UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 27, 2019 (July 15, 2019)
MYR GROUP INC.
(Exact name of registrant as specified in its charter)
| Delaware | 1-08325 | 36-3158643 |
|
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
|
1701 Golf Road, Suite 3-1012 Rolling Meadows, IL |
60008 | |
| (Address of Principal Executive Offices) | (ZIP Code) |
Registrant’s telephone number, including area code: (847) 290-1891
None
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value | MYRG | The Nasdaq Stock Market, LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Explanatory Note
Pursuant to the requirements of the Securities Exchange Act of 1934, MYR Group Inc. (the “Company”) is filing this Current Report on Form 8-K/A to amend its Current Report on Form 8-K filed on July 15, 2019 to provide the required financial information relating to its acquisition of substantially all the assets of CSI Electrical Contractors, Inc., an electrical contracting firm based in California.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
| (1) | The audited financial statements of CSI Electrical Contractors, Inc. as of and for the years ended December 31, 2018 and 2017, and the related notes to such audited financial statements, are filed as Exhibit 99.1 hereto. |
| (2) | The unaudited interim financial statements of CSI Electrical Contractors, Inc. as of June 30, 2019 and for the six months ended June 30, 2019 and June 30, 2018, and the related notes to such unaudited interim financial statements, are filed as Exhibit 99.2 hereto. |
(b) Pro Forma Financial Information.
The unaudited pro forma financial information of the Company as of and for the six months ended June 30, 2019 and for the year ended December 31, 2018 and the notes related thereto, are filed as Exhibit 99.3 hereto.
(d) Exhibits.
| 23.1 | Consent of Meadows & Fries LLP, Independent Auditors of CSI Electrical Contractors, Inc. |
| 99.1 | Audited Financial Statements of CSI Electrical Contractors, Inc. as of and for the years ended December 31, 2018 and 2017 and the related notes to such audited financial statements. |
| 99.3 | Unaudited Pro Forma Combined Financial Statements as of and for the six months ended June 30, 2019 and for the year ended December 31, 2018, and the notes related thereto. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| MYR GROUP INC. | |||
| Dated: September 27, 2019 | By: | /s/ BETTY R. JOHNSON | |
| Name: Betty R. Johnson | |||
| Title: Senior Vice President, Chief Financial Officer and Treasurer | |||
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements on Form S-8 (Nos 333-217559, 333-196110, 333-174152, and 333-156501) of MYR Group Inc. of our report dated March 1, 2019 relating to the financial statements of CSI Electrical Contractors, Inc. as of and for the years ended December 31, 2018 and 2017, which appears in this Current Report on Form 8-K/A dated September 27, 2019.
/s/ Meadows & Fries, LLP
Santa Ana, CA
September 27, 2019
Exhibit 99.1
CSI ELECTRICAL CONTRACTORS, INC.
YEARS ENDED DECEMBER 31, 2018 AND 2017
CSI ELECTRICAL CONTRACTORS, INC.
YEARS ENDED DECEMBER 31, 2018 AND 2017
CONTENTS
| Page | |
| Accountant's report | 1 |
| Financial statements: | |
| Balance sheet | 2-3 |
| Statement of income and retained earnings | 4 |
| Statement of cash flows | 5-6 |
| Notes to financial statements | 7-14 |
|
STEVEN E. MEADOWS JOHN R. FRIES |
MEADOWS & FRIES, LLP CERTIFIED PUBLIC ACCOUNTANTS 2677 N. MAIN ST., SUITE 540 SANTA ANA. CALIFORNIA 92705 TELEPHONE (714) 568-5245 FAX (714) 285-9483 smeadows@meadowsfries.com |
MEMBERS. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
|
To the Management of CSI Electrical Contractors, Inc.
Santa Fe Springs, California
Report on the Financial Statements
We have audited the accompanying financial statements of CSI Electrical Contractors, Inc., a California corporation, which comprise the balance sheet as of December 31, 2018 and 2017, and the related statements of income, retained earnings, and cash flows for the year then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CSI Electrical Contractors, Inc., as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the Unites States of America.
/s/ Meadows & Fries, LLP
March 1, 2019
| 1 |
CSI ELECTRICAL CONTRACTORS, INC.
BALANCE SHEET – DECEMBER 31, 2018 AND 2017
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| Current assets : | ||||||||
| Cash and cash equivalents | $ | 4,726,531 | $ | 4,684,370 | ||||
| Contract receivable (notes 1 and 2) | 92,978,576 | 74,759,201 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts (note 3) | 10,996,076 | 7,171,358 | ||||||
| Officer advance | - | 39,735 | ||||||
| Prepaid charges and other assets | 601,790 | 742,351 | ||||||
| Cash value of life insurance | 1,524,695 | 1,835,166 | ||||||
| Total Current Assets | 110,827,668 | 89,232,181 | ||||||
| Property and equipment, net of accumulated depreciation (note 4) | 3,249,848 | 3,459,810 | ||||||
| Other assets : | ||||||||
| Note receivable (note 5) | 75,526 | 74,745 | ||||||
| Other | 103,454 | 86,950 | ||||||
| Total Other Assets | 178,980 | 161,695 | ||||||
| $ | 114,256,496 | $ | 92,853,686 | |||||
The accompanying notes are an integral part of these financial statement
| 2 |
CSI ELECTRICAL CONTRACTORS, INC.
BALANCE SHEET – DECEMBER 31, 2018 AND 2017 (Continued)
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||||
| Current liabilities : | ||||||||
| Current maturities of long term debt (note 8) | $ | 830,768 | $ | 765,610 | ||||
| Bank lines of credit (note 7) | 7,977,715 | 15,692,792 | ||||||
| Accounts payable | 33,505,716 | 18,331,847 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts (note 3) | 26,642,648 | 23,161,576 | ||||||
| Accrued salaries and benefits | 6,011,143 | 4,699,445 | ||||||
| Compensated absences | 988,376 | 825,753 | ||||||
| Accrued union benefits | 4,789,916 | 3,049,321 | ||||||
| Franchise tax payable | - | 42,957 | ||||||
| Other accruals | 30,402 | - | ||||||
| Total Current Liabilities | 80,776,684 | 66,569,301 | ||||||
| Longs-term debt, less current maturities (note 8) | 1,395,014 | 1,084,976 | ||||||
| Stockholders' equity : | ||||||||
| Common stock, 8,000 and 8,615 shares issued and outstanding, respectively | 8,000 | 38,500 | ||||||
| Retained earnings | 32,076,798 | 25,160,909 | ||||||
| Total Stockholders' Equity | 32,084,798 | 25,199,409 | ||||||
| $ | 114,256,496 | $ | 92,853,686 | |||||
The accompanying notes are an integral part of these financial statement
| 3 |
CSI ELECTRICAL CONTRACTORS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2018 AND 2017
| Year ended December 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Contract revenues earned | $ | 302,475,710 | 100.0 | % | $ | 233,043,845 | 100.0 | % | ||||||||
| Cost of revenues earned | 244,065,835 | 80.7 | 186,199,065 | 79.9 | ||||||||||||
| Gross profit | 58,409,875 | 19.3 | 46,844,780 | 20.1 | ||||||||||||
| Indirect expenses | 12,369,675 | 4.1 | 9,068,661 | 3.9 | ||||||||||||
| Selling, general and administrative expense | 32,207,791 | 10.6 | 28,353,110 | 12.2 | ||||||||||||
| Income from operations | 13,832,409 | 4.6 | 9,423,009 | 4.0 | ||||||||||||
| Other income and (expense): | ||||||||||||||||
| Other income | 15 | 0.0 | 61 | 0.0 | ||||||||||||
| Gain on the sale of assets and disposition of equipment | 11,302 | 0.0 | 1,214 | 0.0 | ||||||||||||
| Interest income | 538 | 0.0 | 3,065 | 0.0 | ||||||||||||
| Interest expense | (384,582 | ) | (0.1 | ) | (462,662 | ) | (0.2 | ) | ||||||||
| Total other income | (372,727 | ) | (0.1 | ) | (458,322 | ) | (0.2 | ) | ||||||||
| Income before state income taxes | 13,459,682 | 4.4 | 8,964,687 | 3.8 | ||||||||||||
| Provision for state income taxes | 13,294 | 0.0 | 118,358 | 0.1 | ||||||||||||
| Net income | 13,446,388 | 4.4 | % | 8,846,329 | 3.8 | % | ||||||||||
| Beginning retained earnings | 25,160,909 | 20,443,496 | ||||||||||||||
| Shareholder distributions (note 9) | (4,719,841 | ) | (4,128,916 | ) | ||||||||||||
| Common stock repurchase | (1,810,658 | ) | - | |||||||||||||
| Ending retained earnings | $ | 32,076,798 | $ | 25,160,909 | ||||||||||||
The accompanying notes are an integral part of these financial statement
| 4 |
CSI ELECTRICAL CONTRACTORS, INC.
