UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
The | ||
(Nasdaq Global Market) |
Indicate 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 1934 during 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 filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ |
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Non-accelerated filer ◻ |
| Smaller reporting company |
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| 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. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 24, 2020, there were
INDEX
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Part I—Financial Information | |||||
Item 1. |
| Financial Statements |
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Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 | 2 | ||||
3 | |||||
4 | |||||
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 | 5 | ||||
6 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||||
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42 |
Throughout this report, references to “MYR Group,” the “Company,” “we,” “us” and “our” refer to MYR Group Inc. and its consolidated subsidiaries, except as otherwise indicated or as the context otherwise requires.
1
MYR GROUP INC.
CONSOLIDATED BALANCE SHEETS
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| June 30, |
| December 31, | ||
(in thousands, except share and per share data) | 2020 | 2019 | ||||
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| (unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowances of $ |
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Contract assets, net of allowances of $ |
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Current portion of receivable for insurance claims in excess of deductibles |
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Refundable income taxes | | | ||||
Other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation of $ |
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Operating lease right-of-use assets |
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Goodwill |
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Intangible assets, net of accumulated amortization of $ |
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Receivable for insurance claims in excess of deductibles |
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Investment in joint ventures |
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Other assets |
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Total assets | $ | | $ | | ||
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt | $ | | $ | | ||
Current portion of operating lease obligations |
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Current portion of finance lease obligations |
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Accounts payable |
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Contract liabilities |
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Current portion of accrued self-insurance |
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Other current liabilities |
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Total current liabilities |
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Deferred income tax liabilities |
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Long-term debt |
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Accrued self-insurance |
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Operating lease obligations, net of current maturities |
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Finance lease obligations, net of current maturities |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock—$ |
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Common stock—$ | ||||||
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Additional paid-in capital |
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Accumulated other comprehensive loss |
| ( |
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Retained earnings |
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Total stockholders’ equity attributable to MYR Group Inc. |
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Noncontrolling interest |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
2
MYR GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Three months ended | Six months ended | ||||||||||
| June 30, | June 30, | ||||||||||
(in thousands, except per share data) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
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Contract revenues | $ | | $ | | $ | | $ | | ||||
Contract costs |
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Gross profit |
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Selling, general and administrative expenses |
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Amortization of intangible assets |
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Gain on sale of property and equipment |
| ( |
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| ( |
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Income from operations |
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Other income (expense): |
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Interest income |
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Interest expense | ( | ( | ( | ( | ||||||||
Other income (expense), net |
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Income before provision for income taxes |
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Income tax expense |
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Net income |
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Less: net loss attributable to noncontrolling interest |
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| ( |
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Net income attributable to MYR Group Inc. | $ | | $ | | $ | | $ | | ||||
Income per common share attributable to MYR Group Inc.: |
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—Basic | $ | | $ | | $ | | $ | | ||||
—Diluted | $ | | $ | | $ | | $ | | ||||
Weighted average number of common shares and potential common shares outstanding: |
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—Basic |
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—Diluted |
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Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income (loss): |
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Foreign currency translation adjustment |
| ( |
| ( |
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Other comprehensive income (loss) |
| ( |
| ( |
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Total comprehensive income |
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Less: net loss attributable to noncontrolling interest |
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Total comprehensive income attributable to MYR Group Inc. | $ | | $ | | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
3
MYR GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated | MYR | |||||||||||||||||||||||||
Additional | Other | Group Inc. | ||||||||||||||||||||||||
Preferred | Common Stock | Paid-In | Comprehensive | Retained | Stockholders’ | Noncontrolling | ||||||||||||||||||||
(in thousands) |
| Stock |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity |
| Interest |
| Total | ||||||||
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Balance at December 31, 2018 |
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| | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | | ||||||||
Net income (loss) |
| — |
| — |
| — |
| — |
| — |
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| ( |
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Stock issued under compensation plans, net |
| — |
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Stock-based compensation expense |
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Shares repurchased |
| — |
| ( |
| — |
| ( |
| — |
| ( |
| ( |
| — |
| ( | ||||||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( |
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| ( | ||||||||
Stock issued - other | — | — | | — | — | — | | — | | |||||||||||||||||
Balance at March 31, 2019 | |
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Net income (loss) |
| — |
| — |
| — |
| — |
| — |
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| ( |
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Stock issued under compensation plans, net |
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Stock-based compensation expense |
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Other comprehensive income |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( |
| — |
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Stock issued - other | — | | ( | | — | — | | — | | |||||||||||||||||
Balance at June 30, 2019 | $ | | | $ | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||||
Balance at December 31, 2019 | — | | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | | ||||||||||
Net income | — | — | — | — | — | | | — | | |||||||||||||||||
Adjustment to adopt ASC 326 | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||
Stock issued under compensation plans, net | — | | — | | — | — | | — | | |||||||||||||||||
Stock-based compensation expense | — | — | — | | — | — | | — | | |||||||||||||||||
Shares repurchased | — | ( | — | ( | — | ( | ( | — | ( | |||||||||||||||||
Other comprehensive income | — | — | — | — | | — | | — | | |||||||||||||||||
Stock issued - other | — | | — | | — | — | | — | | |||||||||||||||||
Balance at March 31, 2020 | — | | | | ( | | | | | |||||||||||||||||
Net income | — | — | — | — | — | | | — | | |||||||||||||||||
Stock issued under compensation plans, net | — | | | — | — | — | | — | | |||||||||||||||||
Stock-based compensation expense | — | — | — | | — | — | | — | | |||||||||||||||||
Other comprehensive income | — | — | — | — | ( | — | ( | — | ( | |||||||||||||||||
Stock issued - other | — | | — | | — | — | | — | | |||||||||||||||||
Balance at June 30, 2020 | $ | — | | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
4
MYR GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six months ended | |||||
| June 30, | |||||
(in thousands) |
| 2020 |
| 2019 | ||
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Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash flows provided by operating activities: |
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Depreciation and amortization of property and equipment |
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Amortization of intangible assets |
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Stock-based compensation expense |
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Deferred income taxes |
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Gain on sale of property and equipment |
| ( |
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Other non-cash items |
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Changes in operating assets and liabilities, net of acquisitions: |
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Accounts receivable, net |
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Contract assets, net |
| ( |
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Receivable for insurance claims in excess of deductibles |
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Other assets |
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Accounts payable |
| ( |
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Contract liabilities |
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Accrued self insurance |
| ( |
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Other liabilities |
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Net cash flows provided by operating activities |
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Cash flows from investing activities: |
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Proceeds from sale of property and equipment |
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Purchases of property and equipment |
| ( |
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Net cash flows used in investing activities |
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Cash flows from financing activities: |
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Net repayments under revolving lines of credit |
| ( |
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Borrowings under equipment notes | | | ||||
Payment of principal obligations under equipment notes |
| ( |
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Payment of principal obligations under finance leases |
| ( |
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Proceeds from exercise of stock options |
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Repurchase of common shares |
| ( |
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Other financing activities |
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Net cash flows provided by (used in) financing activities |
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Effect of exchange rate changes on cash |
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Net decrease in cash and cash equivalents |
| ( |
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Cash and cash equivalents: |
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Beginning of period |
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End of period | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
5
MYR GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Business and Basis of Presentation
Organization and Business
MYR Group Inc. (the “Company”) is a holding company of specialty electrical construction service providers and is currently conducting operations through wholly owned subsidiaries, including: The L. E. Myers Co., a Delaware corporation; Harlan Electric Company, a Michigan corporation; Great Southwestern Construction, Inc., a Colorado corporation; Sturgeon Electric Company, Inc., a Michigan corporation; MYR Energy Services, Inc., a Delaware corporation; E.S. Boulos Company, a Delaware corporation; High Country Line Construction, Inc., a Nevada corporation; Sturgeon Electric California, LLC, a Delaware limited liability company; GSW Integrated Services, LLC, a Delaware limited liability company; Huen Electric, Inc., a Delaware corporation; CSI Electrical Contractors, Inc., a Delaware corporation; MYR Transmission Services Canada, Ltd., a British Columbia corporation; Northern Transmission Services, Ltd., a British Columbia corporation and Western Pacific Enterprises Ltd., a British Columbia corporation.
The Company performs construction services in
The current COVID-19 pandemic has had a significant impact on the global economy, including the US and Canadian economies, during the first and second quarters of 2020. As the situation continues to evolve, the Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our customers, subcontractors, suppliers, vendors and employees. The COVID-19 pandemic caused a slowdown of our projects due to specific state, local, municipal and customer mandated stay-at-home orders and new project requirements that were established to protect construction workers and the general public, most of which impacted our C&I segment in the second quarter of 2020. Although the majority of stay-at-home orders were phased out at the end of the second quarter, we are still experiencing impacts associated with the COVID-19 project specific protocols. We expect the project specific requirements to remain in place which will continue to impact project schedules and workflow going forward.
The Company is unable to predict the ultimate impact that COVID-19 will have on our business, employees, liquidity, financial condition, results of operations and cash flows. Most of the Company’s operations are considered critical and essential businesses, making our projects generally exempt from stay-at-home or similar orders in certain parts of the United States and western Canada. However, if this pandemic persists for a prolonged period of time our business could be more significantly impacted as a result of prolonged unfavorable economic conditions. In addition, in response to the pandemic and related mitigation measures, the Company began implementing changes in March 2020 in an effort to protect our employees and customers, and to support appropriate health and safety protocols, including implementing remote, alternative and flexible work arrangements, where possible. The situation surrounding COVID-19 remains fluid, and if disruptions do arise, they could materially adversely impact our business. The key estimates that could potentially be impacted include estimates of costs to complete contracts, the recoverability of goodwill and intangibles and allowance for doubtful accounts.
6
Basis of Presentation
Interim Consolidated Financial Information
The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations, comprehensive income, stockholders’ equity and cash flows with respect to the interim consolidated financial statements, have been included. Certain reclassifications were made to prior year amounts to conform to the current year presentation. The consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements as of that date. The results of operations and comprehensive income are not necessarily indicative of the results for the full year or the results for any future periods. These financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 4, 2020 (the "2019 Annual Report").
Foreign Currency
The functional currency for the Company’s Canadian operations is the Canadian dollar. Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars at the end-of-period exchange rate. Revenues and expenses are translated using average exchange rates for the periods reported. Equity accounts are translated at historical rates. Cumulative translation adjustments are included as a separate component of accumulated other comprehensive income in shareholders’ equity. Foreign currency transaction gains and losses, arising primarily from changes in exchange rates on short-term monetary assets and liabilities, and ineffective long-term monetary assets and liabilities are recorded in the “other income, net” line on the consolidated statements of operations. Foreign currency gains, recorded in other income, net, for the six months ended June 30, 2020 were
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates.
The most significant estimates are related to estimates of costs to complete contracts, pending change orders and claims, shared savings, insurance reserves, income tax reserves, estimates surrounding stock-based compensation, the recoverability of goodwill and intangibles and allowance for doubtful accounts. The Company estimates a cost accrual every quarter that represents costs incurred but not invoiced for services performed or goods delivered during the period, and estimates revenue from the contract cost portion of these accruals based on current gross margin rates to be consistent with its cost method of revenue recognition.
