The Tontine Term Loan is an unsecuredobligation of the Company and its subsidiary borrowers. The Tontine Term Loan contains no financial covenants or restrictions on dividends or distributionsto stockholders.Capital LeaseThe Company leases certain equipment under agreements, which are classified as capital leases and included in property, plant and equipment. Amortizationof this equipment for the years ended September 30, 2011, 2010 and 2009 was $172, $156 and $112, respectively, which is included in depreciation expensein the accompanying statements of operations.9. LEASESWe enter into non-cancelable operating leases for many of our facility, vehicle and equipment needs. These leases allow us to retain cash, and we pay amonthly 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 leasedasset and the implied book value of the leased asset as calculated in accordance with the lease agreement.For a discussion of leases with certain related parties which are included below, see Note 13, “Related-Party Transactions.”Rent expense was $5,195, $5,931 and $6,977 for the years ended September 30, 2011, 2010 and 2009, respectively. Future minimum lease payments underthese non-cancelable operating leases with terms in excess of one year are as follows: 53Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Year Ended September 30: 2012 $5,577 2013 3,077 2014 1,765 2015 967 2016 530 Thereafter 942 Total $12,860 54Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) 10. INCOME TAXESFederal and state income tax provisions for continuing operations are as follows: Years Ended September 30, 2011 2010 2009 Federal: Current $— $— $— Deferred — — (28) State: Current 224 119 350 Deferred (78) (150) 173 $146 $(31) $495 Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate rate of 35 percent to income beforeprovision for income taxes as follows: Years Ended September 30, 2011 2010 2009 Provision (benefit) at the statutory rate $(12,979) $(11,262) $(4,006) Increase resulting from: Non-deductible expenses 565 533 603 State income taxes, net of federal deduction — — 60 Change in valuation allowance 13,582 11,321 3,798 Contingent tax liabilities (73) — — Other 16 31 57 Decrease resulting from: Change in valuation allowance — — — State income taxes, net of federal deduction (965) (421) — Other — (233) (17) $146 $(31) $495 Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for incometax purposes. The income tax effects of these temporary differences, representing deferred income tax assets and liabilities, result principally from thefollowing: Years Ended September 30, 2011 2010 Deferred income tax assets: Allowance for doubtful accounts $998 $1,269 Accrued expenses 5,269 4,930 Net operating loss carryforward 103,636 93,504 Various reserves 1,728 900 Equity losses in affiliate 286 98 Share-based compensation 2,676 2,584 Capital loss carryforward 3,889 3,901 Other 1,836 2,083 Subtotal 120,318 109,269 Less valuation allowance (119,347) (105,804) Total deferred income tax assets $971 $3,465 55Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Deferred income tax liabilities: Property and equipment $— $(1,040) Deferred contract revenue and other (106) (1,598) Total deferred income tax liabilities (106) (2,638) Net deferred income tax assets $865 $827 In 2002, we adopted a tax accounting method change that allowed us to deduct goodwill for income tax purposes that had previously been classified as non-deductible. The accounting method change resulted in additional amortizable tax basis in goodwill. We believe the realization of the additional tax basis ingoodwill is less than probable and have not recorded a deferred tax asset. Although a deferred tax asset has not been recorded through September 30, 2011,we have derived a cumulative cash tax reduction of $11,438 from the change in tax accounting method and the subsequent amortization of the additional taxgoodwill. In addition, the amortization of the additional tax goodwill has resulted in additional federal net operating loss carry forwards of $135,820 andstate net operating loss carry forwards of $11,981. We believe the realization of the additional net operating loss carry forwards is less than probable and havenot recorded a deferred tax asset. We have $6,007 of tax basis in the additional tax goodwill that remains to be amortized. As of September 30, 2011,approximately two years remain to be amortized.As of September 30, 2011, we had available approximately $435,064 of federal net tax operating loss carry forward for federal income tax purposes,including $135,820 resulting from the additional amortization of tax goodwill. This carry forward, which may provide future tax benefits, will begin toexpire in 2022. On May 12, 2006, we had a change in ownership as defined in Internal Revenue Code Section 382. As such, our net operating loss utilizationafter the change date will be subject to Section 382 limitations for federal income taxes and some state income taxes. The annual limitation underSection 382 on the utilization of federal net operating losses will be approximately $20,000 for the first five tax years subsequent to the change in ownershipand $16,000 thereafter. Approximately $263,829 of federal net operating losses will not be subject to this limitation. Also, after applying the Section 382limitation to available state net operating loss carry forwards, we had available approximately $126,487 state net tax operating loss carry forwards, including$11,981 resulting from the additional amortization of tax goodwill which begin to expire as of September 30, 2011. We have provided valuation allowanceson all net operating losses where it is determined it is more likely than not that they will expire without being utilized.In assessing the realizability of deferred tax assets at September 30, 2011, we considered whether it was more likely than not that some portion or all of thedeferred tax assets will not be realized. Our realization of deferred tax assets is dependent upon the generation of future taxable income during the periods inwhich these temporary differences become deductible. However, GAAP guidelines place considerably more weight on historical results and less weight onfuture projections when there is negative evidence such as cumulative pretax losses in recent years. We incurred a cumulative pretax loss for September 30,2011, 2010 and 2009. In the absence of specific favorable evidence of sufficient weight to offset the negative evidence of the cumulative pretax loss, we haveprovided valuation allowances of $113,810 for all federal deferred tax assets and $5,537 for certain state deferred tax assets. We believe that $363 of federaldeferred tax assets will be realized by offsetting reversing deferred tax liabilities. We believe that $865 of state deferred tax assets will be realized andvaluation allowances were not provided for these assets. We will evaluate the appropriateness of our remaining deferred tax assets and valuation allowanceson at least annually at the end of each fiscal year.Prior to October 1, 2009, to the extent that we realize benefits from the usage of certain pre-emergence deferred tax assets resulting in a reduction in pre-emergence valuation allowances and to the extent we realize a benefit related to pre-emergence unrecognized tax benefits; such benefits will first reducegoodwill, then other long-term intangible assets, then additional paid-in capital. Beginning October 1, 2009, with the adoption of the new standards,reductions in pre-emergence valuation allowances or realization of pre-emergence unrecognized tax benefit will be recorded as an adjustment to our incometax expense. We believe future reductions in pre-emergence valuation allowance or realization of pre-emergence unrecognized tax benefits could have amaterial impact on the Consolidated Financial Statements.As a result of the reorganization and related adjustment to the book basis in goodwill, we have tax basis in excess of book basis in amortizable goodwill ofapproximately $23,902. The tax basis in amortizable goodwill in excess of book basis is not reflected as a deferred tax asset. To the extent the amortization ofthe excess tax basis results in a cash tax benefit, the benefit will first go to reduce goodwill, then other long-term intangible assets, and then additional paid-in capital. As of September 30, 2011, we have received $72 in cash tax benefits related to the amortization of excess tax basis. 56Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) GAAP requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions on the presumption that allrelevant tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but it prohibitsdiscounting 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 therecognition 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 notrecognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at thelargest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.A reconciliation of the beginning and ending balances of unrecognized tax liabilities is as follows: Balance at October 1, 2010 $5,613 Additions for position related to current year 5 Additions for positions of prior years 13 Reduction resulting from the lapse of the applicable statutes of limitations (86) Reduction resulting from settlement of positions of prior years — Balance at September 30, 2011 $5,545 As of September 30, 2011, $5,545 of unrecognized tax benefit would result in a decrease in the provision for income tax expense. We anticipate thatapproximately $76 of unrecognized tax benefits, including accrued interest, may reverse in the next twelve months. The reversal is predominately due to theexpiration of the statutes of limitation for unrecognized tax benefits.We had approximately $178 and $190 accrued for the payment of interest and penalties at September 30, 2011 and 2010, respectively. We recognize interestand penalties related to unrecognized tax benefits as part of the provision for income taxes.We are currently not under federal audit by the Internal Revenue Service. The tax years ended September 30, 2008 and forward are subject to audit as are taxyears prior to September 30, 2008, to the extent of unutilized net operating losses generated in those years.The net deferred income tax assets and liabilities are comprised of the following: Years Ended September 30, 2011 2010 Current deferred income taxes: Assets $198 $1,800 Liabilities (95) (1,605) Net deferred tax asset, current $103 $195 Noncurrent deferred income taxes: Assets $1,046 $1,678 Liabilities (284) (1,046) Net deferred tax asset, non-current 762 632 Net deferred income tax assets $865 $827 11. OPERATING SEGMENTSWe manage and measure performance of our business in three distinct operating segments: Communications, Residential and Commercial & Industrial. Thesesegments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resourcesand assessing performance. The Company’s CODM is its Chief Executive Officer. The Communications segment consists of low voltage installation, design,planning and maintenance for mission critical infrastructure such as data centers. The Residential segment consists of electrical installation, replacement andrenovation services in single-family, condominium, townhouse and low-rise multifamily housing units. 57Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) The Commercial & Industrial segment provides electrical design, installation, renovation, engineering and maintenance and replacement services in facilitiessuch as office buildings, high-rise apartments and condominiums, theaters, restaurants, hotels, hospitals and critical-care facilities, school districts, lightmanufacturing and processing facilities, military installations, airports, outside plants, network enterprises, switch network customers, manufacturing anddistribution centers, water treatment facilities, refineries, petrochemical and power plants, and alternative energy facilities.The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance basedon income from operations of the respective business units prior to the allocation of Corporate office expenses. Transactions between segments are eliminatedin consolidation. Our Corporate office provides general and administrative as well as support services to our three operating segments. Management allocatescosts between segments for selling, general and administrative expenses and depreciation expense.Segment information for the years ended September 30, 2011, 2010 and 2009 is as follows: Fiscal Year Ended September 30, 2011 Communications Residential Commercial &Industrial Corporate Total Revenues $93,579 $114,732 $273,296 $— $481,607 Cost of services 80,966 95,994 268,625 — 445,585 Gross profit 12,613 18,738 4,671 — 36,022 Selling, general and administrative 10,629 18,437 26,836 13,463 69,365 Loss (gain) on sale of assets — 116 (61) (6,638) (6,583) Asset Impairment 72 — 71 4,661 4,804 Restructuring charge — — 3,784 — 3,784 Income (loss) from operations $1,912 $185 $(25,959) $(11,486) $(35,348) Other data: Depreciation and amortization expense $344 $514 $1,699 $3,799 $6,356 Capital expenditures $928 $181 $431 $1,148 $2,688 Total assets $23,073 $23,584 $80,136 $53,473 $180,266 Fiscal Year Ended September 30, 2010 Communications Residential Commercial &Industrial Corporate Total Revenues $79,344 $116,012 $265,277 $— $460,633 Cost of services 65,491 92,470 246,179 — 404,140 Gross profit 13,853 23,542 19,098 — 56,493 Selling, general and administrative 7,983 23,685 39,083 14,169 84,920 (Gain) Loss on sale of assets (8) 23 (124) (65) (174) Restructuring charge 16 — 698 49 763 Income (loss) from operations $5,862 $(166) $(20,559) $(14,153) $(29,016) Other data: Depreciation and amortization expense $431 $949 $2,377 $1,534 $5,291 Capital expenditures $31 $178 $363 $352 $924 Total assets $28,092 $27,164 $84,352 $65,497 $205,105 58Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Fiscal Year Ended September 30, 2009 Communications Residential Commercial &Industrial Corporate Total Revenues $78,724 $157,521 $429,752 $— $665,997 Cost of services 66,868 120,743 368,858 — 556,469 Gross profit 11,856 36,778 60,894 — 109,528 Selling, general and administrative 6,643 33,519 51,943 16,223 108,328 Loss (gain) on sale of assets — 37 (515) 13 (465) Restructuring charge 138 2,662 3,219 1,388 7,407 Income (loss) from operations $5,075 $560 $6,247 $(17,624) $(5,742) Other data: Depreciation and amortization expense $376 $3,287 $3,378 $1,217 $8,258 Capital expenditures $79 $502 $942 $3,217 $4,740 Total assets $19,210 $39,277 $106,140 $103,798 $268,425 12. STOCKHOLDERS’ EQUITYThe 2006 Equity Incentive Plan became effective on May 12, 2006 (as amended, the “2006 Equity Incentive Plan”). The 2006 Equity Incentive Planprovides for grants of stock options as well as grants of stock, including restricted stock. We have approximately 1.0 million shares of common stockauthorized for issuance under the 2006 Equity Incentive Plan.On May 12, 2008, 10,555 shares of outstanding common stock that were reserved for issuance upon exchange of previously issued shares pursuant to ourPlan were cancelled.Treasury StockOn December 12, 2007, our Board of Directors authorized the repurchase of up to one million shares of our common stock, and the Company has establisheda Rule 10b5-1 plan to facilitate this repurchase. This share repurchase program was authorized through December 2009.During the year ended September 30, 2011, we repurchased 20,789 common shares from our employees to satisfy tax withholding requirements upon thevesting of restricted stock issued under the 2006 Equity Incentive Plan, and 130,258 unvested shares were forfeited by former employees and returned totreasury stock. We issued 324,000 shares out of treasury stock under our share-based compensation programs. Finally, 9,616 phantom stock units granted tomembers of the Board of directors vested, triggering an issuance of 9,616 unrestricted shares from the balance held in treasury shares.Restricted StockRestricted Stock Awards: FiscalYear SharesGranted WeightedAverage FairValue atDate ofGrant Vested Forefeitures SharesOutstanding ExpenserecognizedthroughSeptember30, 2011 2006 384,850 $24.78 258,347 126,503 — $6,402 2006 25,000 $17.36 25,000 — — $434 2007 20,000 $25.08 20,000 — — $502 2007 4,000 $26.48 4,000 — — $106 2008 101,650 $19.17 85,750 15,900 — $1,779 2009 185,100 $8.71 146,400 38,700 — $1,344 2010 225,486 $3.64 42,701 68,585 114,200 $360 2011 320,000 $3.39 7,627 50,373 262,000 $174 59Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) During the years ended September 30, 2011, 2010 and 2009, we recognized $787, $1,272, and $1,748, respectively, in compensation expense related to theserestricted stock awards. At September 30, 2011, the unamortized compensation cost related to outstanding unvested restricted stock was $865. We expect torecognize $480 and $299 of this unamortized compensation expense during the years ended September 30, 2012 and 2013, respectively. A summary ofrestricted stock awards for the years ended September 30, 2011, 2010 and 2009 is provided in the table below: Years Ended September 30, 2011 2010 2009 Unvested at beginning of year 352,086 230,716 171,926 Granted 320,000 225,486 185,100 Vested (165,628) (66,116) (126,190) Forfeited (130,258) (38,000) (120) Unvested at end of year 376,200 352,086 230,716 The fair value of shares vesting during the years ended September 30, 2011, 2010 and 2009 was $520, $423 and $1,202, respectively. Fair value wascalculated as the number of shares vested times the market price of shares on the date of vesting. The weighted average grant date fair value of unvestedrestricted stock at September 30, 2011 was $3.41.All the restricted shares granted under the 2006 Equity Incentive Plan (vested or unvested) participate in dividends issued to common shareholders, if any.Phantom Stock UnitsWe recognized $138 in compensation expense for 26,191 shares of performance-based phantom stock units (“PSUs”) are generally granted to the members ofthe Board of Directors in 2010, and $100 in compensation expense for 24,632 PSUs granted in 2011. These PSU’s will be paid via unrestricted stock grants toeach director upon his departure from the Board of Directors. In accordance with the separation agreement resulting from the departure of one employee infiscal 2009, 6,100 PSUs vested and expense of $59 was recorded. 60Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Stock OptionsWe utilized a binomial option pricing model to measure the fair value of stock options granted. Our determination of fair value of share-based paymentawards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, the risk-free rate of return,and actual and projected employee stock option exercise behaviors. The expected life of stock options is not considered under the binomial option pricingmodel that we utilize. The assumptions used in the fair value method calculation for the years ended September 30, 2011, 2010 and 2009 are disclosed in thefollowing table: Years Ended September 30, 2011 2010 2009 Weighted average value per option granted during the period $2.05 N/A $8.56 Dividends (1) $— N/A $— Stock price volatility (2) 69.9% N/A 86.4% Risk-free rate of return 1.9% N/A 1.3% Option term 10.0 years N/A 10.0 years Expected life 6.0 years N/A 6.0 years Forfeiture rate (3) 0.0% N/A 0.0% (1)We do not currently pay dividends on our common stock.(2)Based upon the Company’s historical volatility.