STATEMENT OF CASH FLOW
YEARS ENDED DECEMBER 31, 2018 AND 2017
| Year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities : | ||||||||
| Net income | $ | 13,446,388 | $ | 8,846,329 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 867,332 | 759,052 | ||||||
| Decrease (increase) in: | ||||||||
| Contracts receivable | (18,219,375 | ) | (21,348,557 | ) | ||||
| Costs and estimated earnings in excess of billings | (3,824,718 | ) | 1,679,567 | |||||
| Supplies inventory | - | 125,839 | ||||||
| Prepaid charges and other assets | 140,561 | (466,448 | ) | |||||
| Increase (decrease) in: | ||||||||
| Bank overdraft | - | (1,097,133 | ) | |||||
| Accounts payable | 15,173,869 | 445,559 | ||||||
| Billings in excess of costs and estimated earnings | 3,481,072 | 9,882,681 | ||||||
| Accrued salaries and benefits | 1,311,698 | 806,208 | ||||||
| Compensated absences | 162,623 | 49,353 | ||||||
| Accrued union benefits | 1,740,595 | 89,574 | ||||||
| Other accruals | 30,402 | (608,624 | ) | |||||
| Franchise tax payable | (42,957 | ) | - | |||||
| Net cash provided by operating activities | 14,267,490 | (836,600 | ) | |||||
| Cash flows from investing activities : | ||||||||
| Shareholder distributions | (4,719,841 | ) | (4,128,916 | ) | ||||
| Decrease (increase) in cash value of life insurance | 310,471 | (243,177 | ) | |||||
| Acquisition of property and equipment | (788,999 | ) | (1,341,939 | ) | ||||
| Disposition of property and equipment, net | 131,629 | (73,703 | ) | |||||
| Net cash used by investing activities | (5,066,740 | ) | (5,787,735 | ) | ||||
| Cash flows from financing activities : | ||||||||
| Increase in notes receivable | (781 | ) | (7,565 | ) | ||||
| Increase in other assets | (16,504 | ) | - | |||||
| Decrease (increase) in officer advances | 39,735 | (39,735 | ) | |||||
| Increase (decrease) in bank line of credit | $ | (7,715,077 | ) | $ | 12,028,741 | |||
The accompanying notes are an integral part of these financial statement
| 5 |
CSI ELECTRICAL CONTRACTORS, INC.
STATEMENT OF CASH FLOW (Continued)
YEARS ENDED DECEMBER 31, 2018 AND 2017
| Year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from financing activities (continued) : | ||||||||
| Balance forward | (7,692,627 | ) | 11,981,441 | |||||
| Common stock repurchase | (1,841,158 | ) | - | |||||
| Proceeds from the issuance of long-term debt | 1,489,049 | - | ||||||
| Capital lease proceeds | - | 32,687 | ||||||
| Repayments of long-term debt | (1,113,853 | ) | (770,783 | ) | ||||
| Net cash used by financing activities | (9,158,589 | ) | 11,243,345 | |||||
| Net increase in cash and cash equivalents | 42,161 | 4,619,010 | ||||||
| Cash at beginning of year | 4,684,370 | 65,360 | ||||||
| Cash at end of year | $ | 4,726,531 | $ | 4,684,370 | ||||
| Supplementary cash flow disclosures: | ||||||||
| Interest paid | $ | 387,458 | $ | 440,257 | ||||
| State income taxes paid | $ | 78,927 | $ | 35,843 | ||||
The accompanying notes are an integral part
of these financial statement
| 6 |
CSI ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
| 1. | Nature of Operations and Significant Accounting Policies |
Nature of operations:
CSI Electrical Contractors, Inc., is an electrical subcontracting company. Work is performed under fixed price and cost-plus fee contracts. The length of the Company's contracts varies but is typically less than one year, therefore assets and liabilities are classified as current and noncurrent.
Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue and cost recognition:
Revenues from fixed-price construction contracts are recognized on the percentage-of-completion method, measured by the percentage of direct costs incurred to date to the estimated total direct costs for each contract. Management considers this the best available measure of progress on these contracts. Revenues from cost-plus-fee contacts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.
Contract costs include all direct material and labor costs. Indirect costs are costs related to contract performance such as indirect labor, union benefits, equipment, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements are accounted for as changes in estimates in the current period.
| 7 |
| 1. | Nature of Operations and Significant Accounting Policies (Continued) |
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.
Contracts receivable:
Contracts receivables are based on contracted prices. The Company provides an allowance for doubtful collections which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal contract receivables are due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
Property and equipment:
Property and equipment are recorded at cost and are being depreciated over their estimated useful lives ranging from 3 to 7 years, by use of the straight-line and declining balance methods.
Income taxes:
As of January 1, 2008 the Company elected to be taxed as an S-Corporation. California franchise tax is computed at 1.5% of estimated taxable income, less current year research credits of $160,973 and refunds of $45,957 relating to under accrual of 2017 credits.
| 2. | Contracts Receivable |
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Contracts receivable | ||||||||
| Billed: | ||||||||
| Completed contracts | $ | 4,610,721 | $ | 5,244,503 | ||||
| Contracts in progress | 69,841,370 | 58,604,764 | ||||||
| Retainage | 18,526,485 | 10,909,934 | ||||||
| 92,978,576 | 74,759,201 | |||||||
| Less: Allowances for doubtful collections | - | - | ||||||
| 92,978,576 | 74,759,201 | |||||||
| 8 |
| 3. | Costs and Estimated Earnings on Uncompleted Contracts |
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Costs incurred on uncompleted contracts | $ | 307,564,228 | $ | 299,734,420 | ||||
| Estimated earnings | 51,281,012 | 56,139,802 | ||||||
| 358,845,240 | 355,874,222 | |||||||
| Less: billings to date | 374,491,812 | 371,864,440 | ||||||
| $ | (15,646,572 | ) | $ | (15,990,218 | ) | |||
| Included in the accompanying balance sheet | ||||||||
| under the following captions: | ||||||||
| Costs and estimated earnings in excess of | ||||||||
| billings on uncompleted contracts | $ | 10,996,076 | $ | 7,171,358 | ||||
| Billings in excess of costs and estimated | ||||||||
| earnings on uncompleted contracts | (26,642,648 | ) | (23,161,576 | ) | ||||
| $ | (15,646,572 | ) | $ | (15,990,218 | ) | |||
| 4. | Property and Equipment |
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Assets | ||||||||
| Leasehold improvements | $ | 3,263,190 | $ | 3,137,558 | ||||
| Furniture and fixtures | 1,313,987 | 1,224,919 | ||||||
| Computer equipment | 2,618,490 | 2,468,461 | ||||||
| Machinery and equipment | 1,957,507 | 1,784,289 | ||||||
| Transportation equipment | 524,496 | 559,077 | ||||||
| 9,677,670 | 9,174,304 | |||||||
| Less accumulated depreciation | (6,427,822 | ) | (5,714,494 | ) | ||||
| Net property and equipment | $ | 3,249,848 | $ | 3,459,810 | ||||
| 5. | Note Receivable |
Notes receivable consist of short-term advances to a Company officer and an entity unrelated to the Company.
| 6. | Related-Party Transactions |
On October 9, 2002 the Company entered into an agreement to lease it's corporate office facility from a California limited liability company, of which the Company's president has a majority interest. The term of the agreement is 21 years with a single 5 year renewal option. The lease provides monthly payments of $32,400 for the first 36 months, $34,500 for the next 60 months and $36,180 for the remaining term. On April 2, 2018 the Company entered into a lease amendment providing for monthly payments of $42,120 commencing May 1, 2018 and continuing for the remaining lease term. Lease expense under this agreement totaled $487,620 and $434,160 for the years ended December 31, 2018 and 2017, respectively.
| 9 |
| 7. | Bank Lines of Credit |
On November 20, 2018 and August 19, 2016 the Company negotiated a $28,000,000 and $18,000,000, respectively, revolving line of credit with MUFG Bank. The line is secured by the assets of the corporation, require payment of interest only and is scheduled to mature on April 30, 2019. The interest rate is variable based on 2.35 percentage points above the Bank's LIBOR rate.
The agreement includes various financial covenants, including a minimum net worth, debt to equity and current ratios, and company profitability. The agreements also place restrictions on shareholder loan repayments.
At December 31, 2018 and 2017, $7,977,715 and $15,692,792, respectively, was advanced on the line. The Company was in compliance with all loan covenants.