As of June 30, 2020 and 2019, the Company had recognized revenues of $
7
The cost-to-cost method of accounting requires the Company to make estimates about the expected revenue and gross profit on each of its contracts in process. During the three months ended June 30, 2020, changes in estimates pertaining to certain projects increased consolidated gross margin by
During the three months ended June 30, 2019, changes in estimates pertaining to certain projects decreased consolidated gross margin by
Recent Accounting Pronouncements
Changes to U.S. GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs. The Company, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Company or adoption will have minimal impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill, through the elimination of Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company adopted this ASU on a prospective basis in January 2020 and there was no effect on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposures. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. On January 1, 2020, the Company adopted this ASU resulting in a
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The Company adopted this ASU in January 2020 and there was no effect on the consolidated financial statements or disclosures.
8
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its financial statements.
2. Acquisition
CSI Electrical Contractors, Inc.
On July 15, 2019, the Company completed the acquisition of substantially all the assets of CSI Electrical Contractors, Inc. (“CSI”), an electrical contracting firm based in California. CSI provides services to a broad array of end markets under the Company’s C&I segment. The total consideration, after net asset adjustments of approximately $
The purchase agreement also includes 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, causing 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. Changes in contingent consideration, subsequent to the acquisition, related to the margin guarantee adjustments on contracts of approximately $
3. Contract Assets and Liabilities
Contracts with customers usually stipulate the timing of payment, which is defined by the terms found within the various contracts under which work was performed during the period. Therefore, contract assets and liabilities are created when the timing of costs incurred on work performed does not coincide with the billing terms, which frequently include retention provisions contained in each contract.
The Company’s consolidated balance sheets present contract assets, which contain unbilled revenue and contract retainages associated with contract work that has been completed and billed but not paid by customers, pursuant to retainage provisions, that are generally due once the job is completed and approved. The allowance for doubtful accounts associated with contract assets was $
9
Contract assets consisted of the following:
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| June 30, |
| December 31, |
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(in thousands) | 2020 | 2019 | Change | ||||||
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Unbilled revenue, net | $ | | $ | | $ | | |||
Contract retainages, net |
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| ( | |||
Contract assets, net | $ | | $ | | $ | |
The Company’s consolidated balance sheets present contract liabilities which contain deferred revenue and an accrual for contracts in a loss provision.
Contract liabilities consisted of the following:
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| June 30, |
| December 31, |
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(in thousands) | 2020 | 2019 | Change | ||||||
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Deferred revenue | $ | | $ | | $ | | |||
Accrued loss provision |
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| ( | |||
Contract liabilities | $ | | $ | | $ | |
The following table provides information about contract assets and contract liabilities from contracts with customers:
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| June 30, |
| December 31, |
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(in thousands) | 2020 | 2019 | Change | ||||||
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Contract assets, net | $ | | $ | | $ | | |||
Contract liabilities |
| ( |
| ( |
| ( | |||
Net contract assets (liabilities) | $ | | $ | | $ | ( |
The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing of the Company’s billings in relation to its performance of work. The amounts of revenue recognized in the period that were included in the opening contract liability balances were $
The net asset position for contracts in process consisted of the following:
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| June 30, |
| December 31, | ||
(in thousands) | 2020 | 2019 | ||||
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Costs and estimated earnings on uncompleted contracts | $ | | $ | | ||
Less: billings to date |
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$ | | $ | |
10
The net asset position for contracts in process is included within the contract asset and contract liability in the accompanying consolidated balance sheets as follows:
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| June 30, |
| December 31, | ||
(in thousands) | 2020 | 2019 | ||||
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Unbilled revenue | $ | | $ | | ||
Deferred revenue |
| ( |
| ( | ||
$ | | $ | |
4. Lease Obligations
From time to time, the Company enters into non-cancelable leases for some of our facility, vehicle and equipment needs. These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of facilities, vehicles and equipment rather than purchasing them. The Company’s leases have remaining terms ranging from
The following is a summary of the lease-related assets and liabilities recorded:
(in thousands) |
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| June 30, |
| December 31, | |||
Assets | Classification on the Consolidated Balance Sheet | 2020 |
| 2019 | ||||
Operating lease right-of-use assets |
| Operating lease right-of-use assets | $ | | $ | | ||
Finance lease right-of-use assets |
| Property and equipment, net of accumulated depreciation |
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Total right-of-use lease assets |
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| $ | | $ | | ||
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Liabilities |
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Current |
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Operating lease obligations |
| Current portion of operating lease obligations | $ | | $ | | ||
Finance lease obligations |
| Current portion of finance lease obligations |
| | | |||
Total current obligations |
|
|
| | | |||
Non-current |
|
|
|
| ||||
Operating lease obligations |
| Operating lease obligations, net of current maturities |
| | | |||
Finance lease obligations |
| Finance lease obligations, net of current maturities |
| | | |||
Total non-current obligations |
|
|
| | | |||
Total lease obligations |
|
| $ | | $ | |
11
The following is a summary of the lease terms and discount rates:
June 30, | December 31, | |||
2020 | 2019 | |||
Weighted-average remaining lease term - finance leases |
| |||
Weighted-average remaining lease term - operating leases |
| |||
Weighted-average discount rate - finance leases |
| |||
Weighted-average discount rate - operating leases |
|
The following is a summary of certain information related to the lease costs for finance and operating leases:
Three months ended | Six months ended | |||||||||||
(in thousands) |
| June 30, | June 30, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Lease cost: |
|
| ||||||||||
Finance lease cost: |
|
| ||||||||||
Amortization of right-of-use assets | $ | | $ | | $ | | $ | | ||||
Interest on lease liabilities |
| | | | | |||||||
Operating lease cost |
| | | | | |||||||
Short-term lease cost |
| | | | | |||||||
Variable lease costs |
| | | | | |||||||
Total lease cost | $ | | $ | | $ | | $ | |
The following is a summary of other information and supplemental cash flow information related to finance and operating leases:
| Six months ended June 30, | |||||
(in thousands) |
| 2020 |
| 2019 | ||
Other information: | ||||||
Cash paid for amounts included in the measurement of lease liabilities |
|
| ||||
Operating cash flows from operating leases | $ | | $ | | ||
Right-of-use asset obtained in exchange for new operating lease obligations | $ | | $ | |
12
The future undiscounted minimum lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s consolidated balance sheets, under financial leases, less interest, and under operating leases, less imputed interest, as of June 30, 2020 were as follows:
| Finance |
| Operating |
| Total | ||||
| Lease | Lease | Lease | ||||||
(in thousands) | Obligations | Obligations | Obligations | ||||||
| |||||||||
Remainder of 2020 | $ | | $ | | $ | | |||
2021 |
| |
| |
| | |||
2022 |
| |
| |
| | |||
2023 |
| |
| |
| | |||
2024 | | | | ||||||
2025 | | | | ||||||
Thereafter |
| |
| |
| | |||
Total minimum lease payments |
| |
| |
| | |||
Financing component |
| ( |
| ( |
| ( | |||
Net present value of minimum lease payments |
| |
| |
| | |||
Less: current portion of finance and operating lease obligations |
| ( |
| ( |
| ( | |||
Long-term finance and operating lease obligations | $ | | $ | | $ | |
The financing component for finance lease obligations represents the interest component of finance leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the lease payments to their present value.
Certain subsidiaries of the Company have operating leases for facilities from third party companies that are owned, in whole or part, by employees of the subsidiaries. The terms and rental rates of these leases are at market rental rates. As of June 30, 2020, the minimum lease payments required under these leases totaled $
5. Fair Value Measurements
The Company uses the three-tier hierarchy of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of availability in external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of June 30, 2020 and December 31, 2019, the Company determined that the carrying value of cash and cash equivalents approximated fair value based on Level 1 inputs. As of June 30, 2020, the fair values of the Company’s long-term debt and finance lease obligations were based on Level 2 inputs. As of December 31, 2019, the fair values of the Company's long-term debt and finance lease obligations were based on Level 2 inputs. The Company’s long-term debt was based on variable and fixed interest rates at June 30, 2020 and December 31, 2019, for new issues with similar remaining maturities, and approximated carrying value. In addition, based on borrowing rates currently available to the Company for borrowings with similar terms, the carrying values of the Company’s finance lease obligations also approximated fair value.
13
6. Debt
The table below reflects the Company’s total debt, including borrowings under its credit agreement and master loan agreements for equipment notes:
|
|
|
|
| Outstanding |
| Outstanding | |||||||
Balance as of | Balance as of | |||||||||||||
Stated Interest | Payment | Term | June 30, | December 31, | ||||||||||
(dollar amounts in thousands) | Inception Date | Rate (per annum) | Frequency | (years) | 2020 | 2019 | ||||||||
| ||||||||||||||
Credit Agreement |
|
|
|
|
|
|
|
|
|
|
|
| ||
Revolving loans |
| 9/13/2019 |
| Variable |
| Variable |
| $ | | $ | | |||
|
|
|
|
|
|
|
|
|
| |||||
Equipment Notes |
|
|
|
|
|
|
|
|
|
| ||||
Equipment Note 1 |
| 9/28/2018 |
|
| Semi-annual |
|
| |
| | ||||
Equipment Note 2 |
| 9/28/2018 |
|
| Semi-annual |
|
| |
| | ||||
Equipment Note 3 |
| 12/31/2018 |
| Semi-annual |
|
| |
| | |||||
Equipment Note 4 |
| 12/31/2018 |
| Semi-annual |
|
| |
| | |||||
Equipment Note 5 |
| 12/31/2018 |
| Semi-annual |
|
| |
| | |||||
Equipment Note 6 |
| 6/25/2019 |
| Semi-annual |
|
| |
| | |||||
Equipment Note 7 |
| 6/24/2019 |
| Semi-annual |
|
| |
| | |||||
Equipment Note 8 | 12/27/2019 | Semi-annual | | | ||||||||||
Equipment Note 9 | 12/24/2019 | Semi-annual | | | ||||||||||
|
|
|
|
|
|
|
|
| |
| | |||
Total debt |
|
|
|
|
|
|
|
|
| |
| | ||
Less: current portion of long-term debt |
|
|
|
|
|
|
|
|
| ( |
| ( | ||
Long-term debt |
|
|
|
|
|
|
|
| $ | | $ | |
Credit Agreement
On September 13, 2019, the Company entered into a
Amounts borrowed under the Credit Agreement bear interest, at the Company’s option, at a rate equal to either (1) the Alternate Base Rate (as defined in the Credit Agreement), plus an applicable margin ranging from
14
for performance letters of credit, based on the Company’s consolidated Leverage Ratio. The Company is subject to a commitment fee of
Under the Credit Agreement, the Company is subject to certain financial covenants and must maintain a maximum consolidated Leverage Ratio of
As of June 30, 2020, the Company had letters of credit outstanding under the Facility of approximately $
As of December 31, 2019, the Company had letters of credit outstanding under the Facility of approximately $
The Company had remaining deferred debt issuance costs totaling $
Equipment Notes
The Company has entered into Master Equipment Loan and Security Agreements (the “Master Loan Agreements”) with multiple banks. The Master Loan Agreements may be used for the financing of equipment between the Company and the lending banks pursuant to one or more equipment notes ("Equipment Note"). Each Equipment Note executed under the Master Loan Agreements constitutes a separate, distinct and independent financing of equipment and a contractual obligation of the Company, which may contain prepayment clauses.