(3)The forfeiture rate for these options was assumed on the date of grant to be zero based on the limited number of employees who have been awardedstock options.Stock-based compensation expense recognized during the period is based on the value of the portion of the share-based payment awards that is ultimatelyexpected to vest during the period. As stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awardsultimately expected to vest, it has been reduced for estimated forfeitures. We estimate our forfeitures at the time of grant and revise, if necessary, insubsequent periods if actual forfeitures differ from those estimates.The following table summarizes activity under our stock option plans. Weighted Average Shares Exercise Price Outstanding, September 30, 2008 161,000 $26.66 Options granted 7,500 17.09 Exercised — — Forfeited and Cancelled (10,000) 41.61 Outstanding, September 30, 2009 158,500 $19.87 Options granted — 12.31 Exercised — — Forfeited and Cancelled — 33.35 Outstanding, September 30, 2010 158,500 $18.66 Options granted 20,000 3.24 Exercised — — Forfeited and Cancelled (158,500) 18.66 Outstanding, September 30, 2011 20,000 $3.24 61Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) The following table summarizes options outstanding and exercisable at September 30, 2011: Range of Exercise Prices Outstanding as ofSeptember 30,2011 RemainingContractual Lifein Years Weighted-AverageExercise Price Exercisable as ofSeptember 30,2011 Weighted-AverageExercise Price $3.24 20,000 9.80 $3.24 — $3.24 20,000 9.80 $3.24 — $3.24 All of our outstanding options vest over a three-year period at a rate of one-third per year upon the annual anniversary date of the grant and expire ten yearsfrom the grant date if they are not exercised. Upon exercise of stock options, it is our policy to first issue shares from treasury stock, then to issue new shares.Unexercised stock options expire between July 2016 and November 2018.During the years ended September 30, 2011, 2010 and 2009, we recognized $19, $99 and $479, respectively, in compensation expense related to theseawards. At September 30, 2011, the unamortized compensation cost related to outstanding unvested stock options was $39. We expect to recognize all of thisunamortized compensation expense during the year ended September 30, 2012.There was no intrinsic value of stock options outstanding and exercisable at September 30, 2011 and 2010, respectively. The intrinsic value is calculated asthe difference between the fair value as of the end of the period and the exercise price of the stock options.13. RELATED-PARTY TRANSACTIONSIn connection with some of our original acquisitions, certain divisions have entered into related party lease arrangements with former owners for facilities.Related party lease expense for the years ended September 30, 2011, 2010 and 2009 was $265, $432 and $446, respectively. Future commitments withrespect to these leases are included in the schedule of minimum lease payments in Note 9, “Leases.”As described more fully in Note 8, “Debt – The Tontine Term Loan,” we entered into a $25,000 term loan with Tontine, a related party, in December 2007.During the years ended September 30, 2011, 2010 and 2009 we incurred interest expense of $1,100, $2,058 and $2,758, respectively, related to this termloan.14. EMPLOYEE BENEFIT PLANS401(k) PlanIn November 1998, we established the Integrated Electrical Services, Inc. 401(k) Retirement Savings Plan (the “401(k) Plan”). All full-time IES employees areeligible to participate on the first day of the month subsequent to completing sixty days of service and attaining age twenty-one. Participants become vestedin our matching contributions following three years of service.On February 13, 2009, we suspended company matching cash contributions to employee’s contributions due to the significant impact the economicrecession has had on the Company’s financial performance. The aggregate contributions by us to the 401(k) Plan were $0, $0 and $769, respectively, for theyears ended September 30, 2011, 2010 and 2009.Management Incentive PlanOn December 10, 2008, the Compensation Committee of the Board of Directors, of IES approved and adopted the 2009 Incentive Compensation Planincluding the performance-based criteria by which potential payouts to participants will be determined. The total award under the Incentive CompensationPlan was dependent on the level of achievement against performance goals. As of September 30, 2009, we had recorded a total liability for incentivecompensation of approximately $2,235, which was paid in fiscal 2010.On December 8, 2009, the Compensation Committee of the Board of Directors of IES approved and adopted the 2010 Incentive Compensation Planincluding the performance-based criteria by which potential payouts to participants will be determined. The total award under the Incentive CompensationPlan is dependent on the level of achievement against performance goals. None of the performance-based criteria were met in 2010 for the IncentiveCompensation Plan and no liability was recorded as of September 30,2010. 62Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) On December 16, 2010, the Compensation Committee of the Board of Directors of IES approved and adopted the 2011 Incentive Compensation Planincluding the performance-based criteria by which potential payouts to participants will be determined. The total award under the Incentive CompensationPlan is dependent on the level of achievement against performance goals. None of the performance-based criteria were met in 2011 for the IncentiveCompensation Plan and no liability was recorded as of September 30, 2011.Executive Savings PlanUnder the Executive Deferred Compensation Plan adopted on July 1, 2004 (the “Executive Savings Plan”), certain employees are permitted to defer a portion(up to 75%) of their base salary and/or bonus for a Plan Year. The Compensation Committee of the Board of Directors may, in its sole discretion, credit one ormore participants with an employer deferral (contribution) in such amount as the Committee may choose (“Employer Contribution”). The EmployerContribution, if any, may be a fixed dollar amount, a fixed percentage of the participant’s compensation, base salary, or bonus, or a “matching” amount withrespect to all or part of the participant’s elective deferrals for such plan year, and/or any combination of the foregoing as the Committee may choose.On February 13, 2009, we suspended Company matching cash contributions to employee’s contributions due to the significant impact the economicrecession has had on the Company’s financial performance. The aggregate contributions by us to the Executive Savings Plan were $0 for the September 30,2011, 2010 and 2009.Post Retirement Benefit PlansCertain individuals at one of the Company’s locations are entitled to receive fixed annual payments that reach a maximum amount, as specified in the relatedagreements, for a ten year period following retirement or, in some cases, the attainment of 62 years of age. We recognize the unfunded status of the plan as anon-current liability in our Consolidated Balance Sheet. Benefits vest 50% after ten years of service, which increases by 10% per annum until benefits arefully vested after 15 years of service. We had an unfunded benefit liability of $781 and $576 recorded as of September 30, 2011 and 2010, respectively.15. FAIR VALUE MEASUREMENTSFair Value Measurement AccountingThis disclosure relates to the activity for assets and liabilities measured at fair value on a recurring basis, including transfers of assets and liabilities betweenLevel 1 and Level 2 of the fair value hierarchy and the separate presentation of purchases, sales, issuances and settlements of assets and liabilities withinLevel 3 of the fair value hierarchy. In addition, the update requires enhanced disclosure of the valuation techniques and inputs used in the fair valuemeasurements within Level 2 and Level 3.Fair value is considered the price to sell an asset, or transfer a liability, between market participants on the measurement date. Fair value measurementsassume that the asset or liability is (1) exchanged in an orderly manner, (2) the exchange is in the principal market for that asset or liability, and (3) the marketparticipants are independent, knowledgeable, able and willing to transact an exchange. Fair value accounting and reporting establishes a framework formeasuring fair value by creating a hierarchy for observable independent market inputs and unobservable market assumptions and expands disclosures aboutfair value measurements. Considerable judgment is required to interpret the market data used to develop fair value estimates. As such, the estimates presentedherein are not necessarily indicative of the amounts that could be realized in a current exchange. The use of different market assumptions and/or estimationmethods could have a material effect on the estimated fair value.Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011, are summarized in the following table by the type ofinputs applicable to the fair value measurements: 63Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Total Fair Value Quoted Prices(Level 1) SignificantOtherObservableInputs (Level 2) SignificantUnobservable(Level 3) Money market accounts $1 $1 — — Executive Savings Plan assets 477 477 — — Executive Savings Plan liabilities (552) (552) — — Total $(74) $(74) — — Below is a description of the inputs used to value the assets summarized in the preceding table:Level 1 — Inputs represent unadjusted quoted prices for identical assets exchanged in active markets.Level 2 — Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets exchanged in active orinactive markets; quoted prices for identical assets exchanged in inactive markets; and other inputs that are considered in fair value determinations of theassets.Level 3 — Inputs include unobservable inputs used in the measurement of assets. Management is required to use its own assumptions regarding unobservableinputs because there is little, if any, market activity in the assets or related observable inputs that can be corroborated at the measurement date.We estimated the fair value of our debt securities, solely consisting of our investment in EPV, within the Level 3 hierarchy based on current availableinformation surrounding the private company in which we invested. The fair value of the investments in debt securities was$0 at September 30, 2011 and $0at September 30, 2010. In the years ended September 30, 2011, 2010 and 2009, we recognized $0, $150 and $2,850 of