Additionally, on October 3, 2018 MUFG Union Bank has issued a Standby Letter of Credit in the amount of $1,490,000 and $950,000 in 2017 in favor of Zurich American Insurance Company relating to the Company's high deductible workers compensation plan.
| 8. | Long-Term Debt |
Long-term debt at December 31, 2018 and 2017, consists of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Capital lease, payable to Toyota Commercial Finance in 60 monthly installments of $610.67, including interest at a rate of 4.59% per annum. $1.00 bargain purchase at lease end. | $ | 23,971 | $ | 30,508 | ||||
| Commercial loan payable to MUFG Union bank. Maximum principal $1,000,000, payable in 48 equal installments beginning on July 31, 2016, plus interest payable monthly, at 2.75 percentage points above the bank's LIBOR rate. Loan matures June 30, 2020. | 355,500 | 612,250 | ||||||
| Auto loan payable in 72 monthly installments of $2,370, including interest at a rate of .99%, through February 2024. | 126,401 | - | ||||||
| Auto loan payable to JP Morgan Chase Bank, payable in monthly installments of $1,817 including interest at a rate of 2.34% per annum, through April 2021, respectively. | - | 65,986 | ||||||
| 10 |
| 8. | Long-Term Debt (Continued) |
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Software lease installment agreement, payable to Everbank Commercial Finance, Inc., payable in quarterly installments of $7,567, including interest at 7.17% through September 2018 | - | 21,074 | ||||||
| Note payable to Union Bank, payable in monthly installments of interest only, at a rate of 2.6% above the Bank's Adjusted Treasury Rate, beginning March 31, 2013. 60 equal principal reduction payments began on August 31, 2013 | - | 183,333 | ||||||
| Note payable to former shareholder and officer for the repurchase of 7.14% of Company common stock, payable beginning on September 17, 2018 in 60 monthly installments of $30,547, including interest at 5% per annum. | 1,079,837 | - | ||||||
| Note payable to former shareholder and officer for the repurchase of 12.5% of Company common stock, payable beginning on December 31, 2016 in five annual installments of $344,234, including interest at 5% per annum. | 640,073 | 937,435 | ||||||
| 2,225,782 | 1,850,586 | |||||||
| Less current maturity | (830,768 | ) | (765,610 | ) | ||||
| $ | 1,395,014 | $ | 1,084,976 | |||||
Maturities of long-term debt are as follows:
| As of December 31, | ||||
| 2018 | ||||
| Year ended December 31, | ||||
| 2019 | $ | 830,768 | ||
| 2020 | 740,405 | |||
| 2021 | 307,217 | |||
| 2022 | 318,849 | |||
| 2023 | 24,465 | |||
| Thereafter | 4,078 | |||
| $ | 2,225,782 | |||
| 9. | Shareholder Distributions |
As part of the decision to elect S-Corporation status for income tax reporting, it is the Company's policy to distribute cash to each shareholder, in part, as reimbursement for the individual income tax liability resulting from the pass through of the Company's taxable income.
For the year ended December 31, 2018 a total of $4,719,841 has been distributed. Of this amount $1,440,105 reimbursed the shareholders for their 2017 individual income tax liability and $3,240,003 reimbursed shareholders for 2018 federal and state safe-harbor installments of individual income taxes.
For the year ended December 31, 2017 $4,128,916 has been distributed representing the four safe harbor installments of 2017 federal income taxes and the full amount of 2017 California income taxes estimated to be due.
| 11 |
| 10. | Operating lease Agreements |
The Company rents vehicles, equipment and satellite office facilities under various operating leases. Total rent expense under all operating leases was approximately $2,056,400 and $1,824,900 for the year ended December 31, 2018 and 2017, respectively.
Minimum rents due under the leases are as follows:
| As of December 31, | ||||
| 2018 | ||||
| Twelve months ended December 31, | ||||
| 2019 | $ | 2,129,820 | ||
| 2020 | 1,514,336 | |||
| 2021 | 1,133,866 | |||
| 2022 | 431,088 | |||
| 2023 | 169,350 | |||
| $ | 5,378,460 | |||
| 11. | Backlog |
The following schedule summarizes changes in backlog on contracts for the years ended December 31, 2018 and 2017. Backlog represents the amount of revenue the Company expects to realize from work preformed on uncompleted contracts in progress at year end and from contractual agreements on which work has not yet begun.
| Backlog balance at December 31, 2016 | $ | 97,016,576 | ||
| Contract adjustments | 56,943,443 | |||
| New contracts during the period | 213,564,227 | |||
| 367,524,246 | ||||
| Less contract revenue earned during the period | (233,043,845 | ) | ||
| Backlog balance at December 31, 2017 | $ | 134,480,401 | ||
| Contract adjustments | 79,995,607 | |||
| New contracts during the period | 308,336,729 | |||
| 522,812,737 | ||||
| Less contract revenue earned during the period | (302,915,352 | ) | ||
| Backlog balance at December 31, 2018 | $ | 219,897,385 |
| 12. | Contingent Liability |
On October 21, 2013 a former employee filed a case claiming to be the representative of a class of all non-exempt electricians employed by the Company over the last four years. The case involves seven causes of action, one of which has been dismissed. The Company estimates there are 400 persons in the class. In June, 2017 the Superior Court of California, County of Los Angeles issued an order denying class certification on two of the claims.
The plaintiff appealed that ruling and in September 2018, the Court of Appeals affirmed the trial court's ruling. A status conference is scheduled for June 2019 at which time the remainder of the plaintiff's claims will be discussed.
| 12 |
| 12. | Contingent Liability (Continued) |
Company counsel has indicated it is not possible to predict a range of potential loss in the event a class is certified and a violation of the Labor Code is found. Counsel is confident however that a motion for summary judgment could be granted eliminating any potential Company liability.
In July 2017 a wage and hour class action was brought in Fresno County Superior Court alleging seven causes of action including Failure to Pay Wages. An initial Case Management Conference has been set for April 5, 2019. Company Counsel has advised that the Company will vigorously defend this case and cannot predict a potential outcome until the court has ruled on whether the case can proceed on a class action basis.
In July, 2018 a third-tier subcontractor filed a case alleging breach of contract. The Company has filed a cross complaint against their subcontractor demanding indemnification per the subcontract. The case is currently scheduled for mediation. A trial date is set for December 2019.
The Company has been served with several Notices to Cure relating to delays in construction from an ongoing project. Assessment of liquidated damages has been threatened. The Company has responded to the Notices and is preparing its own claim for damages related to breach of contract. Company counsel has indicated it is too early to assess potential damages.
| 13. | Surety Bonds |
The Company, as a condition for entering into some of it's construction contracts, had outstanding surety bonds approximating $66,581,028 and $7,951,802 as of December 31, 2018 and 2017, respectively. The bonds are collateralized by the personal guarantee of the shareholder and his spouse.
| 14. | Profit Sharing Plan |
The Company has a defined contribution 401(k) profit sharing plan covering all full-time employees who have met certain requirements as to length of service, age, and who are not members of a collective bargaining unit. The plan assets are held by a life insurance company as trustee. The Company contributes to each participant's account a matching contribution equal to 50% of the participant's deferred salary that does not exceed 6% of compensation, once the participant has obtained one year of service. Additionally, the Company makes an annual discretionary contribution to the plan.
For the year ended December 31, 2018 and 2017 the Company declared $390,772 and $299,451 in matching and $1,191,628 and $728,160 in discretionary plan contributions, respectively.
| 15. | Common Stock Repurchase |
On June 30, 2016 the Company repurchased 12.5% of it's common stock from a former officer and shareholder for a total purchase price of $1,696,338. The amount is payable $169,634 on June 30, 2016, with the balance payable in five annual installments, payable on December 31, of $344,234, including interest at a rate of 5% per annum. The note is secured by a stock pledge agreement. At December 31, 2018 and 2017, $640,073 and $937,435, respectively, was due on the note.
The Repurchase Agreement also provides for a contingent liability for open litigation claims against the Company in the amount of $3,000,000 to cover fees, settlements and liabilities from January 1, 2016 until resolved. Upon final resolution 12.5% of any positive balance will be due and payable and will increase the promissory note.
On August 17, 2018 the Company agreed to repurchase 7.14% of it's common stock from a retiring officer and shareholder for a total purchase price of $1,841,158, with an effective date of January 2. 2018. The amount is payable $167,203 on July 1, 2018 with the balance payable in 60 monthly installments of $30,547 beginning on September 1, 2018, including interest at a rate of 5% per annum. At December 31, 2018 $1,079,837 was due on the note.
| 16. | Subsequent Events |
Upon evaluation, the Company notes that there were no material subsequent events between the date of the financial statements and the date that the financial statements were issued or available to be issued.
| 13 |
| 17. | Multiemployer Defined Benefit Plan |
The Company contributes to multiemployer defined benefit pension plans under the terms of bargaining agreements that cover its union represented employees. The risk of participating in these multiemployer plans are different from single-employer plans in the following aspects:
a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating members.
c. If Entity A chooses to stop participating in some of its multiemployer plans, Entity A may be required to pay those plan an amount based on the unfunded status of the plan, referred to as a withdrawal penalty.