As of June 30, 2020, the Company had
|
| Future | |
| Equipment Notes | ||
(in thousands) | Principal Payments | ||
| |||
Remainder of 2020 | $ | | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 | | ||
Thereafter |
| | |
Total future principal payments | $ | | |
Less: current portion of equipment notes |
| ( | |
Long-term principal obligations | $ | |
15
7. Revenue Recognition
Disaggregation of Revenue
A majority of the Company’s revenues are earned through contracts with customers that normally provide for payment upon completion of specified work or units of work as identified in the contract. Although there is considerable variation in the terms of these contracts, they are primarily structured as fixed-price contracts, under which the Company agrees to do the entire project for a fixed amount, or unit-price contracts, under which the Company agrees to do the work at a fixed price per unit of work as specified in the contract. The Company also enters into time-and-equipment and time-and-materials contracts under which the Company is paid for labor and equipment at negotiated hourly billing rates and for other expenses, including materials, as incurred at rates agreed to in the contract. Finally, the Company sometimes enters into cost-plus contracts, where the Company is paid for costs plus a negotiated margin. On occasion, time-and-equipment, time-and-materials and cost-plus contracts include a guaranteed not-to-exceed maximum price.
Historically, fixed-price and unit-price contracts have had the highest potential margins; however, they have had a greater risk in terms of profitability because cost overruns may not be recoverable. Time-and-equipment, time-and-materials and cost-plus contracts have historically had less margin upside, but generally have had a lower risk of cost overruns. The Company also provides services under master service agreements (“MSAs”) and other variable-term service agreements. MSAs normally cover maintenance, upgrade and extension services, as well as new construction. Work performed under MSAs is typically billed on a unit-price, time-and-materials or time-and-equipment basis. MSAs are typically
The components of the Company’s revenue by contract type for the three and six months ended June 30, 2020 and 2019 were as follows:
| Three months ended June 30, 2020 |
| ||||||||||||||
| T&D | C&I | Total |
| ||||||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||
Fixed price | $ | | | % | $ | | | % | $ | | | % | ||||
Unit price |
| |
| |
| |
| |
| |
| | ||||
T&E |
| |
| |
| |
| |
| |
| | ||||
Other |
| |
| |
| |
| |
| |
| | ||||
$ | |
| | % | $ | |
| | % | $ | |
| | % |
| Three months ended June 30, 2019 | |||||||||||||||
T&D | C&I | Total |
| |||||||||||||
(dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent |
| |||||||||
Fixed price | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Unit price |
| |
| |
| |
| |
| |
| | ||||
T&E |
| |
| |
| |
| |
| |
| | ||||
Other |
| |
| |
| |
| |
| |
| | ||||
$ | |
| | % | $ | |
| | % | $ | |
| | % |
16
The components of the Company’s revenue by contract type for the six months ended June 30, 2020 and 2019 were as follows:
Six months ended June 30, 2020 |
| |||||||||||||||
T&D | C&I | Total |
| |||||||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent | ||||
Fixed price | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Unit price |
| |
| |
| |
| |
| |
| | ||||
T&E |
| |
| |
| |
| |
| |
| | ||||
Other |
| |
| |
| |
| |
| |
| | ||||
$ | |
| | % | $ | |
| | % | $ | |
| | % |
Six months ended June 30, 2019 |
| |||||||||||||||
T&D | C&I | Total |
| |||||||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent | ||||
Fixed price | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Unit price |
| |
| |
| |
| |
| |
| | ||||
T&E |
| |
| |
| |
| |
| |
| | ||||
Other |
| |
| |
| |
| |
| |
| | ||||
$ | |
| | % | $ | |
| | % | $ | |
| | % |
The components of the Company’s revenue by market type for the three months ended June 30, 2020 and 2019 were as follows:
| Three months ended June 30, 2020 | Three months ended June 30, 2019 | ||||||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Segment |
| Amount |
| Percent |
| Segment | ||
Transmission | $ | | | % | T&D | $ | | | % | T&D | ||||
Distribution |
| |
| |
| T&D |
| |
| |
| T&D | ||
Electrical construction |
| |
| |
| C&I |
| |
| |
| C&I | ||
Total revenue | $ | |
| | % |
| $ | |
| | % |
|
The components of the Company’s revenue by market type for the six months ended June 30, 2020 and 2019 were as follows:
Six months ended June 30, 2020 | Six months ended June 30, 2019 | |||||||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Segment |
| Amount |
| Percent |
| Segment | ||
Transmission | $ | |
| | % | T&D | $ | |
| | % | T&D | ||
Distribution |
| |
| |
| T&D |
| |
| |
| T&D | ||
Electrical construction |
| |
| |
| C&I |
| |
| |
| C&I | ||
Total revenue | $ | |
| | % |
| $ | |
| | % |
|
Remaining Performance Obligations
As of June 30, 2020, the Company had $
17
The following table summarizes the amount of remaining performance obligations as of June 30, 2020 that the Company expects to be realized and the amount of the remaining performance obligations that the Company reasonably estimates will not be recognized within the next twelve months.
Remaining Performance Obligations at June 30, 2020 | |||||||||
| Amount estimated to not be | Total at | |||||||
(in thousands) |
| Total |
| recognized within 12 months |
| December 31, 2019 | |||
| |||||||||
T&D | $ | | $ | | $ | | |||
C&I |
| |
| |
| | |||
Total | $ | | $ | | $ | |
The Company expects a vast majority of the remaining performance obligations to be recognized within
- months, ’s performance is not always under its control. Additionally, the difference between the remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s MSAs under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to backlog is provided in Item . “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”8. Income Taxes
The U.S. federal statutory tax rate was
The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three and six months ended June 30, 2020 was primarily due to state income taxes and foreign earnings and the associated impact of the global intangible low tax income (“GILTI”).
The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three and six months ended June 30, 2019, was primarily due to state income taxes offset by the impact of the Company’s noncontrolling interest.
The Company had unrecognized tax benefits of approximately $
The Company’s policy is to recognize interest and penalties related to income tax liabilities as a component of income tax expense in the consolidated statements of operations. The amount of interest and penalties charged to income tax expense related to unrecognized tax benefits was not significant for the three and six months ended June 30, 2020 and 2019.
The Company is subject to taxation in various jurisdictions. The Company’s 2017 and 2018 tax returns are subject to examination by U.S. federal authorities. The Company’s tax returns are subject to examination by various state authorities for the years 2015 through 2018.
9. Commitments and Contingencies
Purchase Commitments
As of June 30, 2020, the Company had approximately $
18
Insurance and Claims Accruals
The Company carries insurance policies, which are subject to certain deductibles, for workers’ compensation, general liability, automobile liability and other insurance coverage. The deductible per occurrence for each line of coverage is up to $
The insurance and claims accruals are based on known facts, actuarial estimates and historical trends. While recorded accruals are based on the ultimate liability, which includes amounts in excess of the deductible, a corresponding receivable for amounts in excess of the deductible is included in current and long-term assets in the consolidated balance sheets.
Performance and Payment Bonds and Parent Guarantees
In certain circumstances, the Company is required to provide performance and payment bonds in connection with its future performance on certain contractual commitments. The Company has indemnified its sureties for any expenses paid out under these bonds. As of June 30, 2020, an aggregate of approximately $
From time to time, the Company guarantees the obligations of wholly owned subsidiaries, including obligations under certain contracts with customers, certain lease agreements, and, in some states, obligations in connection with obtaining contractors’ licenses. Additionally, from time to time the Company is required to post letters of credit to guarantee the obligations of wholly owned subsidiaries, which reduces the borrowing availability under the Facility.
Indemnities
From time to time, pursuant to its service arrangements, the Company indemnifies its customers for claims related to the services it provides under those service arrangements. These indemnification obligations may subject the Company to indemnity claims and liabilities and related litigation. The Company is not aware of any material unrecorded liabilities for asserted claims in connection with these indemnification obligations.
Collective Bargaining Agreements
Many of the Company’s subsidiaries’ craft labor employees are covered by collective bargaining agreements. The agreements require the subsidiaries to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If a subsidiary withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the subsidiary could incur liabilities for additional contributions related to these plans. Although the Company has been informed that the underfunding of some of the multi-employer pension plans to which its subsidiaries contribute have been classified as “critical” status, the Company is not currently aware of any potential liabilities related to this issue.
Litigation and Other Legal Matters
The Company is from time-to-time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.
The Company is routinely subject to other civil claims, litigation and arbitration, and regulatory investigations arising in the ordinary course of our business, as well as in respect of our divested businesses. These claims, lawsuits and other proceedings include claims related to the Company’s current services and operations, as well as our historic operations.
19
With respect to all such lawsuits, claims and proceedings, the Company records reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, separately or in the aggregate, would be expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
10. Stock-Based Compensation
The Company maintains
Ordinarily the number of restricted stock awards and ROIC-based performance share awards are determined by dividing the amount of the equity compensation award allocated to each award type, by the closing price of the Company’s common stock on the date of the grant. However, as a result of the negative impact of the COVID-19 pandemic on the Company’s stock price during late March and early April of 2020, the Company’s compensation committee elected to utilize the Company's average closing stock price during the last
The Company has outstanding grants of time-vested stock awards in the form of restricted stock awards and restricted stock units. During the six months ended June 30, 2020, the Company granted
During the six months ended June 30, 2020, the Company granted
During the six months ended June 30, 2020, plan participants exercised options to purchase
The Company recognizes stock-based compensation expense related to restricted stock awards and restricted stock units based on the grant date fair value, which was the closing price of the Company’s stock on the date of grant. The fair value is expensed over the service period, which is generally
20
For performance awards, the Company recognizes stock-based compensation expense based on the grant date fair value of the award. The fair value of internal metric-based performance awards is determined by the closing stock price of the Company’s common stock on the date of the grant. The fair value of market-based performance awards is computed using a Monte Carlo simulation. Performance awards are expensed over the service period of approximately
11. Segment Information
MYR Group is a holding company of specialty contractors serving electrical utility infrastructure and commercial construction markets in the United States and western Canada. The Company has
Transmission and Distribution: The T&D segment provides a broad range of services on electric transmission and distribution networks and substation facilities which include design, engineering, procurement, construction, upgrade, maintenance and repair services with a particular focus on construction, maintenance and repair. T&D services include the construction and maintenance of high voltage transmission lines, substations and lower voltage underground and overhead distribution systems. The T&D segment also provides emergency restoration services in response to hurricane, ice or other storm-related damage. T&D customers include investor-owned utilities, cooperatives, private developers, government-funded utilities, independent power producers, independent transmission companies, industrial facility owners and other contractors.
Commercial and Industrial: The C&I segment provides services such as the design, installation, maintenance and repair of commercial and industrial wiring, installation of traffic networks and the installation of bridge, roadway and tunnel lighting. Typical C&I contracts cover electrical contracting services for airports, hospitals, data centers, hotels, stadiums, convention centers, renewable energy projects, manufacturing plants, processing facilities, waste-water treatment facilities, mining facilities and transportation control and management systems. The C&I segment generally provides electric construction and maintenance services as a subcontractor to general contractors in the C&I industry, but also contracts directly with facility owners. The C&I segment has a diverse customer base with many long-standing relationships.