impairment to these securities.16. COMMITMENTS AND CONTINGENCIESLegal MattersFrom time to time we are a party to various claims, lawsuits and other legal proceedings that arise in the ordinary course of business. We maintain variousinsurance coverages to minimize financial risk associated with these proceedings. None of these proceedings, separately or in the aggregate, are expected tohave a material adverse effect on our financial position, results of operations or cash flows. With respect to all such proceedings, we record reserves when it isprobable that a liability has been incurred and the amount of loss can be reasonably estimated. We expense routine legal costs related to these proceedings asthey are incurred.The following is a discussion of our significant legal matters:Ward Transformer SiteOne of our subsidiaries has been identified as one of more than 200 potentially responsible parties (PRPs) with respect to the clean-up of an electrictransformer resale and reconditioning facility, known as the Ward Transformer Site, located in Raleigh, North Carolina. The facility built, repaired,reconditioned and sold electric transformers from approximately 1964 to 2005. We did not own or operate the facility but a subsidiary that we acquired inJuly 1999 is believed to have sent transformers to the facility during the 1990’s. During the course of its operation, the facility was contaminated byPolychlorinated Biphenyls (PCBs), which also have been found to have migrated off the site.Four PRPs have commenced clean-up of on-site contaminated soils under an Emergency Removal Action pursuant to a settlement agreement andAdministrative Order on Consent entered into between the four PRPs and the U.S. Environmental Protection Agency (EPA) in September 2005. We are not aparty to that settlement agreement or Order on Consent. In April 2009, two of these PRPs, Carolina Power and Light Company and Consolidation CoalCompany, filed suit against us and most of the other PRPs in the U.S. District Court for the Eastern District of North Carolina (Western Division) to contributeto the cost of the clean-up. In addition to the on-site clean-up, the EPA has selected approximately 50 PRPs to which it sent a Special Notice Letter in late2008 to organize the clean-up of soils off site and address contamination of groundwater and other miscellaneous off-site issues. We were not a recipient ofthat letter. 64Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Based on our investigation to date, there is evidence to support our defense that our subsidiary contributed no PCB contamination to the site. In addition, wehave tendered a demand for indemnification to the former owner of our subsidiary that may have transacted business with the facility and are exploring theexistence and applicability of insurance policies that could mitigate potential exposure. As of September 30, 2011, we have not recorded a reserve for thismatter, as we believe the likelihood of our responsibility for damages is not probable and a potential range of exposure is not estimable.Risk-ManagementWe retain the risk for workers’ compensation, employer’s liability, automobile liability, general liability and employee group health claims, resulting fromuninsured deductibles per accident or occurrence which are subject to annual aggregate limits. Our general liability program provides coverage for bodilyinjury and property damage. Losses up to the deductible amounts are accrued based upon our known claims incurred and an estimate of claims incurred butnot reported. As a result, many of our claims are effectively self-insured. Many claims against our insurance are in the form of litigation. At September 30,2011, we had $7,040 accrued for insurance liabilities. We are also subject to construction defect liabilities, primarily within our Residential segment. As ofSeptember 30, 2011, we had reserved $405 for these claims.Some of the underwriters of our casualty insurance program require us to post letters of credit as collateral. This 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, 2011, $8,182 of ouroutstanding letters of credit were utilized to collateralize our insurance program.SuretyMany customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a surety. Those bondsprovide 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 toperform under the terms of our contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide servicesunder 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 anyreimbursements 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 ourrelationships with our sureties will allow us to provide surety bonds as they are required. However, current market conditions, as well as changes in oursureties’ 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 bondsfor our work, our alternatives would include posting other forms of collateral for project performance, such as letters of credit or cash, seeking bondingcapacity 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 isrequired but we are unable to obtain a surety bond, the result can be a claim for damages by the customer for the costs of replacing us with another contractor.As of September 30, 2011, the estimated cost to complete our bonded projects was approximately $87,489. We evaluate our bonding requirements on aregular basis, including the terms offered by our sureties. On May 7, 2010 we entered into a new surety agreement. We believe the bonding capacity presentlyprovided by our current sureties is adequate for our current operations and will be adequate for our operations for the foreseeable future. As of September 30,2011, we had cash totaling $3,985 to collateralize our obligations to certain of our previous sureties (as is included in Other Non-Current Assets in ourConsolidated Balance Sheet). Posting letters of credit in favor of our sureties reduces the borrowing availability under our Revolving Credit Facility.Other Commitments and ContingenciesSome of our customers and vendors require us to post letters of credit as a means of guaranteeing performance under our contracts and ensuring payment byus to subcontractors and vendors. If our customer has reasonable cause to effect payment under a letter of credit, we would be required to reimburse ourcreditor for the letter of credit. At September 30, 2011, $630 of our outstanding letters of credit were to collateralize our vendors. 65Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Between October 2004 and September 2005, we sold all or substantially all of the assets of certain of our wholly-owned subsidiaries. As these sales wereassets sales, rather than stock sales, we may be required to fulfill obligations that were assigned or sold to others, if the purchaser is unwilling or unable toperform the transferred liabilities. If this were to occur, we would seek reimbursement from the purchasers. These potential liabilities will continue to diminishover time. To date, we have not been required to perform on any projects sold under this divestiture program.From time to time, we may enter into firm purchase commitments for materials such as copper or aluminum wire which we expect to use in the ordinary courseof business. These commitments are typically for terms less than one year and require us to buy minimum quantities of materials at specific intervals at a fixedprice over the term. As of September 30, 2011, we had no such open purchase commitments.17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)Quarterly financial information for the years ended September 30, 2011 and 2010, are summarized as follows: Fiscal Year Ended September 30, 2011 First Quarter(As Restated) SecondQuarter(As Restated) ThirdQuarter(As Restated) FourthQuarter Revenues $113,649 $118,326 $122,714 $126,918 Gross profit $11,172 $5,357 $9,063 $10,430 Restructuring charges $— $— $1,667 $2,117 Net income (loss) $(4,273) $(10,081) $(11,347) $(11,992) Earnings (loss) per share from continuing operations: Basic $(0.30) $(0.70) $(0.78) $(0.82) Diluted $(0.30) $(0.70) $(0.78) $(0.82) Earnings (loss) per share: Basic $(0.30) $(0.70) $(0.78) $(0.82) Diluted $(0.30) $(0.70) $(0.78) $(0.82) The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each period’s computation is based onthe weighted average number of shares outstanding during the period.In the quarter ended December 31, 2010, we recorded an impairment charge of $3,551 associated with internally developed software we discontinued and werecorded a gain of $6,763 relating to the sale of a non core manufacturing facility.In the fourth quarter of fiscal 2011, we determined that $2,157 of accelerated amortization expenses attributable to the decision in October, 2010 to replacecertain software earlier than its original assigned life should have been recorded in the first, second and third quarterly reporting periods of fiscal 2011.Additionally, during the fourth quarter of fiscal 2011 we determined an error was made in recording a change order for $475 on one job. As such, we haverestated the quarterly information in the tables above to correct these errors, and have provided restated financial statements in the tables below. Fiscal Year Ended September 30, 2010 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Revenues $120,248 $107,619 $121,405 $111,361 Gross profit $19,932 $13,588 $15,077 $7,896 Restructuring charges $698 $65 $— $— Net income (loss) $(805) $(13,230) $(6,557) $(11,555) Earnings (loss) per share from continuing operations Basic $(0.06) $(0.92) $(0.45) $(0.80) Diluted $(0.06) $(0.92) $(0.45) $(0.80) Earnings (loss) per share: Basic $(0.06) $(0.92) $(0.45) $(0.80) Diluted $(0.06) $(0.92) $(0.45) $(0.80) The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each period’s computation is based onthe weighted average number of shares outstanding during the period.In the second quarter of fiscal 2010, we had a charge of $3,714 related to a reserve placed on a long-term receivable. We ultimately recovered $2,850 inconnection with a settlement in connection with a breach of contract and mechanic’s lien foreclosure actions related to this receivable in the second quarterof fiscal 2011. 66Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) As of December 31, 2010 As Reported Adjustments As Restated ASSETS CURRENT ASSETS: Cash and cash equivalents $26,946 $— $26,946 Accounts receivable: Trade, Net 82,630 — 82,630 Retainage 17,281 — 17,281 Inventories 13,542 — 13,542 Costs and estimated earnings in excess of billings on uncompleted contracts 13,545 — 13,545 Prepaid expenses and other current assets 4,976 — 4,976 Total current assets 158,920 — 158,920 LONG TERM NOTES RECEIVABLES, net 422 — 422 PROPERTY AND EQUIPMENT, net 12,419 (719) 11,700 GOODWILL 3,981 — 3,981 OTHER NON-CURRENT ASSETS, net 11,561 — 11,561 Total assets $187,303 $(719) $186,584 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $609 $— $609 Accounts payable and accrued expenses 55,939 (98) 55,841 Billings in excess of costs and estimated earnings on uncompleted contracts 14,992 — 14,992 Total current liabilities 71,540 (98) 71,442 LONG-TERM DEBT, net of current maturities 10,405 — 10,405 LONG-TERM DEFERRED TAX LIABILITY 1,045 — 1,045 OTHER NON-CURRENT LIABILITIES 6,190 — 6,190 Total liabilities 89,180 (98) 89,082 STOCKHOLDERS’ EQUITY: Preferred stock, $0.01 par value — — — Common stock, $0.01 par value 154 — 154 Treasury stock, at cost (9,770) — (9,770) Additional paid-in capital 167,710 — 167,710 Retained deficit (59,971) (621) (60,592) Total stockholders’ equity 98,123 (621) 97,502 Total liabilities and stockholders’ equity $187,303 $(719) $186,584 67Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Three months ended December 31, 2010 As Reported Adjustments As Restated Revenues $113,649 $— $113,649 Cost of services 102,477 — 102,477 Gross profit 11,172 — 11,172 Selling, general and administrative expenses 18,021 719 18,740 Gain on sale of assets (6,729) — (6,729) Asset Impairment 3,551 — 3,551 Loss from operations (3,671) (719) (4,390) Interest and other (income) expense: Interest expense 599 — 599 Interest income (25) — (25) Other (income) expense, net (15) — (15) Interest and other expense, net 559 — 559 Loss from operations before income taxes (4,230) (719) (4,949) Provision (benefit) for income taxes (578) (98) (676) Net loss $(3,652) $(621) $(4,273) Basic loss per share: Continuing operations $(0.25) $(0.04) $(0.30) Total $(0.25) $(0.04) $(0.30) Diluted loss per share: Continuing operations $(0.25) $(0.04) $(0.30) Total $(0.25) $(0.04) $(0.30) Shares used in the computation of loss per share (Note 6 “Per Share Information”): Basic 14,447,357 14,447,357 14,447,357 Diluted 14,447,357 14,447,357 14,447,357 68Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) As of March 31, 2011 As Reported Adjustments As Restated ASSETS CURRENT ASSETS: Cash and cash equivalents $36,707 $— $36,707 Accounts receivable: Trade, Net 82,915 — 82,915 Retainage 18,397 — 18,397 Inventories 9,454 — 9,454 Costs and estimated earnings in excess of billings on uncompleted contracts 15,115 — 15,115 Prepaid expenses and other current assets 5,031 — 5,031 Total current assets 167,619 — 167,619 LONG TERM NOTES RECEIVABLES, net 315 — 315 PROPERTY AND EQUIPMENT, net 11,642 (1,438) 10,204 GOODWILL 3,981 — 3,981 OTHER NON-CURRENT ASSETS, net 8,942 — 8,942 Total assets $192,499 $(1,438) $191,061 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $447 $— $447 Accounts payable and accrued expenses 71,049 26 71,075 Billings in excess of costs and estimated earnings on uncompleted contracts 14,212 — 14,212 Total current liabilities 85,708 26 85,734 LONG-TERM DEBT, net of current maturities 10,418 — 10,418 LONG-TERM DEFERRED TAX LIABILITY 1,046 — 1,046 OTHER NON-CURRENT LIABILITIES 6,177 — 6,177 Total liabilities 103,349 26 103,375 STOCKHOLDERS’ EQUITY: Preferred stock, $0.01 par value — — — Common stock, $0.01 par value 154 — 154 Treasury stock, at cost (6,861) — (6,861) Additional paid-in capital 165,065 — 165,065 Retained deficit (69,208) (1,464) (70,672) Total stockholders’ equity 89,150 (1,464) 87,686 Total liabilities and stockholders’ equity $192,499 $(1,438) $191,061 69Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Three months ended March 31, 2011 Six months ended March 31, 2011 As Reported Adjustments As Restated As Reported Adjustments As Restated Revenues $118,326 $— $118,326 $231,975 $— $231,975 Cost of services 112,969 — 112,969 215,447 — 215,447 Gross profit 5,357 — 5,357 16,528 — 16,528 Selling, general and administrative expenses 13,333 719 14,052 31,354 1,438 32,792 Gain on sale of assets (87) — (87) (6,816) — (6,816) Asset Impairment — — — 3,551 — 3,551 Loss from operations (7,889) (719) (8,608) (11,561) (1,438) (12,999) Interest and other (income) expense: Interest expense 576 — 576 1,175 — 1,175 Interest income (24) — (24) (49) — (49) Other (income) expense, net (8) — (8) (24) — (24) Interest and other expense, net 544 — 544 1,102 — 1,102 Loss from operations before income taxes (8,433) (719) (9,152) (12,663) (1,438) (14,101) Provision (benefit) for income taxes 804 125 929 227 26 253 Net loss $(9,237) $(844) $(10,081) $(12,890) $(1,464) $(14,354) Basic loss per share: Continuing operations $(0.64) $(0.06) $(0.70) $(0.89) $(0.10) $(0.99) Total $(0.64) $(0.06) $(0.70) $(0.89) $(0.10) $(0.99) Diluted loss per share: Continuing operations $(0.64) $(0.06) $(0.70) $(0.89) $(0.10) $(0.99) Total $(0.64) $(0.06) $(0.70) $(0.89) $(0.10) $(0.99) Shares used in the computation of loss per share (Note6 “Per Share Information”): Basic 14,481,005 14,481,005 14,481,005 14,463,996 14,463,996 14,463,996 Diluted 14,481,005 14,481,005 14,481,005 14,463,996 14,463,996 14,463,996 70Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) As of June 30, 2011 As Reported Adjustments As Restated ASSETS CURRENT ASSETS: Cash and cash equivalents $23,039 $— $23,039 Accounts receivable: Trade, Net 85,749 — 85,749 Retainage 19,845 — 19,845 Inventories 6,203 — 6,203 Costs and estimated earnings in excess of billings on uncompleted contracts 12,038 (475) 11,563 Prepaid expenses and other current assets 4,600 — 4,600 Total current assets 151,474 (475) 150,999 LONG TERM NOTES RECEIVABLES, net 235 — 235 PROPERTY AND EQUIPMENT, net 12,097 (2,157) 9,940 GOODWILL 3,981 — 3,981 OTHER NON-CURRENT ASSETS, net 8,895 — 8,895 Total assets $176,682 $(2,632) $174,050 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $265 $— $265 Accounts payable and accrued expenses 67,127 15 67,142 Billings in excess of costs and estimated earnings on uncompleted contracts 12,644 — 12,644 Total current liabilities 80,036 15 80,051 LONG-TERM DEBT, net of current maturities 10,346 — 10,346 LONG-TERM DEFERRED TAX LIABILITY 1,046 — 1,046 OTHER NON-CURRENT LIABILITIES 6,022 — 6,022 Total liabilities 97,450 15 97,465 STOCKHOLDERS’ EQUITY: Preferred stock, $0.01 par value — — — Common stock, $0.01 par value 154 — 154 Treasury stock, at cost (7,081) — (7,081) Additional paid-in capital 165,531 — 165,531 Retained deficit (79,372) (2,647) (82,019) Total stockholders’ equity 79,232 (2,647) 76,585 Total liabilities and stockholders’ equity $176,682 $(2,632) $174,050 71Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Three months ended June 30, 2011 Nine months ended June 30, 2011 As Reported Adjustments As Restated As Reported Adjustments As Restated Revenues $123,189 $(475) $122,714 $355,163 $(475) $354,688 Cost of services 113,651 — 113,651 329,097 — 329,097 Gross profit 9,538 (475) 9,063 26,066 (475) 25,591 Selling, general and administrative expenses 17,412 719 18,131 48,766 2,157 50,923 Gain on sale of assets 136 — 136 (6,679) — (6,679) Asset Impairment — — — 3,551 — 3,551 Restructuring charges 1,667 — 1,667 1,667 — 1,667 Loss from operations (9,677) (1,194) (10,871) (21,239) (2,632) (23,871) Interest and other (income) expense: Interest expense 571 — 571 1,746 — 1,746 Interest income (13) — (13) (62) — (62) Other (income) expense, net 21 — 21 (3) — (3) Interest and other expense, net 579 — 579 1,681 — 1,681 Loss from operations before income taxes (10,256) (1,194) (11,450) (22,920) (2,632) (25,552) Provision (benefit) for income taxes (91) (12) (103) 135 15 150 Net loss $(10,165) $(1,182) $(11,347) $(23,055) $(2,647) $(25,702) Basic loss per share: Continuing operations $(0.70) $(0.08) $(0.78) $(1.59) $(0.18) $(1.78) Total $(0.70) $(0.08) $(0.78) $(1.59) $(0.18) $(1.78) Diluted loss per share: Continuing operations $(0.70) $(0.08) $(0.78) $(1.59) $(0.18) $(1.78) Total $(0.70) $(0.08) $(0.78) $(1.59) $(0.18) $(1.78) Shares used in the computation of loss per share(Note 6 “Per Share Information”): Basic 14,491,966 14,491,966 14,491,966 14,472,441 14,472,441 14,472,441 Diluted 14,491,966 14,491,966 14,491,966 14,472,441 14,472,441 14,472,441 72Table of ContentsINTEGRATED ELECTRICAL SERVICES, INC.Notes to Consolidated Financial Statements(All Amounts in Thousands Except Share Amounts) Fiscal Year Ended September 30, 2010 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Revenues $120,248 $107,619 $121,405 $111,361 Gross profit $19,932 $13,588 $15,077 $7,896 Restructuring charges $698 $65 $— $— Net income (loss) $(805) $(13,230) $(6,557) $(11,555) Earnings (loss) per share from continuing operations Basic $(0.06) $(0.92) $(0.45) $(0.80) Diluted $(0.06) $(0.92) $(0.45) $(0.80) Earnings (loss) per share: Basic $(0.06) $(0.92) $(0.45) $(0.80) Diluted $(0.06) $(0.92) $(0.45) $(0.80) The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each period’s computation is based onthe weighted average number of shares outstanding during the period.In the second quarter of fiscal 2010, we had a charge of $3,714 related to a reserve placed on a long-term receivable. We ultimately recovered $2,850 inconnection with a settlement in connection with a breach of contract and mechanic’s lien foreclosure actions related to this receivable in the second quarterof fiscal 2011. 73Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresDisclosure controls and proceduresIn accordance with Exchange Act Rule 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management,including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of September 30, 2011 to provide reasonable assurance that information required to be disclosed in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’srules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed inreports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding required disclosure.Management’s Report on Internal Control over Financial ReportingManagement, including the Company’s Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequateinternal control over financial reporting for the Company. The Company’s internal control system was designed to provide reasonable assurance to theCompany’s Management and Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations,internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, and the identification of a material weakness,management concluded that Integrated Electrical Services did not maintain effective internal control over financial reporting during the year endedSeptember 30, 2011.The material weakness that we identified relates to a control deficiency at our corporate office that resulted in the inadequate reporting of certain softwareamortization expense. The corporate office failed to provide adequate managerial oversight, did not perform a timely review of the useful lives of its assetsand did not engage in adequate inter-department communications between the IT and finance departments. The deficiency was identified by corporatemanagement as of September 30, 2011, resulting in material revision of software amortization expense among the quarterly periods of fiscal 2011.Remediation of Material WeaknessManagement believes it has remediated the material weakness related to the review of the useful lives of its assets. The remediation included enhanced inter-department communication, additional internal financial review and a specific review of all material software currently capitalized and amortized during thecompany’s financial close process.Changes in Internal Control over Financial ReportingAt September 30, 2011 we believe the steps identified above have remediated the identified material weakness. Apart from the completion of this remediationprocess, there have been no changes in our internal control over financial reporting that occurred during the year ended September 30, 2011 that havematerially effected, or are reasonably likely to materially effect, our internal control over financial reporting.Item 9B. Other InformationNone. 74Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceEXECUTIVE OFFICERS AND DIRECTORSCertain of the information required to be included Item 10 of Part III of this Form 10-K is incorporated by reference from the sections entitled “SecurityOwnership of Certain Beneficial Owners and Management;” “Section 16(a) Beneficial Ownership Reporting Compliance;” “Report of the Audit Committee”and “Election of Directors” in the Company’s definitive Proxy Statement for its 2012 Annual Meeting of Stockholders (the “Proxy Statement”) to be filedwith the SEC no later than January 28, 2012.Executive OfficersCertain information with respect to each executive officer is as follows:James M. Lindstrom, 39, has served as President and Chief Executive Officer of the Company since October 3, 2011. He previously served as InterimPresident and Chief Executive Officer of the Company since June 30, 2011. Mr. Lindstrom was an employee of Tontine Associates, LLC, a private investmentfund, from 2006 to October 3, 2011. Tontine Associates, LLC is an affiliate of Jeffrey Gendell, the beneficial owner of 57.4% of the Company’s CommonStock. From 2003 to 2006, Mr. Lindstrom was Chief Financial Officer of Centrue Financial Corporation, a regional financial services company and had priorexperience in private equity and investment banking. Mr. Lindstrom served as a director of Broadwind Energy, Inc., (a leading provider of components,logistics and services to the wind power and broader energy markets) from October 2001 to May 2010. He also served as Chairman of the Board, Chairman ofthe Compensation Committee and the Executive Committee and as a member of the Nominating/Governance Committee of Broadwind Energy.Michael J. Caliel, 52, was President and Chief Executive Officer of the Company from July 2006 until his resignation on June 30, 2011. From 1993 until hejoined the Company, Mr. Caliel was employed by Invensys, a global automation, controls and process solutions company, where he served in a variety ofsenior management positions, including his most recent position as President of Invensys Process Systems. Prior to becoming President of Invensys ProcessSystems, he served as President of its North America and Europe, Middle East and Africa operations from 2001 to 2003.Terry L. Freeman, 61, has served as Senior Vice President and Chief Financial Officer since March 2010. Mr. Freeman has been an independent businessconsultant since December 2005. From 1997 until December 2005, Mr. Freeman served Metals USA, a metal service company that served OEMmanufacturers, contractors and metal fabrication businesses, in several senior financial roles, most recently serving as Senior Vice President and ChiefFinancial Officer. From 1990 to 1997, Mr. Freeman held the positions of Corporate Controller and Director of Financial Reporting at Maxxam, Inc., adiversified holding company with sales in excess of $2.3 billion. From 1980 to 1990, he served in senior audit positions at Arthur Andersen & Company andat Deloitte & Touche. He also served in the U. S. Army.William L. Fiedler, 53, has served as Senior Vice President, General Counsel and Secretary of Integrated Electrical Services, Inc. since March 2009. FromOctober 1999 through February 2009, Mr. Fiedler served as Senior Vice President, General Counsel and Secretary of NetVersant Solutions, Inc., a privately-owned communications infrastructure company. From November 1997 through October 1999, Mr. Fiedler was Senior Vice President, General Counsel andSecretary of LandCare USA Inc., a publicly traded commercial landscaping company. From February 1994 through October 1997, Mr. Fiedler was VicePresident, General Counsel and Secretary of Allwaste, Inc., a publicly traded industrial service company, and from February 1990 through January 1994, wasSenior Counsel of Allwaste. Prior to that, Mr. Fiedler held the position of Chief Legal and Compliance Officer of Sentra Securities Corporation, a NASDregistered broker-dealer.Robert B. Callahan, 54, was the Senior Vice President of Human Resources from June 2005 to November 2010. Mr. Callahan was Vice President of HumanResources from February 2005 to June 2005 and was Vice President of Employee Relations since 2004. Mr. Callahan joined IES in 2001, after 11 years withthe H.E.B. Grocery Company where he served as Director of Human Resources. Mr. Callahan has also served as a faculty member at the University of Texas atSan Antonio where he taught Employment Law, Human Resources Management and Business Communications.Richard A. Nix, 57, was Group Vice President of the Company from December 2007 until his resignation on July 1, 2011. From December 2006 to presentMr. Nix was president of Houston Stafford Electric (“HSE”) which changed its name to IES Residential, Inc. in September 2007. From January 2004 untilDecember 2006 he was Senior Division Manager of HSE and a consultant to that entity from January 2003 to January 2004.Mr. Callahan was an officer of the Company when it filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on February 14,2006. 75Table of ContentsWe have adopted a Code of Ethics for Executives that applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. TheCode of Ethics may be found on our website at www.ies-co.com . If we make any substantive amendments to the Code of Ethics or grant any waiver,including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer, we willdisclose the nature of such amendment or waiver on that website or in a report on Form 8-K. Paper copies of these documents are also available free of chargeupon written request to us. We have designated an “audit committee financial expert” as that term is defined by the SEC. Further information about thisdesignee may be found in the Proxy Statement under the section entitled “Report of the Audit Committee—Audit Committee Financial Expert.”DirectorsCertain information with respect to each director is as follows. Each director with an asterisk next to his name is independent in accordance with theCompany’s Corporate Governance Guidelines and the rules and regulations of the NASDAQ Global Market System (“NASDAQ”) and the Securities andExchange Commission (the “SEC”).James M. Lindstrom, 39, has served as President and Chief Executive Officer of the Company since October 3, 2011. He previously served as InterimPresident and Chief Executive Officer of the Company since June 30, 2011. Mr. Lindstrom was an employee of Tontine Associates, LLC, a private investmentfund, from 2006 to October 3, 2011. Tontine Associates, LLC is an affiliate of Jeffrey Gendell, the beneficial owner of 57.4% of the Company’s CommonStock. From 2003 to 2006, Mr. Lindstrom was Chief Financial Officer of Centrue Financial Corporation, a regional financial services company and had priorexperience in private equity and investment banking. Mr. Lindstrom served as a director of Broadwind Energy, Inc., (a leading provider of components,logistics and services to the wind power and broader energy markets) from October 2001 to May 2010. He also served as Chairman of the Board, Chairman ofthe Compensation Committee and the Executive Committee and as a member of the Nominating/Governance Committee of Broadwind Energy.Donald L. Luke*, 74, was Chairman and Chief Executive Officer of American Fire Protection Group, Inc., a private company involved in the design,fabrication, installation and service of products in the fire sprinkler industry from 2001 until April 2005. From 1997 to 2000, Mr. Luke