The Company's participation in these plans for the annual period ended December 31, 2018 and 2017 is outlined in the table below. The Pension Protection Act (PPA) zone status is based on information that Company received from the plan and is certified by the plan's actuary. The FIP/RP column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented.
| 2018 | 2017 | ||||||||||
| Pension | EIN | PPA | FIP/RP | PPA | FIP/RP | Surcharge | Expiration Date | ||||
| Fund | Plan Number | Zone Status | Status | Zone Status | Status | 2018 | 2017 | 2016 | 2015 | Imposed | of Agreement |
| IBEW NECA | 95-6392774 | Adopted | Adopted | Various through | |||||||
| So Calif | 001 | Critical | 4/26/2018 | Critical | Dec 2013 | $24,563,904 | $26,782,569 | $18,857,108 | $18,218,852 | No | May 31, 2020 |
| IBEW 639/413 | 95-6209008 | ||||||||||
| Central CA | 001 | Green | None | Green | None | 90,298 | 993,061 | 588,078 | 97,909 | No | May 31, 2019 |
| IBEW 428 | 95-6123049 | ||||||||||
| Kern County | 001 | Green | None | Green | None | 1,541,072 | 986,806 | 4,879,819 | 719,769 | No | Nov 30, 2020 |
| IBEW 569 | 95-6101801 | ||||||||||
| San Diego | 001 | Green | None | Green | None | 303,552 | 157,202 | 65,447 | 100,403 | No | May 31, 2020 |
| IBEW 952 | 95-6397996 | Adopted | Adopted | ||||||||
| Ventura Cnty | 001 | Endangered | 5/18/2018 | Critical | Sep -10 | 93,468 | 203,780 | 523,510 | 984,555 | Yes | Sept 30, 2020 |
| IBEW 9 | 43-6159056 | ||||||||||
| So Calif | 001 | Green | None | Green | None | 702,366 | 421,118 | 501,873 | 364,669 | No | Nov 30, 2019 |
| IBEW 100 | 94-6216336 | ||||||||||
| Fresno Cnty | 001 | Green | None | Green | None | 964,493 | 2,069,739 | 2,293,437 | 1,728,039 | No | May 31, 2021 |
| IBEW 595 | N/A | ||||||||||
| Stockton CA | 001 | Green | None | Green | None | 723,863 | 1,581,192 | 1,106,123 | 28,211 | No | May 31, 2019 |
| IBEW 332 | N/A | ||||||||||
| San Jose | 001 | Green | None | Green | None | 5,447,325 | 2,452,320 | 2,409,988 | 2,066,076 | No | May 31, 2021 |
| IBEW 6 | 94-6062674 | ||||||||||
| San Francisco | 001 | Green | None | Green | None | 44,302 | - | 101,601 | 173,928 | No | May 31, 2022 |
| IBEW 340 | 94-2773478 | ||||||||||
| Sacramento | 001 | N/A | None | N/A | None | - | - | - | 573,894 | No | May 31, 2021 |
| 14 |
EXHIBIT 99.2
CSI ELECTRICAL CONTRACTORS, INC.
interim Financial Statements
SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited)
CSI ELECTRICAL CONTRACTORS, INC.
SIX MONTHS ENDED JUNE 30, 2019 AND 2018
CONTENTS
Page
| Financial statements: | |
| Balance sheet as of June 30, 2019 (unaudited) and December 31, 2018 | 1-2 |
| Unaudited statement of income and retained earnings for the six months ended June 30, 2019 and 2018 | 3 |
| Unaudited statement of cash flows for the six months ended June 30, 2019 and 2018 | 4 |
| Unaudited notes to financial statements | 5-12 |
CSI ELECTRICAL CONTRACTORS, INC.
BALANCE SHEET
| June 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets : | ||||||||
| Cash and cash equivalents | $ | 2,801,642 | $ | 4,726,531 | ||||
| Contract receivable (notes 1 and 2) | 93,338,567 | 92,978,576 | ||||||
| Costs and estimated earnings in excess of billings | ||||||||
| on uncompleted contracts (note 3) | 11,690,188 | 10,996,076 | ||||||
| Prepaid charges and other assets | 421,460 | 601,790 | ||||||
| Cash value of life insurance | 1,624,241 | 1,524,695 | ||||||
| Total Current Assets | 109,876,098 | 110,827,668 | ||||||
| Property and equipment, net of accumulated depreciation (note 4) | 3,029,273 | 3,249,848 | ||||||
| Other assets : | ||||||||
| Note receivable (note 5) | 95,097 | 75,526 | ||||||
| Other | 148,977 | 103,454 | ||||||
| Total Other Assets | 244,074 | 178,980 | ||||||
| $ | 113,149,445 | $ | 114,256,496 | |||||
The accompanying notes are an integral part of these financial statement
| 1 |
CSI ELECTRICAL CONTRACTORS, INC.
BALANCE SHEET – (Continued)
| June 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| LIABILITIES AND STOCKHOLDER'S EQUITY | (unaudited) | |||||||
| Current liabilities : | ||||||||
| Current maturities of long term debt (note 8) | 31,002 | $ | 830,768 | |||||
| Bank lines of credit (note 7) | 16,510,000 | 7,977,715 | ||||||
| Accounts payable | 21,376,099 | 33,505,716 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts (note 3) | 26,896,611 | 26,642,648 | ||||||
| Accrued salaries and benefits | 9,574,717 | 6,011,143 | ||||||
| Compensated absences | 1,291,264 | 988,376 | ||||||
| Accrued union benefits | 3,449,040 | 4,789,916 | ||||||
| Other accruals | 422,238 | 30,402 | ||||||
| Total Current Liabilities | 79,550,971 | 80,776,684 | ||||||
| Longs-term debt, less current maturities (note 8) | 103,869 | 1,395,014 | ||||||
| Stockholders' equity : | ||||||||
| Common stock, 8,000 shares issued and outstanding | 8,000 | 8,000 | ||||||
| Retained earnings | 33,486,605 | 32,076,798 | ||||||
| Total Stockholders' Equity | 33,494,605 | 32,084,798 | ||||||
| $ | 113,149,445 | $ | 114,256,496 | |||||
The accompanying notes are an integral part of these financial statement
| 2 |
CSI ELECTRICAL CONTRACTORS, INC.
UNAUDITED STATEMENT OF INCOME AND RETAINED EARNINGS
| Six months ended June 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Contract revenues earned | $ | 158,679,160 | 100.0 | % | $ | 117,270,608 | 100.0 | % | ||||||||
| Cost of revenues earned | 121,607,690 | 76.6 | 91,479,448 | 78.0 | ||||||||||||
| Gross profit | 37,071,470 | 23.4 | 25,791,160 | 22.0 | ||||||||||||
| Indirect expenses | 7,164,744 | 4.5 | 5,113,642 | 4.4 | ||||||||||||
| Selling, general and administrative expense | 20,923,125 | 13.2 | 13,405,916 | 11.4 | ||||||||||||
| Income from operations | 8,983,601 | 5.7 | 7,271,602 | 6.2 | ||||||||||||
| Other income and (expense): | ||||||||||||||||
| Other income | 30 | 0.0 | 16 | 0.0 | ||||||||||||
| Loss on the sale of assets | (230,624 | ) | (0.2 | ) | - | 0.0 | ||||||||||
| Interest income | - | 0.0 | 538 | 0.0 | ||||||||||||
| Interest expense | (134,762 | ) | (0.1 | ) | (100,003 | ) | (0.1 | ) | ||||||||
| Total other expense | (365,356 | ) | (0.3 | ) | (99,449 | ) | (0.1 | ) | ||||||||
| Income before state income taxes | 8,618,245 | 5.4 | 7,172,153 | 6.1 | ||||||||||||
| Provision for state income taxes | 18,059 | 0.0 | 85,500 | 0.1 | ||||||||||||
| Net income | 8,600,186 | 5.4 | % | 7,086,653 | 6.0 | % | ||||||||||
| Beginning retained earnings | 32,076,798 | 25,160,909 | ||||||||||||||
| Shareholder distributions (note 9) | (7,190,379 | ) | (3,119,381 | ) | ||||||||||||
| Ending retained earnings | $ | 33,486,605 | $ | 29,128,181 | ||||||||||||
The accompanying notes are an integral part
of these financial statement
| 3 |
CSI ELECTRICAL CONTRACTORS, INC.