21
The information in the following table is derived from the segment’s internal financial reports used for corporate management purposes:
| Three months ended | Six months ended | ||||||||
| June 30, | June 30, | ||||||||
(in thousands) |
| 2020 | 2019 |
| 2020 | 2019 | ||||
| ||||||||||
Contract revenues: |
|
|
|
| ||||||
T&D | $ | | $ | | $ | | $ | | ||
C&I |
| |
| |
| |
| | ||
$ | | $ | | $ | | $ | | |||
Income from operations: |
|
|
|
|
|
|
|
| ||
T&D | $ | | $ | | $ | | $ | | ||
C&I |
| |
| |
| |
| | ||
General Corporate |
| ( |
| ( |
| ( |
| ( | ||
$ | | $ | | $ | | $ | |
For the three and six months ended June 30, 2020, contract revenues attributable to the Company’s Canadian operations were $
12. Noncontrolling Interest
On July 2, 2018, through the acquisition of certain assets of the Huen Electric, Inc., Huen Electric New Jersey Inc., and Huen New York, Inc. (collectively, the “Huen Companies”), the Company became the majority controlling interest in a joint venture. As a result, the Company has consolidated the carrying value of the joint ventures’ assets and liabilities and results of operations in the Company’s consolidated financial statements. The equity owned by the other joint venture partners has been recorded as noncontrolling interest in the Company’s consolidated balance sheets, consolidated statements of stockholders’ equity, and their portions, if material, of net income (loss) and other comprehensive income shown as net income or other comprehensive income attributable to noncontrolling interest in the Company’s consolidated statements of operations and other comprehensive income. Additionally, the joint venture associated with the Company’s noncontrolling interest is a partnership, and consequently, the tax effect of only the Company’s share of the joint venture income is recognized by the Company.
The acquired joint venture made
13. Earnings Per Share
The Company computes earnings per share attributable to MYR Group Inc. using the treasury stock method. Under the treasury stock method, basic earnings per share attributable to MYR Group Inc. are computed by dividing net income available to stockholders by the weighted average number of common shares outstanding during the period, and diluted earnings per share are computed by dividing net income available to stockholders by the weighted average number of common shares outstanding during the period plus all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalent would be anti-dilutive.
22
Net income attributable to MYR Group Inc. and the weighted average number of common shares used to compute basic and diluted earnings per share were as follows:
| Three months ended | Six months ended | ||||||||||
| June 30, | June 30, | ||||||||||
(in thousands, except per share data) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| ||||||||||||
Numerator: |
|
|
|
| ||||||||
Net income attributable to MYR Group Inc. | $ | | $ | | $ | | $ | | ||||
|
|
|
|
|
| |||||||
Denominator: |
|
|
|
|
|
| ||||||
Weighted average common shares outstanding |
| |
| |
| |
| | ||||
Weighted average dilutive securities |
| |
| |
| |
| | ||||
Weighted average common shares outstanding, diluted |
| |
| |
| |
| | ||||
|
|
|
|
|
|
| ||||||
Income per common share attributable to MYR Group Inc.: |
|
|
|
|
|
| ||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | |
For the three and six months ended June 30, 2020 and 2019, certain common stock equivalents were excluded from the calculation of dilutive securities because their inclusion would either have been anti-dilutive or, for stock options, the exercise prices of those stock options were greater than the average market price of the Company’s common stock for the period. All of the Company’s unvested time-vested stock awards were included in the computation of weighted average dilutive securities.
The following table summarizes the shares of common stock underlying the Company’s unexercised stock options, unvested time-vested stock awards and unvested performance awards that were excluded from the calculation of dilutive securities:
| Three months ended | Six months ended | ||||||
| June 30, | June 30, | ||||||
(in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
Time-vested stock awards | | | | | ||||
Performance awards |
| |
| |
| |
| |
23
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and with our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”). In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed herein under the captions “Cautionary Statement Concerning Forward-Looking Statements and Information” and “Risk Factors,” as well as in the 2019 Annual Report. We assume no obligation to update any of these forward-looking statements.
Overview and Outlook
We are a holding company of specialty electrical construction service providers that was established through the merger of long-standing specialty contractors. Through our subsidiaries, we serve the electric utility infrastructure, commercial and industrial construction markets. We manage and report our operations through two electrical contracting service segments: Transmission and Distribution (“T&D”) and Commercial and Industrial (“C&I”).
We have operated in the transmission and distribution industry since 1891. We are one of the largest contractors servicing the T&D sector of the electric utility industry in the United States and provide T&D services in western Canada. Our T&D customers include many of the leading companies in the industry. We have operated in the commercial and industrial industry since 1912. We are one of the largest electrical contractors servicing the C&I industry in the United States and in western Canada. Our C&I customers include facility owners and general contractors.
We believe that we have a number of competitive advantages in both of our segments, including our project management team, skilled workforce, extensive centralized fleet, proven safety performance and reputation for timely completion of quality work that allows us to compete favorably in our markets. In addition, we believe that we are better capitalized than some of our competitors, which provides us with valuable flexibility to take on additional and more complex projects.
The current COVID-19 pandemic has had a significant impact on the global economy, including the US and Canadian economies, during the first and second quarters of 2020. As the situation continues to evolve, the Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our customers, subcontractors, suppliers, vendors and employees. The COVID-19 pandemic caused a slowdown of our projects due to specific state, local, municipal and customer mandated stay-at-home orders and new project requirements that were established to protect construction workers and the general public, most of which impacted our C&I segment in the second quarter of 2020. Although the majority of stay-at-home orders were phased-out at the end of the second quarter, we are still experiencing impacts associated with the COVID-19 project specific protocols. We expect the project specific requirements to remain in place which will continue to impact project schedules and workflow going forward.
The Company is unable to predict the ultimate impact that COVID-19 will have on our business, employees, liquidity, financial condition, results of operations and cash flows. Most of the Company’s operations are considered critical and essential businesses, making our projects generally exempt from stay-at-home or similar orders in certain parts of the United States and western Canada. However, if this pandemic persists for a prolonged period of time our business could be more significantly impacted as a result of prolonged unfavorable economic conditions. In addition, in response to the pandemic and related mitigation measures, the Company began implementing changes in March 2020 in an effort to protect our employees and customers, and to support appropriate health and safety protocols, including implementing remote, alternative and flexible work arrangements, where possible. The situation surrounding COVID-19 remains fluid, and if disruptions do arise, they could materially adversely impact our business. The key estimates that could potentially be impacted include estimates of costs to complete contracts, the recoverability of goodwill and intangibles and allowance for doubtful accounts.
24
We had consolidated revenues for the six months ended June 30, 2020 of $1.0 billion, of which 52.0% was attributable to our T&D customers and 48.0% was attributable to our C&I customers. Our consolidated revenues for the six months ended June 30, 2019 were $916.9 million. For the six months ended June 30, 2020, our net income attributable to MYR Group Inc. and EBITDA(1) were $23.3 million and $58.9 million, respectively, compared to $14.6 million and $41.5 million, respectively, for the six months ended June 30, 2019.
We believe there is an ongoing need for utilities to sustain investment in their transmission systems to improve reliability, reduce congestion and connect to new sources of renewable generation. Consequently, we believe we will continue to see significant bidding activity on large transmission projects over the next two years. The timing of multi-year transmission project awards and substantial construction activity is difficult to predict due to regulatory requirements and the permitting needed to commence construction. Significant construction on any large, multi-year projects awarded in 2020 will not likely occur before 2021. Bidding and construction activity for small to medium-size transmission projects and upgrades remains steady, and we expect this trend to continue, primarily due to reliability and economic drivers. However, in light of the current COVID-19 environment, we believe there may be a slowdown of construction activity in the transmission market in 2020, the recovery of which will be dependent upon the pace and timing of the United States recovery from the COVID-19 pandemic.
Because of reduced spending by United States utilities on their distribution systems for several years, we believe there is a need for sustained investment by utilities on their distribution systems to properly maintain or meet reliability requirements. We believe the increased hurricane activity over the past several years and recent destruction caused by wildfires will cause a push to strengthen utility distribution systems against catastrophic damage. Several industry and market trends are also prompting customers in the electric utility industry to seek outsourcing partners rather than performing projects internally. These trends include an aging electric utility workforce, increasing costs and staffing constraints. We believe electric utility employee retirements could increase with further economic recovery, which may result in an increase in outsourcing opportunities. We expect to see an incremental increase in distribution opportunities in the United States in 2021, however, in light of the current COVID-19 environment we believe there may be a slowdown of construction activity in distribution systems in 2020, the recovery of which will be dependent upon the pace and timing of the United States recovery from the COVID-19 pandemic.
Amid the current COVID-19 pandemic, we expect C&I bidding opportunities to be impacted and market uncertainty could contribute to an overall deceleration in projects coming out to bid. Recovery through the balance of the year will be heavily dependent on overall economic recovery. We are hopeful that the various approved stimulus packages provide greater opportunity and are encouraged by the possible approval of a long-awaited infrastructure bill. We believe that the primary markets we serve may be somewhat less vulnerable to economic slowing, such as health care, transportation, data centers, warehousing, renewable energy and water projects. In addition, many analysts are predicting increased spending in these markets as the US and Canadian societies change their post pandemic behavior. The small project market could experience a greater slow-down while owners focus their efforts on dealing with the pandemic. Many signs indicate that the service industry and small project market could quickly rebound later in the year as pent-up demand will need to be addressed.
In addition, the United States has experienced a decade of privately funded economic expansion which has challenged the capacity of public water and transportation infrastructure forcing states and municipalities to seek creative means to fund needed expansion. We believe the need for expanding public infrastructure will offer opportunity in our C&I segment for several years.
We expect the long-term growth in our C&I segment to generally track the economic growth of the regions we serve. We also expect to see increased bidding opportunities in the new C&I markets we recently entered through strategic acquisitions and organic expansions.
We strive to maintain our status as a preferred provider to our T&D and C&I customers. In an effort to support our growth strategy and maximize stockholder returns, we seek to efficiently manage our capital. We continue to
(1) | EBITDA is a non-GAAP measure. Refer to “Non-GAAP Measure—EBITDA” for a discussion of this measure. |
25
implement strategies that further expand our capabilities and allow opportunities to provide prudent capital returns. On July 15, 2019, we completed the acquisition of substantially all the assets of CSI Electrical Contractors, Inc. (“CSI”), which expanded our C&I operations in California. The total consideration was approximately $80.7 million, funded through borrowings under our credit facility. We ended the second quarter of 2020 with $280.2 million available under our credit facility. We believe that our financial position, positive cash flows and other operational strengths will enable us to manage the current challenges and uncertainties in the markets we serve, including new challenges and uncertainties associated with the COVID-19 pandemic, and give us the flexibility to successfully execute our strategies. In light of the uncertainties around the economic impacts from the COVID-19 pandemic, we are focused on controlling our costs and capital expenditures to preserve our ability to continue to fund our operations; however, we continue to invest in developing key management and craft personnel in both our T&D and C&I markets and in procuring the specific specialty equipment and tooling needed to win and execute projects of all sizes and complexity.