was President andChief Operating Officer of Encompass Services (construction services) and its predecessor company, GroupMac. Mr. Luke held a number of key positions inproduct development, marketing and executive management in multiple foreign and domestic publicly traded companies. Mr. Luke also serves on the boardof directors of American Fire Protection Group, Inc. and is a director of Cable Lock, Inc., which manages the affiliated Olshan Foundation Repair companies.Charles H. Beynon*, 63, From 1973 until his retirement from the firm in 2002, Mr. Beynon was employed by Arthur Andersen & Co., an accounting firm,including 19 years as a partner. He also currently serves as a director of Broadwind Energy, Inc. (a leading provider of component, logistics and services tothe wind power and broader energy markets) and is Chairman of its Audit Committee. Mr. Beynon also is a Certified Public Accountant.John E. Welsh*, 60, is President of Avalon Capital Partners, LLC, a private investment vehicle, a position he has held since January 2003. From October 2000until December 2002, Mr. Welsh was Managing Director of CIP Management, LLC, the management entity for a series of venture capital partnershipsaffiliated with Rothchild, Inc. Mr. Welsh has been a director of General Cable Corp., a developer, designer, manufacturer, marketer and distributor of copper,aluminum and fiber optic wire and cable products since 1997, and Non-Executive Chairman since August 2001.Item 11. Executive CompensationThe information required to be included in Item 11 of Part III of this Form 10-K is incorporated by reference from the section entitled “ExecutiveCompensation” in the Proxy Statement.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersCertain information required to be included in Item 12 of Part III of this Form 10-K is incorporated by reference from the section entitled “Security Ownershipof Certain Beneficial Owners and Management” in the Proxy Statement. 76Table of ContentsSECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANSEquity Compensation Plan InformationThe following table provides information as of September 30, 2011 with respect to shares of our common stock that may be issued upon the exercise ofoptions, warrants and rights granted to employees or members of the Board of Directors under the Company’s existing equity compensation plans. Foradditional information about our equity compensation plans, see Note 12, “Stockholders’ Equity” to our Consolidated Financial Statements set forth inItem 8 “Financial Statements and Supplementary Data” to this Form 10-K. Plan Category (a) Number of Securitiestobe Issued Upon Exerciseof Outstanding Options,Warrants and Rights (b) Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights (c) Number of SecuritiesRemaining Available forFuture Issuance UnderEquity CompensationPlans (ExcludingSecurities Reflectedin Column (a)) Equity compensation plans approved bysecurity holders — — — Equity compensation plans notapproved by security holders 20,000(1) $3.24 1,021,225(2) (1)Represents shares issuable upon exercise of outstanding options granted under the Integrated Electrical Services, Inc. 2006 Equity Incentive Plan. Thisplan was authorized pursuant to the Company’s plan of reorganization and provides for the granting or awarding of stock options, stock and restrictedstock to employees (including officers), consultants and directors of the Company. All stock options granted under this plan were granted at fair marketvalue on the date of grant. 486,926 shares of restricted stock are outstanding under this plan.(2)Represents shares remaining available for issuance under the Integrated Electrical Services, Inc. 2006 Equity Incentive PlanItem 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required to be included in Item 13 of Part III of this Form 10-K is incorporated by reference from the section entitled “Certain Relationshipsand Related Person Transactions” in the Proxy Statement and from Item 10 of this Form 10-K.Item 14. Principal Accountant Fees and ServicesThe information required to be included in Item 14 of Part III of this Form 10-K is incorporated by reference from the section entitled “Audit Fees” in theProxy Statement. 77Table of ContentsPART IVItem 15. Exhibits and Financial Statement Schedules(a) Financial Statements and Supplementary Data, Financial Statement Schedules and ExhibitsSee Index to Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this report.(b) Exhibits 2.1 Second Amended Joint Plan of Reorganization of Integrated Electrical Services, Inc. and Certain of its Direct and Indirect Subsidiaries underChapter 11 of the Bankruptcy Code, dated March 17, 2006. (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-Kfiled May 1, 2006)3.1 Second Amended and Restated Certificate of Incorporation of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit 4.1 to theCompany’s registration statement on Form S-8 filed on May 12, 2006)3.2 Bylaws of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit 4.2 to the Company’s registration statement on Form S-8, filedon May 12, 2006)4.1 Note Purchase Agreement, dated as of December 12, 2007, by and among Tontine Capital Partners, L.P., Integrated Electrical Services, Inc. and theother borrowers parties thereto. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 17, 2007)4.2 Senior Subordinated Note, dated as of December 12, 2007. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filed November 12, 2008)4.3 Specimen common stock certificate. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 18, 2008)4.4 First amendment, dated November 12, 2008, to Note Purchase Agreement by and among Tontine Capital Partners, L.P., Integrated ElectricalServices, Inc. and other borrowers thereto. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filedNovember 12, 2008)10.1 Restated Underwriting, Continuing Indemnity and Security Agreement, dated May 12, 2006, by Integrated Electrical Services, Inc. and certain of itssubsidiaries and affiliates in favor of Federal Insurance Company. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report onForm 8-K filed May 17, 2006)10.2 First Amendment, dated as of October 30, 2006, to the Restated Underwriting, Continuing Indemnity, and Security Agreement, dated May 12, 2006,by Integrated Electrical Services, Inc., certain of its subsidiaries and Federal Insurance Company and certain of its affiliates. (Incorporated byreference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 6, 2006)10.3 Third Amendment, dated May 1, 2007, to the Restated Underwriting, Continuing Indemnity and Security Agreement, dated May 12, 2006, byIntegrated Electrical Services, Inc., certain of its subsidiaries and Federal Insurance Company and certain of its affiliates. (Incorporated by referenceto Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 12, 2007)10.4 Fourth Amendment to the Restated Underwriting, Continuing Indemnity and Security Agreement, dated May 12, 2006, by Integrated ElectricalServices, Inc., certain of its subsidiaries and Federal Insurance Company and certain of its affiliates. (Incorporated by reference to Exhibit 10.2 to theCompany’s Current Report on Form 8-K filed October 12, 2007)10.5 Rider to Add Principal/Indemnitor and Fifth Amendment, dated September 29, 2008, to Restated Underwriting, Continuing Indemnity, and SecurityAgreement, dated May 12, 2006, by Integrated Electrical Services, Inc., certain of its subsidiaries and Federal Insurance Company and certain of itsaffiliates. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 24, 2008)10.6 Agreement of Indemnity, dated May 7, 2010, by Integrated Electrical Services, Inc. and certain of its present and future subsidiaries and affiliatesand Chartis Property Casualty Company, Chartis Insurance Company of Canada, American Home Assurance Company, Commerce and IndustryInsurance Company, Granite State Insurance Company, Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa.,New Hampshire Insurance Company and The Insurance Company of the State of Pennsylvania and any and all of their affiliates, subsidiaries,successors and assigns. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 13, 2010) 78Table of Contents10.7 Loan and Security Agreement, dated May 12, 2006, by and among Integrated Electrical Services, Inc., and its subsidiaries, Bank of America, N.A.and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 17, 2006)10.8 Amendment, dated October 1, 2006, to Loan and Security Agreement, dated May 12, 2006, by and among the Company and its subsidiaries, Bankof America, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filedDecember 5, 2006)10.9 Amendment and Waiver, dated October 13, 2006, to Loan and Security Agreement, dated May 12, 2006, by and among the Company and itssubsidiaries, Bank of America, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed October 19, 2006)10.10 Amendment, dated December 11, 2006, to Loan and Security Agreement, dated May 12, 2006, by and among the Company and its subsidiaries,Bank of America, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-Kfiled December 15, 2006)10.11 Amendment, dated May 7, 2007, to Loan and Security Agreement, dated May 12, 2006, by and among the Company and its subsidiaries, Bank ofAmerica, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filedMay 10, 2007)10.12 Amendment, dated December 11, 2007, to Loan and Security Agreement, dated May 12, 2006, by and among Integrated Electrical Services, Inc.and its subsidiaries, Bank of America, N.A. and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to the Company’s CurrentReport on Form 8-K filed December 17, 2007)10.13 Amendment, dated March 5, 2008, to Loan and Security Agreement, dated May 12, 2006, by and among the Company and its subsidiaries, Bankof America, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filedMarch 17, 2008)10.14 Amendment, dated May 7, 2008, to Loan and Security Agreement, dated May 12, 2006, by and among the Company and its subsidiaries, Bank ofAmerica, N.A. and the lenders thereto. (Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed onMay 12, 2008)10.15 Amendment, dated as of August 13, 2008, to Loan and Security Agreement, dated May 12, 2006, by and among Integrated Electrical Services, Inc.and its subsidiaries, Bank of America, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.14 to the Company’s AnnualReport on Form 10-K filed December 15, 2008)10.16 Amendment, dated April 30, 2010, to Loan and Security Agreement, dated May 12, 2006, by and among Integrated Electrical Services, Inc. and itssubsidiaries, Bank of American, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed May 6, 2010)10.17 Pledge Agreement, dated May 12, 2006, by and among Integrated Electrical Services, Inc. and its subsidiaries, Bank of America, N.A. and thelenders party thereto. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 17, 2006)10.18 Amendment, dated December 15, 2011, to Loan and Security Agreement, dated May 12, 2006, by and among Integrated Electrical Services, Inc.and its subsidiaries, Bank of America, N.A. and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s CurrentReport on Form 8-K filed December 20, 2011)10.19 Employment Agreement, dated June 26, 2006, by and between the Company and Michael J. Caliel. (Incorporated by reference to Exhibit 10.1 tothe Company’s Current Report on Form 8-K filed June 30, 2006)10.20 Amended and Restated 2006 Equity Incentive Plan. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-Kfiled October 17, 2007)10.21 Term Life Insurance Plan. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed October 17, 2007)10.22 Form of Phantom Share Award. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 19,2007)10.23 Form of Stock Option Award Agreement under the 2006 Equity Incentive Plan. (Incorporated by reference to Exhibit 10.7 to the Company’sCurrent Report on Form 8-K filed on May 17, 2006)10.24 Form of Restricted Stock Award. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 19,2007) 79Table of Contents10.25 Amended and Restated 2009 Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.34 to the Company’s Annual Report onForm 10-K filed December 15, 2008)10.26 Integrated Electrical Services, Inc. Long Term Incentive Plan, as amended and restated. (Incorporated by reference to Exhibit 10.2 to theCompany’s Current Report on Form 8-K filed September 23, 2009)10.27 Subcontract, dated June 17, 2009, by and between IES Commercial, Inc. and Manhattan Torcon A Joint Venture. (Incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed November 24, 2009)10.28 Letter Agreement, dated November 4, 2009, by and between Integrated Electrical Services, Inc., IES Commercial, Inc. and Manhattan TorconA Joint Venture. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 24, 2009)10.29 Employment Agreement, dated March 29, 2010, by and between the Company and Terry L. Freeman. (Incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed March 31, 2010)10.30 Amended and Restated Form of Restricted Stock Award Agreement under the 2006 Equity Incentive Plan. (Incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed September 24, 2010)10.31 First Amendment to Employment Agreement, dated September 24, 2010, by and between the Company and Michael J. Caliel. (Incorporatedby reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 24, 2010)10.32 First Amendment to Employment Agreement, dated September 24, 2010, by and between the Company and Terry Freeman. (Incorporated byreference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed September 24, 2010)10.33 Amended and Restated Employment Agreement, dated September 24, 2010, by and between the Company and Richard A. Nix. (Incorporatedby reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed September 24, 2010)10.34 Amended and Restated Employment Agreement, dated September 24, 2010, by and between the Company and William L. Fiedler.(Incorporated by reference to Exhibit 10.45 to the Company’s Report on Form 10-K filed December 14, 2010)10.35 Fiscal 2011 Annual Management Incentive Plan. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-Kfiled December 21, 2010).10.36 Fiscal 2011 Annual Management Incentive Plan Performance Criteria. (Incorporated by reference to Exhibit 10.2 to the Company’s CurrentReport on Form 8-K filed December 21, 2010).21.1 Subsidiaries of the Registrant(1)23.1 Consent of Ernst & Young LLP(1)31.1 Rule 13a-14(a)/15d-14(a) Certification of James M. Lindstrom, Chief Executive Officer(1)31.2 Rule 13a-14(a)/15d-14(a) Certification of Terry L. Freeman, Chief Financial Officer(1)32.1 Section 1350 Certification of James M. Lindstrom, Chief Executive Officer(1)32.2 Section 1350 Certification of Terry L. Freeman, Chief Financial Officer(1)101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL XBRL Taxonomy Extension Calculation Linkbase Document101.DEF XBRL Taxonomy Extension Definition Linkbase Document101.LAB XBRL Taxonomy Extension Label Linkbase Document101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *Management contracts or compensatory plans or arrangements required to be filed herewith pursuant to Item 15(a)(3) of this Annual Report onForm 10-K.(1)Filed herewith. 80Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on December 20, 2011. INTEGRATED ELECTRICAL SERVICES, INC.By: /s/ JAMES M. LINDSTROM James M. Lindstrom Chief Executive Officer and PresidentPOWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and directors of INTEGRATED ELECTRICAL SERVICES, INC. herebyconstitutes and appoints James M. Lindstrom and William L. Fiedler, and each of them individually, as his true and lawful attorneys-in-fact and agents, withfull power of substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file any or allamendments to this report, with any and all exhibits thereto, and all other documents required to be filed therewith, with the Securities and ExchangeCommission or any regulatory authority, granting unto each such attorney-in-fact and agent, full power and authority to do and perform each and every actand thing requisite and necessary to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as he himself mightor could do, if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes orsubstitute, may lawfully do or cause to be done by virtue hereof.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on December 20, 2011.INTEGRATED ELECTRICAL SERVICES, INC. Signature Title/s/ James M. Lindstrom Chief Executive Officer, President and Chairman of the Board of DirectorsJames M. Lindstrom /s/ Terry L. Freeman Senior Vice President and Chief Financial Officer(Principal Financial Officer)Terry L. Freeman /s/ Charles H. Beynon DirectorCharles H. Beynon /s/ Donald L. Luke DirectorDonald L. Luke /s/ John E. Welsh, III DirectorJohn E. Welsh, III 81Exhibit 21.1SUBSIDIARIES OF THE REGISTRANTAs of September 30, 2011 Subsidiary Jurisdiction of IncorporationIES Residential, Inc. DelawareICS Holdings LLC DelawareIES Commercial, Inc. DelawareIES Management ROO, LP TexasIES Management, LP TexasIES Operations Group, Inc. DelawareIES Properties, Inc. DelawareIES Reinsurance, Ltd. BermudaIntegrated Electrical Finance, Inc. DelawareKey Electrical Supply, Inc. TexasThomas Popp & Company OhioIES Tangible Properties, Inc. DelawareIES Purchasing and Materials, Inc. DelawareIES Consolidated LLC DelawareIES Shared Services, Inc. DelawareIES Commercial & Industrial, LLC Delaware Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-134100) pertaining to the Integrated Electrical Services, Inc.2006 Equity Incentive Plan of our reports dated December 19, 2011, with respect to the Consolidated Financial Statements of Integrated Electrical Services,Inc. included in this Annual Report (Form 10-K) for the year ended September 30, 2011./s/ ERNST & YOUNG LLPHouston, TexasDecember 19, 2011Exhibit 31.1CERTIFICATIONI, James M. Lindstrom, certify that:1. I have reviewed this Annual Report on Form 10-K of Integrated Electrical Services, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theRegistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with accounting principles generally accepted in the United States of America;(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theRegistrant’s internal control over financial reporting; and5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting.Date: December 20, 2011 /s/ JAMES M. LINDSTROMJames M. LindstromPresident and Chief Executive OfficerExhibit 31.2CERTIFICATIONI, Terry L. Freeman, certify that:1. I have reviewed this Annual Report on Form 10-K of Integrated Electrical Services, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theRegistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with accounting principles generally accepted in the United States of America;(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recentfiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theRegistrant’s internal control over financial reporting; and5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controlover financial reporting.Date: December 20, 2011 /s/ TERRY L. FREEMANTerry L. FreemanSenior Vice President and Chief Financial OfficerExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with this Annual Report of Integrated Electrical Services, Inc. (the “Company”) on Form 10-K for the period ending September 30, 2011 (the“Report”), I, James M. Lindstrom, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: December 20, 2011 By: /s/ JAMES M. LINDSTROM James M. Lindstrom President and Chief Executive OfficerExhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with this Annual Report of Integrated Electrical Services, Inc. (the “Company”) on Form 10-K for the period ending September 30, 2011 (the“Report”), I, Terry L. Freeman, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuantto § 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: December 20, 2011 By: /s/ TERRY L. FREEMAN Terry L. Freeman Senior Vice President and Chief Financial Officer

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