UNAUDITED STATEMENT OF CASH FLOW
| Six months ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities : | ||||||||
| Net income | $ | 8,600,186 | $ | 7,086,653 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 422,835 | 454,555 | ||||||
| Loss on sale of property and equipment | 230,624 | - | ||||||
| Decrease (increase) in: | ||||||||
| Contracts receivable | (359,991 | ) | 15,911,115 | |||||
| Costs and estimated earnings in excess of billings | (694,112 | ) | (1,006,133 | ) | ||||
| Prepaid charges and other assets | 180,330 | 352,534 | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable | (12,129,617 | ) | (1,808,530 | ) | ||||
| Billings in excess of costs and estimated earnings | 253,963 | (8,488,915 | ) | |||||
| Accrued salaries and benefits | 3,563,574 | (15,344 | ) | |||||
| Compensated absences | 302,888 | 42,829 | ||||||
| Accrued union benefits | (1,340,876 | ) | (350,699 | ) | ||||
| Other accruals | 391,836 | (424,720 | ) | |||||
| Franchise tax payable | - | (15,936 | ) | |||||
| Net cash (used) provided by operating activities | (578,360 | ) | 11,737,409 | |||||
| Cash flows from investing activities : | ||||||||
| Shareholder distributions | (7,190,379 | ) | (3,119,381 | ) | ||||
| Increase in cash value of life insurance | (99,546 | ) | (59,554 | ) | ||||
| Acquisition of property and equipment | (441,684 | ) | (376,002 | ) | ||||
| Proceeds from disposition of property and equipment | 8,800 | - | ||||||
| Net cash used by investing activities | (7,722,809 | ) | (3,554,937 | ) | ||||
| Cash flows from financing activities : | ||||||||
| Increase in notes receivable | (19,571 | ) | (19,038 | ) | ||||
| Other financing activities | (45,523 | ) | (16,504 | ) | ||||
| Decrease in officer advances | - | 39,735 | ||||||
| Borrowings (repayments) under bank line of credit | 8,532,285 | (12,679,357 | ) | |||||
| Repayments of long-term debt, net | (2,090,911 | ) | (107,335 | ) | ||||
| Net cash provided (used) by financing activities | 6,376,280 | (12,782,499 | ) | |||||
| Net decrease in cash and cash equivalents | (1,924,889 | ) | (4,600,027 | ) | ||||
| Cash at beginning of year | 4,726,531 | 4,684,370 | ||||||
| Cash at end of period | $ | 2,801,642 | $ | 84,343 | ||||
| Supplementary cash flow disclosures: | ||||||||
| Interest paid | $ | 134,762 | $ | 100,103 | ||||
| State income taxes paid | $ | 4,995 | $ | 76,936 | ||||
The accompanying notes are an integral part
of these financial statement
| 4 |
CSI ELECTRICAL CONTRACTORS, INC.
UNAUDITED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Explanatory Note
The results of operations for CSI Electrical Contractors, Inc. (California) as of and for the six months ended June 30, 2019 and 2018 are set forth below. These results were derived from the unaudited results of CSI Electrical Contractors, Inc. (California) and have been included herein for informational purposes.
| 1. | Nature of Operations and Significant Accounting Policies |
Nature of operations:
CSI Electrical Contractors, Inc., (the “Company”) is an electrical subcontracting company. Work is performed under fixed price and cost-plus fee contracts. The length of the Company's contracts varies but is typically less than one year, therefore assets and liabilities are classified as current and noncurrent.
Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue and cost recognition:
Revenues from fixed-price construction contracts are recognized on the percentage-of-completion method, measured by the percentage of direct costs incurred to date to the estimated total direct costs for each contract. Management considers this the best available measure of progress on these contracts. Revenues from cost-plus-fee contacts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.
Contract costs include all direct material and labor costs. Indirect costs are costs related to contract performance such as indirect labor, union benefits, equipment, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated
| 5 |
| 1. | Nature of Operations and Significant Accounting Policies (Continued) |
profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements are accounted for as changes in estimates in the current period.
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.
Contracts receivable:
Contracts receivables are based on contracted prices. The Company provides an allowance for doubtful collections which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal contract receivables are due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
Property and equipment:
Property and equipment are recorded at cost and are being depreciated over their estimated useful lives ranging from 3 to 7 years, by use of the straight-line and declining balance methods.
Income taxes:
As of January 1, 2008 the Company elected to be taxed as an S-Corporation. California franchise tax is computed at 1.5% of estimated taxable income, less anticipated research, enterprise zone, and other State of California tax credits.
| 6 |
| 2. | Contracts Receivable |
| June 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Contracts receivable | ||||||||
| Billed: | ||||||||
| Completed contracts | $ | 3,057,749 | $ | 4,610,721 | ||||
| Contracts in progress | 65,391,128 | 69,841,370 | ||||||
| Retainage | 24,943,643 | 18,526,485 | ||||||
| 93,392,520 | 92,978,576 | |||||||
| Less: Allowances for doubtful collections | (53,953 | ) | - | |||||
| 93,338,567 | 92,978,576 | |||||||
| 3. | Costs and Estimated Earnings on Uncompleted Contracts |
| June 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Costs incurred on uncompleted contracts | $ | 370,070,141 | $ | 307,564,228 | ||||
| Estimated earnings | 75,996,313 | 51,281,012 | ||||||
| 446,066,454 | 358,845,240 | |||||||
| Less: billings to date | 461,272,877 | 374,491,812 | ||||||
| $ | (15,206,423 | ) | $ | (15,646,572 | ) | |||
| Included in the accompanying balance sheet | ||||||||
| under the following captions: | ||||||||
| Costs and estimated earnings in excess of | ||||||||
| billings on uncompleted contracts | $ | 11,690,188 | $ | 10,996,076 | ||||
| Billings in excess of costs and estimated | ||||||||
| earnings on uncompleted contracts | $ | (26,896,611 | ) | (26,642,648 | ) | |||
| $ | (15,206,423 | ) | $ | (15,646,572 | ) | |||
| 4. | Property and Equipment |
| June 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Assets | ||||||||
| Leasehold improvements | $ | 3,398,800 | $ | 3,263,190 | ||||
| Furniture and fixtures | 1,313,987 | 1,313,987 | ||||||
| Computer equipment | 2,534,195 | 2,618,490 | ||||||
| Machinery and equipment | 1,977,331 | 1,957,507 | ||||||
| Transportation equipment | 428,559 | 524,496 | ||||||
| 9,652,872 | 9,677,670 | |||||||
| Less accumulated depreciation | (6,623,599 | ) | (6,427,822 | ) | ||||
| Net property and equipment | $ | 3,029,273 | $ | 3,249,848 | ||||
| 5. | Note Receivable |
Notes receivable consist of short-term advances to a Company officer and an entity unrelated to the Company.
| 7 |
| 6. | Related-Party Transactions |
On October 9, 2002 the Company entered into an agreement to lease its corporate office facility from a California limited liability company, of which the Company's president has a majority interest. The term of the agreement was 21 years with a single five-year renewal option. The lease provides monthly payments of $32,400 for the first 36 months, $34,500 for the next 60 months and $36,180 for the remaining term. On April 2, 2018 the Company entered into a lease amendment providing for monthly payments of $42,120 commencing May 1, 2018 and continuing for the remaining lease term. Lease expense under this agreement totaled $252,720 and $234,900 for the six months ended June 30, 2019 and 2018, respectively.
| 7. | Bank Lines of Credit |
On November 20, 2018 and August 19, 2016, the Company negotiated a $28,000,000 and $18,000,000, respectively, revolving line of credit with MUFG Bank. The line is secured by the assets of the corporation, require payment of interest only and was scheduled to mature on April 30, 2019. An amendment was signed extending the terms through October 31, 2019 in the amount of $18,000,000. The interest rate is variable based on 2.35 percentage points above the Bank's LIBOR rate.
The agreement includes various financial covenants, including a minimum net worth, debt to equity and current ratios, and company profitability. The agreements also place restrictions on shareholder loan repayments.
At June 30, 2019 and December 31, 2018, $16,510,000 and $7,977,715, respectively, was advanced on the line. The Company was in compliance with all loan covenants. Additionally, on October 3, 2018 MUFG Union Bank has issued a Standby Letter of Credit in the amount of $1,490,000 and $950,000 in 2017 in favor of Zurich American Insurance Company relating to the Company’s high deductible workers compensation plan.
| 8 |
| 8. | Long-Term Debt |
Long-term debt at June 30, 2019 and December 31, 2018, consists of the following:
| June 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Capital lease, payable to Toyota Commercial Finance in 60 monthly installments of $610.67, including interest at a rate of 4.59% per annum. $1.00 bargain purchase at lease end. | $ | 20,702 | $ | 23,971 | ||||
| Commercial loan payable to MUFG Union bank. Maximum principal $1,000,000, payable in 48 equal installments beginning on July 31, 2016, plus interest payable monthly, at 2.75 percentage points above the bank's LIBOR rate. Loan matures June 30, 2020. | - | 355,500 | ||||||
| Auto loan payable in 72 monthly installments of $2,370, including interest at a rate of .99%, through February 2024. | 114,169 | 126,401 | ||||||
| Note payable to former shareholder and officer for the repurchase of 7.14% of Company common stock, payable beginning on September 17, 2018 in 60 monthly installments of $30,547, including interest at 5% per annum. | - | 1,079,837 | ||||||
| Note payable to former shareholder and officer for the repurchase of 12.5% of Company common stock, payable beginning on December 31, 2016 in five annual installments of $344,234, including interest at 5% per annum. | - | 640,073 | ||||||
| 134,871 | 2,225,782 | |||||||
| Less current maturity | (31,002 | ) | (830,768 | ) | ||||
| $ | 103,869 | $ | 1,395,014 | |||||
Maturities of long-term debt are as follows:
| As of June 30, | ||||||
| 2019 | ||||||
| Remainder of 2019 | $ | 15,501 | ||||
| 2020 | 31,002 | |||||
| 2021 | 31,002 | |||||
| 2022 | 28,824 | |||||
| 2023 | 24,465 | |||||
| Thereafter | 4,077 | |||||
| $ | 134,871 | |||||
| 9 |
| 9. | Shareholder Distributions |
As part of the decision to elect S-Corporation status for income tax reporting, it is the Company's policy to distribute cash to each shareholder, in part, as reimbursement for the individual income tax liability resulting from the pass through of the Company's taxable income.