Backlog
We refer to our estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue we have recognized under such contracts, as “backlog.” A customer’s intention to award us work under a fixed-price contract is not included in backlog unless there is an actual written award to perform a specific scope of work at specific terms and pricing. For many of our unit-price, time-and-equipment, time-and-materials and cost plus contracts, we only include projected revenue for a three-month period in the calculation of backlog, although these types of contracts are generally awarded as part of master service agreements that typically have a one-year to three-year duration from execution. Backlog may not accurately represent the revenues that we expect to realize during any particular period. Several factors, such as the timing of contract awards, the type and duration of contracts, and the mix of subcontractor and material costs in our projects, can impact our backlog at any point in time. Some of our revenue does not appear in our periodic backlog reporting because the award of the project, as well as the execution of the work, may all take place within the period. Our backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Backlog should not be relied upon as a stand-alone indicator of future events.
The difference between our backlog and remaining performance obligations is due to the exclusion of a portion of our master service agreements under certain contract types from our remaining performance obligations as these contracts can be canceled for convenience at any time by us or the customer without considerable cost incurred by the customer. Our estimated backlog also includes our proportionate share of unconsolidated joint venture contracts. Additional information related to our remaining performance obligations is provided in Note 7–Revenue Recognition in the accompanying notes to our Consolidated Financial Statements.
Our backlog was $1.55 billion at June 30, 2020, compared to $1.50 billion at December 31, 2019 and $1.16 billion at June 30, 2019. Our backlog at June 30, 2020 increased 0.5% from March 31, 2020. Backlog in the T&D segment increased $64.0 million and C&I backlog decreased $55.6 million compared to March 31, 2020. Our backlog as of June 30, 2020 included our proportionate share of joint venture backlog totaling $28.7 million, compared to $42.1 million at March 31, 2020.
The following table summarizes that amount of our backlog that we believe to be firm as of the dates shown and the amount of our current backlog that we reasonably estimate will not be recognized within the next twelve months:
Backlog at June 30, 2020 | |||||||||
|
| Amount estimated to not |
| Total backlog at | |||||
(in thousands) | Total | be recognized within 12 months | December 31, 2019 | ||||||
T&D | $ | 520,803 | $ | 40,418 | $ | 469,898 | |||
C&I |
| 1,027,855 |
| 191,528 |
| 1,029,305 | |||
Total | $ | 1,548,658 | $ | 231,946 | $ | 1,499,203 |
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Project Bonding Requirements and Parent Guarantees
A substantial portion of our business requires performance and payment bonds or other means of financial assurance to secure contractual performance. These bonds are typically issued at the face value of the contract awarded. If we fail to perform or pay our subcontractors or vendors, the customer may demand that the surety provide services or make payments under the bond. In such a case, we would likely be required to reimburse the surety for any expenses or outlays it incurs. To date, we have not been required to make any reimbursements to our sureties for claims against our surety bonds. As of June 30, 2020, we had approximately $1.079 billion in original face amount of surety bonds outstanding. Our estimated remaining cost to complete these bonded projects was approximately $452.0 million as of June 30, 2020.
From time to time, we guarantee the obligations of our wholly owned subsidiaries, including obligations under certain contracts with customers, certain lease agreements, and, in some states, obligations in connection with obtaining contractors’ licenses. Additionally, from time to time, we are required to post letters of credit to guarantee the obligations of our wholly owned subsidiaries, which reduces the borrowing availability under our credit facility.
Consolidated Results of Operations
The following table sets forth selected consolidated statements of operations data and such data as a percentage of revenues for the periods indicated:
Three months ended |
| Six months ended | ||||||||||||||||||||
June 30, |
| June 30, | ||||||||||||||||||||
2020 | 2019 |
| 2020 | 2019 | ||||||||||||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
|
| Amount |
| Percent |
| Amount |
| Percent | |||||
Contract revenues | $ | 513,051 |
| 100.0 | % | $ | 448,776 |
| 100.0 | % | $ | 1,031,521 | 100.0 | % | $ | 916,870 | 100.0 | % | ||||
Contract costs |
| 451,746 |
| 88.1 |
| 405,613 |
| 90.4 | 908,584 | 88.1 | 830,831 | 90.6 | ||||||||||
Gross profit |
| 61,305 |
| 11.9 |
| 43,163 |
| 9.6 | 122,937 | 11.9 | 86,039 | 9.4 | ||||||||||
Selling, general and |
|
|
|
| ||||||||||||||||||
administrative expenses |
| 41,199 |
| 8.0 |
| 33,944 |
| 7.6 | 86,245 | 8.4 | 66,931 | 7.3 | ||||||||||
Amortization of intangible assets |
| 1,203 |
| 0.2 |
| 735 |
| 0.2 | 2,431 | 0.2 | 1,469 | 0.2 | ||||||||||
Gain on sale of property and |
|
|
|
| ||||||||||||||||||
equipment |
| (439) |
| (0.1) |
| (926) |
| (0.2) | (1,489) | (0.2) | (1,397) | (0.2) | ||||||||||
Income from operations |
| 19,342 |
| 3.8 |
| 9,410 |
| 2.0 | 35,750 | 3.5 | 19,036 | 2.1 | ||||||||||
Other income (expense) |
|
|
|
| ||||||||||||||||||
Interest income |
| 4 |
| — |
| — |
| — | 6 | — | — | — | ||||||||||
Interest expense |
| (1,315) |
| (0.3) |
| (1,168) |
| (0.3) | (2,828) | (0.3) | (2,373) | (0.3) | ||||||||||
Other income (expense), net |
| 321 |
| 0.1 |
| 582 |
| 0.1 | (574) | (0.1) | 1,328 | 0.1 | ||||||||||
Income before provision for income taxes |
| 18,352 |
| 3.6 |
| 8,824 |
| 1.8 | 32,354 | 3.1 | 17,991 | 1.9 | ||||||||||
Income tax expense |
| 4,967 |
| 1.0 |
| 2,466 |
| 0.4 | 9,037 | 0.8 | 5,013 | 0.5 | ||||||||||
Net income |
| 13,385 |
| 2.6 |
| 6,358 |
| 1.4 | 23,317 | 2.3 | 12,978 | 1.4 | ||||||||||
Less: net loss attributable to noncontrolling interest |
| — |
| — |
| (849) |
| (0.2) | — | — | (1,582) | (0.2) | ||||||||||
Net income attributable to MYR Group Inc. | $ | 13,385 |
| 2.6 | % | $ | 7,207 |
| 1.6 | % | $ | 23,317 | 2.3 | % | $ | 14,560 | 1.6 | % |
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenues. Revenues were $513.1 million for the three months ended June 30, 2020 compared to $448.8 million for the three months ended June 30, 2019. The increase of $64.3 million, or 14.3%, was primarily due to incremental revenues from the CSI acquisition, which was acquired in the third quarter of 2019, along with an increase in revenue on transmission and distribution projects. These increases were partially offset by a decrease in revenue on various-sized C&I projects, along with impacts related to the COVID-19 pandemic primarily associated with our C&I segment.
Gross margin. Gross margin was 11.9% for the three months ended June 30, 2020 compared to 9.6% for the three months ended June 30, 2019. The increase in gross margin was primarily due to better-than-anticipated productivity, an increase in higher margin work and favorable job close-outs on certain projects. These improvements were partially offset by decreases in revenue recognized on pending claims and change orders for which the Company is seeking reimbursement, and labor inefficiencies on certain projects. Additionally, gross margin during the three months ended June 30, 2019 was negatively impacted by inefficiencies associated with a joint venture project, that has since
27
been completed. Changes in estimates of gross profit on certain projects resulted in a gross margin increase of 0.2% and a decrease of 0.9% for the three months ended June 30, 2020 and 2019, respectively.
Gross profit. Gross profit was $61.3 million for the three months ended June 30, 2020 compared to $43.2 million for the three months ended June 30, 2019. The increase of $18.1 million, or 42.0% was due to higher revenues and margins.
Selling, general and administrative expenses. Selling, general and administrative expenses (“SG&A”) was $41.2 million for the three months ended June 30, 2020 compared to $33.9 million for the three months ended June 30, 2019. The period-over-period increase of $7.3 million was primarily due to the acquisition of CSI along with higher employee-related expenses to support the growth in our operations partially offset by a reversal of contingent compensation expense related to a prior acquisition.
Gain on sale of property and equipment. Gains from the sale of property and equipment for the three months ended June 30, 2020 were $0.4 million compared to $0.9 million for the three months ended June 30, 2019. Gains from the sale of property and equipment are attributable to routine sales of property and equipment no longer useful or valuable to our ongoing operations.
Interest expense. Interest expense was $1.3 million for the three months ended June 30, 2020 compared to $1.2 million for the three months ended June 30, 2019.
Other income (expense). Other income was $0.3 million for the three months ended June 30, 2020, primarily attributable to a contingent consideration related to margin guarantees on certain contracts associated with the acquisition of CSI recognized in the three months ended June 30, 2020.
Income tax expense. Income tax expense was $5.0 million for the three months ended June 30, 2020, with an effective tax rate of 27.1%, compared to the expense of $2.5 million for the three months ended June 30, 2019, with an effective tax rate of 27.9%. The decrease in the tax rate for the three months ended June 30, 2020 was primarily due to a decrease in our foreign taxes.
Net income attributable to MYR Group Inc. Net income attributable to MYR Group Inc. was $13.4 million for the three months ended June 30, 2020 compared to $7.2 million for the three months ended June 30, 2019. The increase was primarily due to the reasons stated earlier.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment, segment net sales as percentage of total net sales and segment operating income as a percentage of segment net sales:
Three months ended June 30, |
| ||||||||||
2020 | 2019 |
| |||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
| ||
Contract revenues: |
|
|
|
|
|
|
|
| |||
Transmission & Distribution | $ | 276,759 |
| 53.9 | % | $ | 255,910 |
| 57.0 | % | |
Commercial & Industrial |
| 236,292 |
| 46.1 |
| 192,866 |
| 43.0 | |||
Total | $ | 513,051 |
| 100.0 | % | $ | 448,776 |
| 100.0 | % | |
Operating income (loss): |
|
|
|
|
|
|
|
| |||
Transmission & Distribution | $ | 23,838 |
| 8.6 | % | $ | 16,050 |
| 6.3 | % | |
Commercial & Industrial |
| 8,958 |
| 3.8 |
| 4,512 |
| 2.3 | |||
Total |
| 32,796 |
| 6.4 |
| 20,562 |
| 4.6 | |||
General Corporate |
| (13,454) |
| (2.6) |
| (11,152) |
| (2.5) | |||
Consolidated | $ | 19,342 |
| 3.8 | % | $ | 9,410 |
| 2.1 | % |
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Transmission & Distribution
Revenues for our T&D segment for the three months ended June 30, 2020 were $276.8 million compared to $255.9 million for the three months ended June 30, 2019, an increase of $20.9 million, or 8.1%. The increase in revenue was primarily related to an increase in volume on both transmission and distribution projects.
Revenues from transmission projects represented 65.5% and 66.2% of T&D segment revenue for the three months ended June 30, 2020 and 2019, respectively. Additionally, for the three months ended June 30, 2020, measured by revenue in our T&D segment, we provided 45.7% of our T&D services under fixed-price contracts, as compared to 46.7% for the three months ended June 30, 2019.
Operating income for our T&D segment for the three months ended June 30, 2020 was $23.8 million, an increase of $7.7 million, or 48.5%, from the three months ended June 30, 2019. The increase in T&D operating income from the prior year was primarily due to higher revenues, better-than-anticipated productivity and an increase in higher margin work on certain projects. These increases were partially offset by decreases in revenue recognized on pending claims and change orders for which the Company is seeking reimbursement. As a percentage of revenues, operating income for our T&D segment was 8.6% for the three months ended June 30, 2020 compared to 6.3% for the three months ended June 30, 2019.
Commercial & Industrial
Revenues for our C&I segment for the three months ended June 30, 2020 were $236.3 million compared to $192.9 million for the three months ended June 30, 2019, an increase of $43.4 million, or 22.5%, primarily due to incremental revenues from the CSI acquisition, partially offset by a decrease due to the timing of activity on various-sized projects along with impacts related to the COVID-19 pandemic. Measured by revenue in our C&I segment, we provided 79.4% of our services under fixed-price contracts for the three months ended June 30, 2020, compared to 59.7% for the three months ended June 30, 2019.
Operating income for our C&I segment for the three months ended June 30, 2020 was $9.0 million, an increase of $4.5 million, over the three months ended June 30, 2019. The period-over-period increase in operating income was due to higher revenues, better-than-anticipated productivity and favorable job close-outs on certain projects. Operating income was also positively impacted by a reversal of contingent compensation expense related to a prior acquisition. These increases were partially offset by labor inefficiencies on certain projects and decreases in revenue recognized on pending claims and change orders for which the Company is seeking reimbursement. As a percentage of revenues, operating income for our C&I segment was 3.8% for the three months ended June 30, 2020 compared to 2.3% for the three months ended June 30, 2019.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenues. Revenues were $1.0 billion for the six months ended June 30, 2020 compared to $916.9 million for the six months ended June 30, 2019. The increase of $114.6 million, or 12.5%, was primarily due to incremental revenues from the CSI acquisition, partially offset by a decrease due to the timing of activity on various-sized C&I projects, along with impacts related to the COVID-19 pandemic primarily associated with our C&I segment.
Gross margin. Gross margin was 11.9% for the six months ended June 30, 2020 compared to 9.4% for the six months ended June 30, 2019. The increase in gross margin was primarily due to better-than-anticipated productivity and an increase in higher margin work on certain projects. These increases were partially offset by decreases in revenue recognized on pending claims and change orders for which the Company is seeking reimbursement, labor inefficiencies on certain projects, and inclement weather experienced on certain projects. Additionally, gross margin during the six months ended June 30, 2019 was negatively impacted by inefficiencies associated with a joint venture project, that has since been completed. Changes in estimates of gross profit on certain projects resulted in gross margin decreases of 0.1% and 1.0% for the six months ended June 30, 2020 and 2019, respectively.
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Gross profit. Gross profit was $122.9 million for the six months ended June 30, 2020 compared to $86.0 million for the six months ended June 30, 2019, the increase of $36.9 million, or 42.9% was due to higher revenues and margins.
Selling, general and administrative expenses. SG&A was $86.2 million for the six months ended June 30, 2020 compared to $66.9 million for the six months ended June 30, 2019. The period-over-period increase of $19.3 million was primarily due to the acquisition of CSI along with higher employee-related expenses to support the growth in our operations partially offset by a reversal of contingent compensation expense related to a prior acquisition.
Gain on sale of property and equipment. Gains from the sale of property and equipment for the six months ended June 30, 2020 were $1.5 million compared to $1.4 million for the six months ended June 30, 2019. Gains from the sale of property and equipment are attributable to routine sales of property and equipment no longer useful or valuable to our ongoing operations.
Interest expense. Interest expense was $2.8 million for the six months ended June 30, 2020 compared to $2.4 million for the six months ended June 30, 2019. This increase was primarily attributable to increased borrowing related to the acquisition of CSI and an increase in our working capital needs to support higher volume, partially offset by a decrease in our weighted average interest rate during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.
Other income (expense). Other expense was $0.6 million for the six months ended June 30, 2020, primarily attributable to a contingent consideration related to margin guarantees on certain contracts associated with the acquisition of CSI recognized in the three months ended June 30, 2020. Other income was $1.3 million for the six months ended June 30, 2019.
Income tax expense. Income tax expense was $9.0 million for the six months ended June 30, 2020, with an effective tax rate of 27.9%, compared to the expense of $5.0 million for the six months ended June 30, 2019, with an effective tax rate of 27.9%.
Net income attributable to MYR Group Inc. Net income attributable to MYR Group Inc. was $23.3 million for the six months ended June 30, 2020 compared to $14.6 million for the six months ended June 30, 2020. The increase was primarily due to the reasons stated earlier.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment, segment net sales as percentage of total net sales and segment operating income as a percentage of segment net sales:
Six months ended June 30, |
| ||||||||||
2020 | 2019 |
| |||||||||
(dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
| ||
Contract revenues: |
|
|
|
|
|
|
|
| |||
Transmission & Distribution | $ | 536,029 |
| 52.0 | % | $ | 528,458 |
| 57.6 | % | |
Commercial & Industrial |
| 495,492 |
| 48.0 |
|
| 388,412 |
| 42.4 | ||
Total | $ | 1,031,521 |
| 100.0 | % | $ | 916,870 |
| 100.0 | % | |
Operating income (loss): |
|
|
|
|
| ||||||
Transmission & Distribution | $ | 41,802 |
| 7.8 | % | $ | 30,980 |
| 5.9 | % | |
Commercial & Industrial |
| 18,270 |
| 3.7 | % |
| 9,570 |
| 2.5 | % | |
Total |
| 60,072 |
| 5.8 | % |
| 40,550 |
| 4.4 | % | |
General Corporate |
| (24,322) |
| (2.3) |
|
| (21,514) |
| (2.3) | ||
Consolidated | $ | 35,750 |
| 3.5 | % | $ | 19,036 |
| 2.1 | % |
30
Transmission & Distribution
Revenues for our T&D segment for the six months ended June 30, 2020 were $536.0 million compared to $528.5 million for the six months ended June 30, 2019, an increase of $7.5 million, or 1.4%. The increase in revenue was primarily related to an increase in revenue on distribution projects, partially offset by a decrease in revenue on transmission projects.
Revenues from transmission projects represented 65.8% and 67.6% of T&D segment revenue for the six months ended June 30, 2020 and 2019, respectively. Additionally, for the six months ended June 30, 2020, measured by revenue in our T&D segment, we provided 46.1% of our T&D services under fixed-price contracts, as compared to 47.9% for the six months ended June 30, 2019.
Operating income for our T&D segment for the six months ended June 30, 2020 was $41.8 million, an increase of $10.8 million, or 34.9%, from the six months ended June 30, 2019. The increase in T&D operating income from the prior year was primarily due to better-than-anticipated productivity, cost improvements and an increase in higher margin work on certain projects, partially offset by inclement weather experienced on certain projects, a decrease in revenue recognized on pending claims and change orders for which the Company is seeking reimbursement, and labor and material inefficiencies. As a percentage of revenues, operating income for our T&D segment was 7.8% for the six months ended June 30, 2020 compared to 5.9% for the six months ended June 30, 2019.
Commercial & Industrial
Revenues for our C&I segment for the six months ended June 30, 2020 were $495.5 million compared to $388.4 million for the six months ended June 30, 2019, an increase of $107.1 million, or 27.6%, primarily due to incremental revenues from the CSI acquisition, partially offset by a decrease due to the timing of activity on various-sized projects along with impacts related to the COVID-19 pandemic. Measured by revenue in our C&I segment, we provided 82.0% of our services under fixed-price contracts for the six months ended June 30, 2020, compared to 64.1% for the six months ended June 30, 2019.
Operating income for our C&I segment for the six months ended June 30, 2020 was $18.3 million, an increase of $8.7 million over the six months ended June 30, 2019. The period-over-period increase in operating income was primarily due to higher revenues and better-than-anticipated productivity on certain projects, partially offset by labor inefficiencies on certain projects, a decrease in revenue recognized on pending claims and change orders for which the Company is seeking reimbursement, along with amortization related to certain intangibles acquired with CSI. As a percentage of revenues, operating income for our C&I segment was 3.7% for the six months ended June 30, 2020 compared to 2.5% for the six months ended June 30, 2019.
Non-GAAP Measure—EBITDA
We define EBITDA, a performance measure used by management, as net income attributable to MYR Group Inc. plus net income from noncontrolling interest, interest expense net of interest income, provision for income taxes and depreciation and amortization. EBITDA, a non-GAAP financial measure, does not purport to be an alternative to net income attributable to MYR Group Inc. as a measure of operating performance or to net cash flows provided by operating activities as a measure of liquidity. We believe that EBITDA is useful to investors and other external users of our Consolidated Financial Statements in evaluating our operating performance and cash flow because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, useful lives placed on assets, capital structure and the method by which assets were acquired. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly-titled measures of other companies. We use, and we believe investors benefit from, the presentation of EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations.
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Using EBITDA as a performance measure has material limitations as compared to net income, or other financial measures as defined under accounting principles generally accepted in the United States of America (“U.S. GAAP”), as it excludes certain recurring items, which may be meaningful to investors. EBITDA excludes interest expense net of interest income; however, as we have borrowed money to finance transactions and operations, or invested available cash to generate interest income, interest expense and interest income are elements of our cost structure and can affect our ability to generate revenue and returns for our stockholders. Further, EBITDA excludes depreciation and amortization; however, as we use capital and intangible assets to generate revenues, depreciation and amortization are a necessary element of our costs and ability to generate revenue. Finally, EBITDA excludes income taxes; however, as we are organized as a corporation, the payment of taxes is a necessary element of our operations. As a result of these exclusions from EBITDA, any measure that excludes interest expense net of interest income, depreciation and amortization and income taxes has material limitations as compared to net income. When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA to net income in each period, to allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after-tax basis. Using both EBITDA and net income to evaluate the business allows management and investors to (a) assess our relative performance against our competitors and (b) monitor our capacity to generate returns for our stockholders.