For the six months ended June 30, 2019 a total of $7,190,379 has been distributed. A majority of these distributions were to reimburse the shareholders for their 2018 individual income tax liability and 2019 federal and state safe-harbor installments of individual income taxes.
For the six months ended June 30, 2018 a total of $3,119,381 has been distributed. A majority of these distributions were to reimburse the shareholders for their 2017 individual income tax liability and 2018 federal and state safe-harbor installments of individual income taxes.
| 10. | Operating lease Agreements |
The Company rents vehicles, equipment and satellite office facilities under various operating leases. Total rent expense under all operating leases was approximately $1,385,033 and $779,771 for the six months ended June 30, 2019 and 2018, respectively.
Minimum rents due under the leases are as follows:
| As of June 30, | ||||||
| 2019 | ||||||
| Remainder of 2019 | $ | 1,484,415 | ||||
| 2020 | 2,766,174 | |||||
| 2021 | 2,513,696 | |||||
| 2022 | 1,983,047 | |||||
| 2023 | 1,501,578 | |||||
| $ | 10,248,910 | |||||
| 10 |
| 11. | Backlog |
The following schedule summarizes changes in backlog on contracts for the six months ended June 30, 2019. Backlog represents the amount of revenue the Company expects to realize from work performed on uncompleted contracts in progress at year end and from contractual agreements on which work has not yet begun.
| Backlog balance at December 31, 2018 | $ | 219,897,385 | ||
| Contract adjustments | 65,030,261 | |||
| New contracts during the period | 78,341,537 | |||
| 363,269,183 | ||||
| Less contract revenue earned during the period | (158,679,161 | ) | ||
| Backlog balance at June 30, 2019 | $ | 204,590,022 |
| 12. | Contingent Liability |
In July 2017 a wage and hour class action was brought in Fresno County Superior Court alleging seven causes of action including Failure to Pay Wages. Mediation has been set for October 2, 2019. Company counsel has advised that the Company will vigorously defend this case and cannot predict a potential outcome until the court has ruled on whether the case can proceed on a class action basis.
The Company has been served with several Notices to Cure relating to delays in construction from an ongoing project. Assessment of liquidated damages has been threatened. The Company has responded to the Notices and is preparing its own claim for damages related to breach of contract. Company counsel has indicated it is too early to assess potential damages.
In August 2019, CSI was served with a complaint in California state court from an electrical contractor alleging, unfair competition, intentional interference with prospective economic advantage, misappropriation of trade secrets and conspiracy.
No contingent liability has been recorded as of June 30, 2019 and 2018.
| 13. | Surety Bonds |
The Company, as a condition for entering into some of it's construction contracts, had outstanding surety bonds approximating $50,911,119 and $17,849,159 as of June 30, 2019 and 2018, respectively. The bonds are collateralized by the personal guarantee of the shareholder and his spouse.
| 11 |
| 14. | Profit Sharing Plan |
The Company has a defined contribution 401(k) profit sharing plan covering all full-time employees who have met certain requirements as to length of service, age, and who are not members of a collective bargaining unit. The plan assets are held by a life insurance company as trustee. The Company contributes to each participant's account a matching contribution equal to 50% of the participant's deferred salary that does not exceed 6% of compensation, once the participant has obtained one year of service. Additionally, the Company makes an annual discretionary contribution to the plan.
For the six months ended June 30, 2019 and 2018 the Company declared $239,741 and $138,604 in matching and $550,000 and $275,230 in discretionary plan contributions, respectively.
| 15. | Subsequent Events |
On July 15, 2019, substantially all of the Company’s assets and liabilities were acquired by MYR Group, Inc., a holding company of specialty electrical construction service providers. The total consideration received was approximately $79.7 million, subject to working capital and net asset adjustments. Additionally, there could also be contingent payments based on the successful achievement of certain performance targets and continued employment of certain key executives of the Company.
| 12 |
Exhibit 99.3
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On July 15, 2019, MYR Group Inc. (“MYR”), a holding company of leading specialty contractors serving the electric utility infrastructure, commercial and industrial construction markets in the United States and western Canada, completed the acquisition of substantially all the assets (the “Acquisition”) of CSI Electrical Contractors, Inc. (“CSI”), an electrical contracting firm based in California. The total consideration paid was approximately $79.7 million, subject to working capital and net asset adjustments, entirely funded through borrowings under MYR’s credit facility. Additionally, there could be contingent payments based on the achievement of certain performance targets and continued employment of certain key executives of CSI. The costs associated with these contingent payments will be recognized as compensation expense in the consolidated statements of operations and comprehensive income as earned over the period achievement becomes probable. The purchase agreement also included contingent consideration provisions for margin guarantee adjustments based upon contract performance subsequent to the acquisition. The contracts were valued at fair value at the acquisition date, resulting in no margin guarantee estimate or adjustments for fair value. Changes in contract estimates, such as modified costs to complete or change order recognition, will result in changes to these margin guarantee estimates.
The following unaudited pro forma combined financial statements are based on the Company’s historical consolidated financial statements and the historical financial statements of CSI, as adjusted, to give effect to the Acquisition. The unaudited pro forma combined balance sheet gives effect to the Acquisition as if it had occurred on June 30, 2019, and the unaudited pro forma combined statement of income for the six months ended June 30, 2019, and the year ended December 31, 2018 gives effect to the Acquisition as if it had occurred on January 1, 2018.
The Acquisition will be accounted for as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations pursuant to which the total purchase price of the Acquisition will be allocated to the net assets acquired based upon their estimated fair values of the date of the completion of the Acquisition.
The unaudited pro forma combined financial statements have been presented for illustrative purposes only and are not intended to represent or be indicative of what the combined company’s financial position or results of operations actually would have been had the Acquisition been completed as of the dates indicated. The unaudited pro forma combined financial statements do not purport to project the future financial position or operating results of CSI or the combined company. The future financial position and results of operations of CSI may differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results following the dates of the pro forma financial information. The adjustments included in these unaudited pro forma combined financial statements are preliminary and may be revised. There can be no assurance that any revisions to estimates will not result in material changes to the information presented.