The following table provides a reconciliation of net income to EBITDA:
Three months ended |
| Six months ended | ||||||||||
June 30, |
| June 30, | ||||||||||
(in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net income attributable to MYR Group Inc. | $ | 13,385 | $ | 7,207 | $ | 23,317 | $ | 14,560 | ||||
Net loss attributable to noncontrolling interests |
| — |
| (849) | — | (1,582) | ||||||
Net income |
| 13,385 |
| 6,358 | 23,317 | 12,978 | ||||||
Add: |
|
| ||||||||||
Interest expense, net |
| 1,311 |
| 1,168 | 2,822 | 2,373 | ||||||
Income tax expense |
| 4,967 |
| 2,466 | 9,037 | 5,013 | ||||||
Depreciation & amortization |
| 11,886 |
| 10,634 | 23,755 | 21,183 | ||||||
EBITDA | $ | 31,549 | $ | 20,626 | $ | 58,931 | $ | 41,547 |
We also use EBITDA as a liquidity measure. Certain material covenants contained within our credit agreement (the “Credit Agreement”) are based on EBITDA with certain additional adjustments. Non-compliance with these financial covenants under the Credit Agreement — our interest coverage ratio which is defined in the Credit Agreement as Consolidated EBITDA (as defined in the Credit Agreement) divided by interest expense (as defined in the Credit Agreement) and our leverage ratio, which is defined in the Credit Agreement as Consolidated Total Indebtedness (as defined in the Credit Agreement), divided by Consolidated EBITDA (as defined in the Credit Agreement) — could result in our lenders requiring us to immediately repay all amounts borrowed. If we anticipated a potential covenant violation, we would seek relief from our lenders, likely causing us to incur additional cost, and such relief might not be available, or if available, might not be on terms as favorable as those in the Credit Agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under the Credit Agreement from engaging in certain activities, such as incurring additional indebtedness, making certain payments, and acquiring or disposing of assets. Based on the information above, management believes that the presentation of EBITDA as a liquidity measure is useful to investors and relevant to their assessment of our capacity to service or incur debt, fund capital expenditures, finance acquisitions and expand our operations.
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The following table provides a reconciliation of net cash flows provided by operating activities to EBITDA:
Three months ended |
| Six months ended | ||||||||||
June 30, |
| June 30, | ||||||||||
(in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Provided By Operating Activities: |
|
|
|
| ||||||||
Net cash flows provided by operating activities | $ | 62,680 | $ | 15,604 | $ | 97,923 | $ | 7,399 | ||||
Add/(subtract): |
|
| ||||||||||
Changes in operating assets and liabilities |
| (35,882) |
| 2,841 | (49,363) | 28,324 | ||||||
Adjustments to reconcile net income to net cash flows provided by operating activities |
| (13,413) |
| (12,087) | (25,243) | (22,745) | ||||||
Depreciation & amortization |
| 11,886 |
| 10,634 | 23,755 | 21,183 | ||||||
Provision for income taxes |
| 4,967 |
| 2,466 | 9,037 | 5,013 | ||||||
Interest expense, net |
| 1,311 |
| 1,168 | 2,822 | 2,373 | ||||||
EBITDA | $ | 31,549 | $ | 20,626 | $ | 58,931 | $ | 41,547 |
Liquidity and Capital Resources
As of June 30, 2020, we had working capital of $191.4 million. We define working capital as current assets less current liabilities. During the six months ended June 30, 2020, operating activities of our business provided net cash of $97.9 million, compared to $7.4 million of cash provided for the six months ended June 30, 2019. Cash flow from operations is primarily influenced by demand for our services, operating margins, timing of contract performance and the type of services we provide to our customers. The $90.5 million year-over-year increase in cash provided by operating activities was primarily due to favorable net changes in operating assets and liabilities of $77.7 million and increases in net income of $10.3 million and depreciation and amortization of $2.6 million. The favorable change in operating assets and liabilities was primarily due to the net favorable year-over-year increases in various working capital accounts that relate primarily to construction activities (accounts receivable, contract assets, accounts payable and contract liabilities) of $40.1 million and a favorable change of $27.6 million in other liabilities, of which $9.1 million is due to the timing of payroll and the related tax payments, which we have elected to defer under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The increase in cash provided by working capital accounts, primarily related to construction activities, was primarily due to higher collections of accounts receivable, partially offset by net increases in other working capital requirements needed to support our increased revenue.
In the six months ended June 30, 2020, we used net cash in investing activities of $15.3 million, consisting of $16.9 million for capital expenditures, partially offset by $1.6 million of proceeds from the sale of equipment.
In the six months ended June 30, 2020, financing activities used net cash of $84.8 million, consisting primarily of $70.4 million of repayments under our revolving line of credit, $13.4 million of repayments of principal obligations under equipment notes, $0.6 million of repayments of finance lease obligations and share repurchases of $0.4 million, all of which represented shares surrendered to satisfy tax obligations under our stock compensation programs during the six months ended June 30, 2020.
We anticipate that our borrowing availability of $280.2 million at June 30, 2020 under our revolving line of credit and future cash flow from operations will provide sufficient cash to enable us to meet our future operating needs, debt service requirements, capital expenditures, acquisition and joint venture opportunities, and any new challenges and uncertainties associated with the COVID-19 pandemic. Although we believe that we have adequate cash and borrowing capacity to meet our liquidity needs, any large projects or acquisitions may require additional capital. Additionally, in light of the uncertainties around the economic impacts from the COVID-19 pandemic, we are focused on controlling our costs and capital expenditures to preserve our ability to continue to fund our operations; however, we continue to invest in developing key management and craft personnel in both our T&D and C&I markets and in procuring the specific specialty equipment and tooling needed to win and execute projects of all sizes and complexity.
We have not historically paid dividends and currently do not expect to pay dividends.
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Debt Instruments
Credit Agreement
On September 13, 2019, we entered into a five-year amended and restated credit agreement (the “Credit Agreement”) with a syndicate of banks led by JPMorgan Chase Bank, N.A. and Bank of America, N.A. The Credit Agreement provides for a facility of $375 million (the “Facility”), not to exceed three times Consolidated EBITDA (as defined in the Credit Agreement) less Consolidated Total Indebtedness (as defined in the Credit Agreement), that may be used for revolving loans of which $150 million may be used for letters of credit. The Facility also allows for revolving loans and letters of credit in Canadian dollars and other currencies, up to the U.S. dollar equivalent of $75 million. We have an expansion option to increase the commitments under the Facility or enter into incremental term loans, subject to certain conditions, by up to an additional $200 million upon receipt of additional commitments from new or existing lenders. Subject to certain exceptions, the Facility is secured by substantially all of our assets and the assets of our domestic subsidiaries and by a pledge of substantially all of the capital stock of our domestic subsidiaries and 65% of the capital stock of our direct foreign subsidiaries. Additionally, subject to certain exceptions, our domestic subsidiaries also guarantee the repayment of all amounts due under the Credit Agreement. If an event of default occurs and is continuing, on the terms and subject to the conditions set forth in the Credit Agreement, amounts outstanding under the Facility may be accelerated and may become or be declared immediately due and payable. Borrowings under the Facility are used for refinancing existing debt, working capital, capital expenditures, acquisitions and other general corporate purposes.
Amounts borrowed under the Credit Agreement bear interest, at our option, at a rate equal to either (1) the Alternate Base Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 0.00% to 0.75%; or (2) Adjusted LIBO Rate (as defined in the Credit Agreement) plus an applicable margin ranging from 1.00% to 1.75%. The applicable margin is determined based on our consolidated leverage ratio (“Leverage Ratio”) which is defined in the Credit Agreement as Consolidated Total Indebtedness (as defined in the Credit Agreement) divided by Consolidated EBITDA (as defined in the Credit Agreement). Letters of credit issued under the Facility are subject to a letter of credit fee of 1.00% to 1.75% for non-performance letters of credit or 0.50% to 0.875% for performance letters of credit, based on our consolidated Leverage Ratio. We are subject to a commitment fee of 0.15% to 0.25%, based on our consolidated Leverage Ratio, on any unused portion of the Facility. The Credit Agreement restricts certain types of payments when our consolidated Leverage Ratio exceeds 2.50 or our consolidated Liquidity (as defined in the Credit Agreement) is less than $50 million.
Under the Credit Agreement, we are subject to certain financial covenants and must maintain a maximum consolidated Leverage Ratio of 3.0 and a minimum interest coverage ratio of 3.0, which is defined in the Credit Agreement as Consolidated EBITDA (as defined in the Credit Agreement) divided by interest expense (as defined in the Credit Agreement). The Credit Agreement also contains a number of covenants, including limitations on asset sales, investments, indebtedness and liens. We were in compliance with all of the financial covenants under the Credit Agreement as of June 30, 2020.
As of June 30, 2020, we had $33.4 million of debt outstanding under the Facility and letters of credit outstanding of approximately $10.5 million. As of December 31, 2019, we had $103.8 million of debt outstanding under the Facility and letters of credit outstanding of approximately $10.6 million.
Equipment Notes
We have entered into multiple Master Loan Agreements with multiple banks. The Master Loan Agreements may be used for financing of equipment between us and the lending banks pursuant to one or more equipment notes ("Equipment Notes"). Each Equipment Note constitutes a separate, distinct and independent financing of equipment and contractual obligation.
As of June 30, 2020, we had executed eight Equipment Notes that are collateralized by equipment and vehicles owned by us. The outstanding balance of these Equipment Notes was $48.6 million as of June 30, 2020.
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Off-Balance Sheet Transactions
As is common in our industry, we enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheets. Our significant off-balance sheet transactions, such as liabilities associated with letter of credit obligations and surety guarantees related to performance bonds, could be entered into in the normal course of business. We have not engaged in any off-balance sheet financing arrangements through special purpose entities.
For a discussion regarding off-balance sheet transactions, please refer to Note 9–Commitments and Contingencies in the accompanying notes to our Consolidated Financial Statements.
Concentration of Credit Risk
We grant trade credit under normal payment terms, generally without collateral, to our customers, which include high credit quality electric utilities, governmental entities, general contractors and builders, owners and managers of commercial and industrial properties located in the United States. Consequently, we are subject to potential credit risk related to changes in business and economic factors throughout the United States. However, we generally have certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosures or negotiated settlements, we may take title to the underlying assets in lieu of cash in settlement of receivables. As of June 30, 2020 and 2019, none of our customers individually exceeded 10.0% of consolidated accounts receivable. Management believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.
New Accounting Pronouncements
For a discussion regarding new accounting pronouncements, please refer to Note 1–Organization, Business and Basis of Presentation—Recent Accounting Pronouncements in the accompanying notes to our Consolidated Financial Statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. For further information regarding our critical accounting policies and estimates, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” included in our 2019 Annual Report.
Cautionary Statement Concerning Forward-Looking Statements and Information
We are including the following discussion to inform you of some of the risks and uncertainties that can affect our company and to take advantage of the protections for forward-looking statements that applicable federal securities law affords.
Statements in this Quarterly Report on Form 10-Q 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,”
35
“project,” “likely,” “unlikely,” “possible,” “potential,” “should” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q. 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 expectations and assumptions about future events. While we consider these expectations and 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. In addition, many of these risks, contingencies and uncertainties are currently amplified by, and may continue to be amplified by, the COVID-19 pandemic. These and other important factors, including those discussed under the caption “Forward-Looking Statements” and in Item 1A. “Risk Factors” in our 2019 Annual Report, 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.
These risks, contingencies and uncertainties include, but are not limited to, the following:
● | Our operating results may vary significantly from period to period. |
● | Our industry is highly competitive. Increased competition can place downward pressure on contract prices and profit margins and may limit the number of projects that we are awarded. |
● | We may be unsuccessful in generating internal growth, which could impact the projects available to the Company. |
● | Negative economic and market conditions, as well as regulatory and environmental requirements, may adversely impact our customers’ future spending and, as a result, our operations and growth. |
● | Project performance issues, including those caused by third parties, or certain contractual obligations may result in additional costs to us, reductions or delays in revenues or the payment of penalties, including liquidated damages. |
● | Our revenues may be exposed to potential risk if a project is terminated or canceled, if our customers encounter financial difficulties or if we encounter disputes with our customers. |
● | Our business is labor intensive and we may be unable to attract and retain qualified personnel. |
● | The timing of new contracts and termination of existing contracts may result in unpredictable fluctuations in our cash flows and financial results. |
● | During the ordinary course of our business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations. |
● | We may incur liabilities and suffer negative financial or reputational impacts relating to occupational health and safety matters. |
● | Backlog may not be realized or may not result in profits and may not accurately represent future revenue. |
● | Our business growth could outpace the capability of our internal resources and limit our ability to support growth. |
● | Our dependence on suppliers, subcontractors and equipment manufacturers could expose us to the risk of loss in our operations. |
● | Our participation in joint ventures and other projects with third parties may expose us to liability for failures of our partners. |
● | Our inability to successfully execute or integrate acquisitions or joint ventures may have an adverse impact on our growth strategy and business. |
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● | Legislative or regulatory actions relating to electricity transmission and renewable energy may impact demand for our services. |
● | Our use of percentage-of-completion accounting could result in a reduction or reversal of previously recognized profits. |
● | Our insurance has limits and exclusions that may not fully indemnify us against certain claims or losses, and the unavailability or cancellation of third party insurance coverages would increase our overall risk exposure and could disrupt our operations. |
● | Our actual costs may be greater than expected in performing our fixed-price and unit-price contracts. |
● | Our financial results are based upon estimates and assumptions that may differ from actual results. |
● | The loss of a major customer may have an adverse effect on us. |
● | We extend trade credit to customers for purchases of our services, and may have difficulty collecting receivables from them. |
● | Our failure to comply with environmental and other laws and regulations could result in significant liabilities. |
● | We may not be able to compete for, or work on, certain projects if we are not able to obtain necessary bonds, letters of credit, bank guarantees or other financial assurances. |
● | Inability to hire or retain key personnel could disrupt our business. |
● | The COVID-19 pandemic may have an adverse impact on our business, employees, liquidity, financial condition, results of operations and cash flows. |
● | Our business may be affected by seasonal and other variations, including severe weather conditions and the nature of our work environment. |
● | Work stoppages or other labor issues with our unionized workforce could adversely affect our business, and we may be subject to unionization attempts. |
● | Failure to obtain permitting, right-of-way access and other tactical considerations prior to the commencement of work could delay the commencement of work on projects or cause modifications of work plans, potentially resulting in lower margins. |
● | Multi-employer pension plan obligations related to our unionized workforce could adversely impact our earnings. |
● | Our results of operations could be adversely affected as a result of asset impairments. |
● | We may not have access in the future to sufficient funding to finance desired growth and operations. |
● | We rely on information, communications and data systems in our operations and we or our business partners may be subject to failures, interruptions or breaches of such systems, which could affect our operations or our competitive position, expose sensitive information or damage our reputation. |
● | Our operations are subject to a number of operational risks which may result in unexpected costs or liabilities. |
● | Opportunities associated with government contracts could lead to increased governmental regulation applicable to us. |
● | Changes in our interpretation of tax laws could impact the determination of our income tax liabilities. |
● | The nature of our business exposes us to potential liability for warranty claims and faulty engineering, which may reduce our profitability. |
37
● | Our stock may experience significant price and volume fluctuations and future issuances of our common stock could lead to dilution of our issued and outstanding common stock. |
● | Risks associated with operating in the Canadian market could restrict our ability to expand and harm our business and prospects. |
● | Our failure to comply with the laws applicable to our Canadian activities, including the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws, could have an adverse effect on us. |
● | If we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or prevent or detect fraud, which could have a material adverse effect on our business or the market price of our common stock. |
● | An increase in the prices of certain materials and commodities used in our business could adversely affect our business. |
● | Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly. |
● | Certain provisions in our organizational documents and Delaware law could delay or prevent a change in control of our company. |
● | We are subject to risks associated with climate change. |
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2020, we were not party to any derivative instruments. We did not use any material derivative financial instruments during the six months ended June 30, 2020 and 2019, including instruments for trading, hedging or speculating on changes in interest rates or commodity prices of materials used in our business.
As of June 30, 2020, we had $33.4 million of debt outstanding under the Facility. Borrowings under the Facility are based upon an interest rate that will vary depending upon the prime rate, federal funds rate and Adjusted LIBOR. If the prime rate, federal funds rate or Adjusted LIBOR increased, our interest payment obligations on outstanding borrowings would increase and have a negative effect on our cash flow and financial condition. We currently do not maintain any hedging contracts that would limit our exposure to variable rates of interest when we have outstanding borrowings. If market rates of interest on all our revolving debt as of June 30, 2020, which is subject to variable rates, permanently increased by 1%, the increase in interest expense on all revolving debt would decrease future income before provision for income taxes and cash flows by approximately $0.3 million annually. If market rates of interest on all our revolving debt, which is subject to variable rates as of June 30, 2020, permanently decreased by 1%, the decrease in interest expense on all debt would increase future income before provision for income taxes and cash flows by the same amount.
Borrowings under our Equipment Notes are at fixed rates established on the date the respective Equipment Note was executed.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.
38
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
For the year ended December 31, 2019, management’s assessment of our internal control over financial reporting excluded the internal control over financial reporting of CSI Electrical Contractors, Inc., which was acquired on July 15, 2019. Pursuant to the SEC’s general guidance that a recently acquired business may be omitted from the scope of an assessment in the year of the acquisition, the scope of our assessment does not include CSI Electrical Contractors, Inc. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2020 will include CSI Electrical Contractors, Inc. As of June 30, 2020, CSI Electrical Contractors, Inc. represented a total of approximately 15.5% and 19.8% of total assets and net assets, respectively, and 14.2% and 2.9% of contract revenues and income before income taxes, respectively, for the quarter then ended.
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PART II—OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
For discussion regarding legal proceedings, please refer to Note 9–Commitments and Contingencies—Litigation and Other Legal Matters in the accompanying notes to our Consolidated Financial Statements.
ITEM 1A.RISK FACTORS
We face a number of risks that could materially and adversely affect our business, employees, liquidity, financial condition, results of operations and cash flows. A discussion of our risk factors can be found in Item 1A. “Risk Factors” in our 2019 Annual Report. The information below includes additional risks relating to the COVID-19 pandemic. The impact of COVID-19 may also exacerbate other risks discussed in Item 1A. “Risk Factors” in our 2019 Annual Report, any of which could have a material effect on us.
The COVID-19 pandemic may have an adverse impact on our business, employees, liquidity, financial condition, results of operations and cash flows.
In December 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) in China that has since spread to nearly all regions of the world. The outbreak was subsequently declared a pandemic by the World Health Organization in March 2020. To date, the COVID-19 outbreak and preventative measures taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas and significant disruption in the financial markets both globally and in the United States and Canada.
In response to the pandemic and related mitigation measures, we began implementing changes in our business in March 2020 in an effort to protect our employees and customers, and to support appropriate health and safety protocols, including implementing remote, alternative and flexible work arrangements, where possible. While these measures have been necessary and appropriate, they could result in higher operating costs and could adversely impact our business, including certain operational, reporting, accounting or other processes. In addition, an extended period of remote work arrangements could impair our ability to effectively manage our business, and introduce additional operational risks, including but not limited to cybersecurity risks and increased vulnerability to security breaches, cyber-attacks, computer viruses, ransomware, or other similar events and intrusions.
As our response to the pandemic evolves, we may incur additional costs and could experience adverse impacts to our business, each of which may be significant. We have focused on controlling our costs and capital expenditures to preserve our ability to continue to fund our operations and may need to take additional actions to reduce spending in the future. Although we are unable to predict the ultimate impact of the COVID-19 outbreak at this time, the pandemic could adversely affect, our business, employees, liquidity, financial condition, results of operations and cash flows. Such effects may be material and the potential impacts include, but are not limited to:
● | disruptions in our supply chain due to transportation delays, travel restrictions, raw material cost increases and shortages, and closures of businesses or facilities; |
● | reductions in our operating effectiveness due to workforce disruptions resulting from “shelter-in-place” and “stay-at-home” orders, and the unavailability of key personnel necessary to conduct our business activities; and |
● | volatility in the global financial markets, which could have a negative impact on our ability to access capital and additional sources of financing in the future. |
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The situation surrounding COVID-19 remains fluid, and given its inherent uncertainty, the pandemic may have an adverse impact on our business in the near term. Should these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, may have a material adverse effect on our business, employees, liquidity, financial condition, results of operations and cash flows. In addition, we cannot predict the impact that COVID-19 will have on our customers and suppliers, and any adverse impacts on these parties may have a material adverse impact on our business.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuances of Common Stock. On April 23, 2020, 884 unregistered shares of our common stock, valued in the aggregate at $23,974 were issued to directors of the Company who elected to receive a portion of their director retainer fee in stock in lieu of cash. The shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 for an issuance not involving a public offering.
Purchases of Common Stock. The Company did not repurchase any shares of its common stock during the period from April 1, 2020 through June 30, 2020.
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ITEM 6.EXHIBITS
Number |
| Description |
|
|
| ||
10.1 | |||
31.1 | Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(a)/15d-14(a)† | ||
31.2 | Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(a)/15d-14(a)† | ||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350† | ||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350† | ||
|
| ||
101.INS | Inline XBRL Instance Document* | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document* | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
† | Filed herewith |
+ | Indicates management contract or compensatory plan or arrangement. |
* | Electronically filed |
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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 thereunto duly authorized.
|
| MYR GROUP INC. |
|
| (Registrant) | ||
|
| ||
July 29, 2020 | /s/ BETTY R. JOHNSON | ||
| Betty R. Johnson Senior Vice President, Chief Financial Officer and Treasurer |
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Exhibit 31.1
CERTIFICATIONS
Certification of Principal Executive Officer
I, Richard S. Swartz, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MYR Group 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 the statements 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 the financial 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 in Exchange 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 the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure 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 our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 recent fiscal 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, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’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 reasonably likely 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 control over financial reporting.
July 29, 2020 | /s/ RICHARD S. SWARTZ, JR. |
| |
| (Principal Executive Officer) |
| Chief Executive Officer and President |
Exhibit 31.2
CERTIFICATIONS
Certification of Principal Financial Officer
I, Betty R. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MYR Group 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 the statements 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 the financial 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 in Exchange 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 the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure 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 our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness 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 recent fiscal 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, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’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 reasonably likely 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 control over financial reporting.
July 29, 2020 | /s/ BETTY R. JOHNSON |
| |
| (Principal Financial Officer) |
| Senior Vice President, Chief Financial Officer and Treasurer |
Exhibit 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER,
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard S. Swartz, Jr., Chief Executive Officer and President of MYR Group Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2020 of the Company 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 such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
July 29, 2020 | /s/ RICHARD S. SWARTZ, JR. |
| |
| Chief Executive Officer and President |
Exhibit 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Betty R. Johnson, Senior Vice President, Chief Financial Officer and Treasurer of MYR Group, Inc. (the “Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2020 of the Company 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 such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
July 29, 2020 | /s/ BETTY R. JOHNSON |
| |
| Senior Vice President, Chief Financial Officer and Treasurer |