The pro forma adjustments are based upon information and assumptions available at the time of the filing of the Current Report on Form 8-K/A to which these unaudited pro forma combined financial statements are filed as Exhibit 99.3 (the “Current Report”). The pro forma combined financial statements are derived from and should be read in conjunction with (i) MYR’s consolidated financial statements and related footnotes for the year ended December 31, 2018, (ii) MYR’s unaudited consolidated financial statements for the three and six months ended June 30, 2019, and (iii) the financial statements of CSI, which are filed as Exhibits 99.1 and 99.2 to the Current Report.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
| June 30, 2019 | ||||||||||||||||||
| (In thousands) | MYR Group, Inc. | CSI Electrical Contractors, Inc (1) |
Pro Forma Adjustments |
MYR Group Pro Forma |
||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||||
| Current assets: | ||||||||||||||||||
| Cash and cash equivalents | $ | 4,355 | $ | 2,802 | $ | (2,802 | ) | (a) | $ | 4,355 | ||||||||
| Accounts receivable, net of allowances | 313,455 | 68,395 | (8,816 | ) | (a) | 373,034 | ||||||||||||
| Contract assets | 174,805 | 36,634 | 2,336 | (a) | 213,775 | |||||||||||||
| Current portion of receivable for insurance claims in excess of deductibles | 10,083 | — | — | 10,083 | ||||||||||||||
| Cash value of life insurance | — | 1,624 | (1,624 | ) | (a) | — | ||||||||||||
| Other current assets | 10,681 | 421 | (167 | ) | (a) | 10,935 | ||||||||||||
| Total current assets | 513,379 | 109,876 | (11,073 | ) | 612,182 | |||||||||||||
| Property and equipment, net of accumulated depreciation | 168,972 | 3,029 | 4,935 | (a), (b) | 176,936 | |||||||||||||
| Operating lease right-of-use assets | 14,130 | — | 9,287 | (c) | 23,417 | |||||||||||||
| Goodwill | 56,596 | — | 8,963 | (d) | 65,559 | |||||||||||||
| Intangible assets, net of accumulated amortization | 31,818 | — | 26,000 | (e) | 57,818 | |||||||||||||
| Receivable for insurance claims in excess of deductibles | 17,094 | — | — | 17,094 | ||||||||||||||
| Investment in joint ventures | 2,222 | — | — | 2,222 | ||||||||||||||
| Other assets | 2,484 | 244 | (95 | ) | (a) | 2,633 | ||||||||||||
| Total assets | $ | 806,695 | $ | 113,149 | $ | 38,017 | $ | 957,861 | ||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||
| Current liabilities: | ||||||||||||||||||
| Current portion of long-term debt | $ | 6,856 | $ | 31 | $ | (31 | ) | (a) | $ | 6,856 | ||||||||
| Current portion of operating lease obligations | 3,817 | — | 2,702 | (c) | 6,519 | |||||||||||||
| Current portion of finance lease obligations | 1,135 | — | — | 1,135 | ||||||||||||||
| Banks lines of credit | — | 16,510 | (16,510 | ) | (a) | — | ||||||||||||
| Accounts payable | 166,350 | 21,376 | 8,157 | (a) | 195,883 | |||||||||||||
| Contract liabilities | 53,581 | 26,897 | (7,963 | ) | (a) | 72,515 | ||||||||||||
| Current portion of accrued self-insurance | 19,692 | — | — | 19,692 | ||||||||||||||
| Accrued salaries and benefits | — | 9,575 | 2,929 | (a) | 12,504 | |||||||||||||
| Other current liabilities | 52,669 | 5,162 | (4,799 | ) | (a) | 53,032 | ||||||||||||
| Total current liabilities | 304,100 | 79,551 | (15,515 | ) | 368,136 | |||||||||||||
| Deferred income tax liabilities | 17,359 | — | — | 17,359 | ||||||||||||||
| Long-term debt | 99,623 | 104 | 79,636 | (a), (f) | 179,363 | |||||||||||||
| Accrued self-insurance | 33,664 | — | — | 33,664 | ||||||||||||||
| Operating lease obligations, net of current maturities | 10,456 | — | 6,585 | (c) | 17,041 | |||||||||||||
| Finance lease obligations, net of current maturities | 923 | — | — | 923 | ||||||||||||||
| Other liabilities | 1,633 | — | 805 | (g) | 2,438 | |||||||||||||
| Total liabilities | 467,758 | 79,655 | 71,511 | 618,924 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||
| Preferred stock | — | — | — | — | ||||||||||||||
| Common stock | 166 | 8 | (8 | ) | (h) | 166 | ||||||||||||
| Additional paid-in capital | 150,177 | — | — | 150,177 | ||||||||||||||
| Accumulated other comprehensive loss | (393 | ) | — | — | (393 | ) | ||||||||||||
| Retained earnings | 189,089 | 33,486 | (33,486 | ) | (h) | 189,089 | ||||||||||||
| Total stockholders equity attributable to MYR Group, Inc. | 339,039 | 33,494 | (33,494 | ) | 339,039 | |||||||||||||
| Noncontrolling interest | (102 | ) | — | — | (102 | ) | ||||||||||||
| Total stockholders’ equity | 338,937 | 33,494 | (33,494 | ) | 338,937 | |||||||||||||
| Total liabilities and stockholders’ equity | $ | 806,695 | $ | 113,149 | $ | 38,017 | $ | 957,861 | ||||||||||
| (1) | Certain items have been reclassified to conform with MYR’s classifications, most notably $24.9 million of retainage was reclassed from accounts receivable, net of allowances to contract assets. |
See Note 3–Preliminary Pro Forma Reclassifications and Adjustments for further information related to reclassifications and adjustments presented above.
| 2 |
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
| Six months ended June 30, 2019 | ||||||||||||||||||||||||
| (in thousands, except per share data) | MYR Group, Inc. |
CSI Electrical Contractors, Inc |
Pro Forma Reclassifications |
Pro Forma Adjustments |
MYR Group Pro Forma |
|||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Contract revenues | $ | 916,870 | $ | 158,679 | $ | — | $ | — | $ | 1,075,549 | ||||||||||||||
| Contract costs | 830,831 | 121,608 | 7,165 | (i) | 750 | (k) | 960,354 | |||||||||||||||||
| Gross profit | 86,039 | 37,071 | (7,165 | ) | (750 | ) | 115,195 | |||||||||||||||||
| Indirect expenses | — | 7,165 | (7,165 | ) | (i) | — | — | |||||||||||||||||
| Selling, general and administrative expenses | 66,931 | 20,923 | — | 2,155 | (m) | 90,009 | ||||||||||||||||||
| Amortization of intangible assets | 1,469 | — | — | 571 | (n) | 2,040 | ||||||||||||||||||
| (Gain) loss on sale of property and equipment | (1,397 | ) | — | 230 | (j) | — | (1,167 | ) | ||||||||||||||||
| Income from operations | 19,036 | 8,983 | (230 | ) | (3,476 | ) | 24,313 | |||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Loss on the sale of assets | — | (230 | ) | 230 | (j) | — | — | |||||||||||||||||
| Interest expense | (2,373 | ) | (135 | ) | — | (1,263 | ) | (o) | (3,771 | ) | ||||||||||||||
| Other income, net | 1,328 | — | — | — | 1,328 | |||||||||||||||||||
| Income before income tax expense | 17,991 | 8,618 | — | (4,739 | ) | 21,870 | ||||||||||||||||||
| Income tax expense | 5,013 | 18 | — | 1,067 | (p) | 6,098 | ||||||||||||||||||
| Net income | 12,978 | 8,600 | — | (5,806 | ) | 15,772 | ||||||||||||||||||
| Less: net loss attributable to noncontrolling interests | (1,582 | ) | — | — | — | (1,582 | ) | |||||||||||||||||
| Net income attributable to MYR Group, Inc | $ | 14,560 | $ | 8,600 | $ | — | $ | (5,806 | ) | $ | 17,354 | |||||||||||||
| Income per common share attributable to MYR Group Inc.: | ||||||||||||||||||||||||
| —Basic | $ | 0.88 | $ | 1.05 | ||||||||||||||||||||
| —Diluted | $ | 0.87 | $ | 1.04 | ||||||||||||||||||||
| Weighted average number of common shares and potential common shares outstanding: | ||||||||||||||||||||||||
| —Basic | 16,557 | 16,557 | ||||||||||||||||||||||
| —Diluted | 16,682 | 16,682 | ||||||||||||||||||||||
| Net income | $ | 12,978 | $ | 8,600 | $ | — | $ | (5,806 | ) | $ | 15,772 | |||||||||||||
| Other comprehensive loss: | ||||||||||||||||||||||||
| Foreign currency translation adjustment | (200 | ) | — | — | — | (200 | ) | |||||||||||||||||
| Other comprehensive loss | (200 | ) | — | — | — | (200 | ) | |||||||||||||||||
| Total comprehensive income | $ | 12,778 | $ | 8,600 | $ | — | $ | (5,806 | ) | $ | 15,572 | |||||||||||||
| Less: net loss attributable to noncontrolling interests | (1,582 | ) | — | — | — | (1,582 | ) | |||||||||||||||||
| Total comprehensive income attributable to MYR Group Inc. | $ | 14,360 | $ | 8,600 | $ | — | $ | (5,806 | ) | $ | 17,154 | |||||||||||||
See Note 3–Preliminary Pro Forma Reclassifications and Adjustments for further information related to the reclassifications and adjustments presented above.
| 3 |
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
| Year ended December 31, 2018 | ||||||||||||||||||||||
| (in thousands, except per share data) | MYR Group, Inc. |
CSI Electrical Contractors, Inc |
Pro Forma Reclassifications |
Pro Forma Adjustments |
MYR Group Pro Forma |
|||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
| Contract revenues | $ | 1,531,169 | $ | 302,476 | $ | — | $ | — | $ | 1,833,645 | ||||||||||||
| Contract costs | 1,364,109 | 244,066 | 12,370 | (i) | 1,500 | (k) | 1,622,045 | |||||||||||||||
| Gross profit | 167,060 | 58,410 | (12,370 | ) | (1,500 | ) | 211,600 | |||||||||||||||
| Indirect expense | — | 12,370 | (12,370 | ) | (i) | — | — | |||||||||||||||
| Selling, general and administrative expenses | 118,737 | 32,208 | — | 3,618 | (l), (m) | 154,563 | ||||||||||||||||
| Amortization of intangible assets | 1,843 | — | — | 4,542 | (n) | 6,385 | ||||||||||||||||
| Gain on sale of property and equipment | (3,832 | ) | — | (11 | ) | (j) | — | (3,843 | ) | |||||||||||||
| Income from operations | 50,312 | 13,832 | 11 | (9,660 | ) | 54,495 | ||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||
| Gain on the sale of assets | — | 11 | (11 | ) | (j) | — | — | |||||||||||||||
| Interest income | 24 | 1 | — | — | 25 | |||||||||||||||||
| Interest expense | (3,652 | ) | (385 | ) | — | (2,068 | ) | (o) | (6,105 | ) | ||||||||||||
| Other expense, net | (3,616 | ) | — | — | — | (3,616 | ) | |||||||||||||||
| Income before income tax expense | 43,068 | 13,459 | — | (11,728 | ) | 44,799 | ||||||||||||||||
| Income tax expense | 11,774 | 13 | — | 471 | (p) | 12,258 | ||||||||||||||||
| Net income | 31,294 | 13,446 | — | (12,199 | ) | 32,541 | ||||||||||||||||
| Less: net income attributable to noncontrolling interests | 207 | — | — | — | 207 | |||||||||||||||||
| Net income attributable to MYR Group, Inc | $ | 31,087 | $ | 13,446 | $ | — | $ | (12,199 | ) | $ | 32,334 | |||||||||||
| Income per common share attributable to MYR Group Inc.: | ||||||||||||||||||||||
| —Basic | $ | 1.89 | $ | 1.97 | ||||||||||||||||||
| —Diluted | $ | 1.87 | $ | 1.95 | ||||||||||||||||||
| Weighted average number of common shares and potential common shares outstanding: | ||||||||||||||||||||||
| —Basic | 16,441 | 16,441 | ||||||||||||||||||||
| —Diluted | 16,585 | 16,585 | ||||||||||||||||||||
| Net income | $ | 31,294 | $ | 13,446 | $ | — | $ | (12,199 | ) | $ | 32,541 | |||||||||||
| Other comprehensive income: | ||||||||||||||||||||||
| Foreign currency translation adjustment | 106 | — | — | — | 106 | |||||||||||||||||
| Other comprehensive income | 106 | — | — | — | 106 | |||||||||||||||||
| Total comprehensive income | $ | 31,400 | $ | 13,446 | $ | — | $ | (12,199 | ) | $ | 32,647 | |||||||||||
| Less: net income attributable to noncontrolling interests | 207 | — | — | — | 207 | |||||||||||||||||
| Total comprehensive income attributable to MYR Group Inc | $ | 31,193 | $ | 13,446 | $ | — | $ | (12,199 | ) | $ | 32,440 | |||||||||||
See Note 3–Preliminary Pro Forma Reclassifications and Adjustments for further information related to the reclassifications and adjustments presented above.
| 4 |
Notes to Unaudited Pro Forma Combined Financial Statements
1. Basis of Presentation
The unaudited pro forma combined financial statements (“Pro Forma”) have been prepared in connection with the Acquisition, and are intended to reflect the impact of the Acquisition on MYR’s consolidated financial statements and present the pro forma combined financial position and result of the operations of MYR after giving effect to the Acquisition. The Pro Forma have been prepared for illustrative purposes only and to give effect to the Acquisition pursuant to the assumptions described in notes to the Pro Forma. The unaudited pro forma combined balance sheet as of June 30, 2019 gives effect to the Acquisition as if it had occurred on June 30, 2019. The unaudited pro forma combined statements of operations for the six months ended June 30, 2019 and the year ended December 31, 2018 give effect to the Acquisition as if it had occurred as of January 1, 2018.
The Acquisition has been accounted for as a business combination, under the acquisition method of accounting, which results in acquired assets and assumed liabilities being measured at their estimated fair values as of July 15, 2019, the acquisition date. As of the acquisition date, goodwill is measured as the excess of consideration transferred, which is also generally measured at fair value of the net acquisition date fair values of the assets acquired and liabilities assumed.
The Pro Forma are based on a preliminary purchase price allocation, provided for illustrative purposes only, and do not purport to represent what the combined company’s financial results would have been had the Acquisition occurred on the dates indicated. The Pro Forma do not purport to project the future financial position or operating results of CSI, or the combined companies. The future financial position and results of operations of CSI may differ, perhaps significantly, from the Pro Forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results following the dates of the pro forma financial information. The adjustments included in the Pro Forma are preliminary and may be revised. There can be no assurance that any revisions to estimates will not result in material changes to the information presented.
2. Estimated Preliminary Purchase Price Allocation
This preliminary purchase price allocation has been used to prepare pro forma adjustments in the Pro Forma. The final purchase price allocation will be determined when MYR has completed the detailed valuations and its related calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include changes in allocations to intangible assets and goodwill, and other changes to assets and liabilities.
Total consideration paid may include a portion subject to potential net asset adjustments which are expected to be finalized in 2020. The Company’s preliminary estimate of these net asset adjustments is approximately $0.8 million as of the July 15, 2019 closing date, which would increase the total consideration to be paid.
MYR has developed preliminary estimates of the fair value of
the assets acquired and liabilities assumed for the purposes of allocating the purchase price. Further adjustments are expected
to the allocation as third party valuations of identifiable intangible assets, including backlog, customer relationships, trade
name and off-market component, are determined, and as net asset adjustments are finalized. MYR expects that approximately $26.0
million of the purchase price over the net amount of the fair values to be assigned to assets acquired and liabilities assumed
will be allocated to identifiable intangible assets.
| 5 |
The following is the summary of the assets acquired and the liabilities assumed by MYR in the Acquisition, reconciled to the purchase price transferred net of our preliminary estimated net asset adjustments (in thousands):
| Consideration paid | $ | 79,720 | ||
| Preliminary estimated net asset adjustments | 805 | |||
| Total consideration, net of net asset adjustments | $ | 80,525 | ||
| Accounts receivable, net | $ | 59,579 | ||
| Contract assets | 38,970 | |||
| Other current assets | 254 | |||
| Property and equipment | 7,964 | |||
| Operating lease right-of-use assets | 9,287 | |||
| Intangible assets | 26,000 | |||
| Other long term assets | 149 | |||
| Accounts payable | (29,533 | ) | ||
| Contract liabilities | (18,934 | ) | ||
| Current portion of operating lease obligations | (2,702 | ) | ||
| Other current liabilities | (4,776 | ) | ||
| Operating lease obligations, net of current maturities | (6,585 | ) | ||
| Long-term debt | (20 | ) | ||
| Accrued salaries and benefits | (8,091 | ) | ||
| Net identifiable assets | 71,562 | |||
| Goodwill | $ | 8,963 |
3. Preliminary Pro Forma Reclassifications and Adjustments
The pro forma reclassifications and adjustments have been prepared to illustrate the estimated effect of the Acquisition and certain other adjustments. The historical consolidated financial statements have been adjusted in the Pro Forma, as detailed below, to give effect to pro forma events that are: (i) directly attributable to the Acquisition, (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results. The Pro Forma do not reflect the non-recurring cost of any integration activities or benefits from the Acquisition including potential synergies that may be generated in future periods. Additionally, the pro forma combined income tax expense does not necessarily reflect the amounts that would have resulted had MYR and CSI recorded consolidated income tax provisions during the periods presented.
Balance Sheet Adjustments
| (a) | To adjust for assets and liabilities not acquired in the Acquisition and certain net asset adjustments based on the purchase price allocation as of the Acquisition date as shown in Note 2. |
| (b) | To record the estimated step-up in fair value of the property and equipment acquired in the Acquisition. |
| (c) | To record the preliminary right of use lease assets and lease liabilities acquired as part of the Acquisition. |
| (d) | To record the preliminary estimate of goodwill, which represents the excess of the purchase price over the preliminary fair value of CSI’s identifiable assets acquired and liabilities assumed as shown in Note 2. |
| (e) | To record the preliminary fair value of intangible assets acquired in the Acquisition. |
| (f) | To record the incremental borrowing of $79.7 million on MYR’s credit facility to finance the Acquisition. |
| (g) | To record preliminary estimated net asset adjustments due to CSI from MYR. |
| (h) | To eliminate CSI’s historical equity balance. |
| 6 |
Statements of Operations Reclassifications
| (i) | Indirect expenses have been reclassified as contract costs to conform to MYR’s presentations of these items. |
| (j) | (Gain) Loss on sale of property and equipment has been reclassified as income from operations to conform to MYR’s presentation of these items. |
Statements of Operations Adjustments
| (k) | To record additional depreciation associated with the estimated step-up in fair value of the property and equipment acquired in the Acquisition. |
| (l) | To record transaction costs associated with the Acquisition. |
| (m) | To record estimated compensation expense related to contingent payments associated with the achievement of certain performance targets and continued employment of certain key executives of CSI. |
| (n) | To record the estimated amortization related to the acquired intangible assets discussed in Note 2. |
| (o) | To remove interest expense recorded by CSI and to record additional interest expense related to the incremental borrowings of $79.7 million on MYR’s credit facility with an interest rate of 3.51% for the six months ended June 30, 2019 and 3.08% for the year ended December 31, 2018. |
| (p) | To reflect the income tax effect of pro forma adjustments at the statutory tax rate. |
Cautionary Statement Concerning Forward-Looking Statements
Statements in this exhibit 99.3 contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), which represent our beliefs and assumptions concerning future events. When used in this document and in documents incorporated by reference, forward-looking statements include, without limitation, statements regarding financial forecasts or projections, and our expectations, beliefs, intentions or future strategies that are signified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “likely,” “unlikely,” “possible,” “potential,” “should” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements speak only as of the date of this Current Report on Form 8-K/A. We disclaim any obligation to update these statements (unless required by securities laws), and we caution you not to rely on them unduly. We have based these forward-looking statements on our current assumptions about future events. While we consider these assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict, and many of which are beyond our control. These and other important factors, including those discussed under the caption “Forward-Looking Statements” and in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, and in any risk factors or cautionary statements contained in our other filings with the Securities and Exchange Commission, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.
| 7 |