SEC Filing | MYR Group Inc.

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myrg-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020


☐			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: 1-08325

_____________________________________________________________

MYR GROUP INC.

(Exact name of registrant as specified in its charter)

Delaware

36-3158643

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

1701 Golf Road,

Suite 3-1012

Rolling Meadows,

60008

(Address of principal executive offices)

(Zip Code)

(847) 290-1891

(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
Common Stock, $0.01 par value	MYRG	The Nasdaq Stock Market, LLC
		(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. Yes x No ¨

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). Yes x No ¨

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 ¨

Accelerated filer

Non-accelerated filer ¨

Smaller reporting company

☐

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 ☐ No x

As of October 23, 2020, there were 16,727,116 outstanding shares of the registrant’s $0.01 par value common stock.

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INDEX


		Page
	Part I—Financial Information
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	2
	Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019	3
	Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019	4
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	Part II—Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 6.	Exhibits	39

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.

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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MYR GROUP INC.

CONSOLIDATED BALANCE SHEETS


(in thousands, except share and per share data)	September 30, 2020		December 31, 2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	18,946	$	12,397
Accounts receivable, net of allowances of $1,761 and $3,364, respectively	400,998		388,479
Contract assets, net of allowances of $502 and $147, respectively	221,591		217,109
Current portion of receivable for insurance claims in excess of deductibles	9,851		6,415
Refundable income taxes	—		1,973
Other current assets	7,376		12,811
Total current assets	658,762		639,184
Property and equipment, net of accumulated depreciation of $290,088 and $272,865, respectively	185,914		185,344
Operating lease right-of-use assets	22,620		22,958
Goodwill	66,055		66,060
Intangible assets, net of accumulated amortization of $13,889 and $10,880, respectively	51,918		54,940
Receivable for insurance claims in excess of deductibles	24,437		30,976
Investment in joint ventures	4,972		4,722
Other assets	4,233		3,687
Total assets	$	1,018,911	$	1,007,871

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	4,318	$	8,737
Current portion of operating lease obligations	6,468		6,205
Current portion of finance lease obligations	607		1,135
Accounts payable	205,601		192,107
Contract liabilities	125,611		105,486
Current portion of accrued self-insurance	21,659		18,780
Other current liabilities	95,290		64,364
Total current liabilities	459,554		396,814
Deferred income tax liabilities	21,684		20,945
Long-term debt	65,876		157,087
Accrued self-insurance	42,884		48,024
Operating lease obligations, net of current maturities	16,230		16,884
Finance lease obligations, net of current maturities	—		338
Other liabilities	4,079		3,304
Total liabilities	610,307		643,396
Commitments and contingencies
Stockholders’ equity:
Preferred stock—$0.01 par value per share; 4,000,000 authorized shares; none issued and outstanding at September 30, 2020 and December 31, 2019	—		—
Common stock—$0.01 par value per share; 100,000,000 authorized shares;16,719,330 and 16,648,616 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	167		166
Additional paid-in capital	156,461		152,532
Accumulated other comprehensive loss	(403)		(446)
Retained earnings	252,375		212,219
Total stockholders’ equity attributable to MYR Group Inc.	408,600		364,471
Noncontrolling interest	4		4
Total stockholders’ equity	408,604		364,475
Total liabilities and stockholders’ equity	$	1,018,911	$	1,007,871

The accompanying notes are an integral part of these consolidated financial statements.

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MYR GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


	Three months ended September 30,				Nine months ended September 30,
(in thousands, except per share data)	2020		2019		2020		2019

Contract revenues	$	607,901	$	583,214	$	1,639,422	$	1,500,084
Contract costs	531,429		524,017		1,440,013		1,354,848
Gross profit	76,472		59,197		199,409		145,236
Selling, general and administrative expenses	51,443		41,667		137,688		108,598
Amortization of intangible assets	578		1,419		3,009		2,888
Gain on sale of property and equipment	(478)		(1,151)		(1,967)		(2,548)
Income from operations	24,929		17,262		60,679		36,298
Other income (expense):
Interest income	—		—		6		—
Interest expense	(1,113)		(2,125)		(3,941)		(4,498)
Other income (expense), net	18		(922)		(556)		406
Income before provision for income taxes	23,834		14,215		56,188		32,206
Income tax expense	6,542		3,754		15,579		8,767
Net income	17,292		10,461		40,609		23,439
Less: net income (loss) attributable to noncontrolling interest	—		106		—		(1,476)
Net income attributable to MYR Group Inc.	$	17,292	$	10,355	$	40,609	$	24,915
Income per common share attributable to MYR Group Inc.:
—Basic	$	1.04	$	0.62	$	2.44	$	1.50
—Diluted	$	1.02	$	0.62	$	2.42	$	1.49
Weighted average number of common shares and potential common shares outstanding:
—Basic	16,698		16,614		16,670		16,576
—Diluted	16,882		16,714		16,798		16,692

Net income	$	17,292	$	10,461	$	40,609	$	23,439
Other comprehensive income (loss):
Foreign currency translation adjustment	(5)		1		43		(199)
Other comprehensive income (loss):	(5)		1		43		(199)
Total comprehensive income	17,287		10,462		40,652		23,240
Less: net income (loss) attributable to noncontrolling interest	—		106		—		(1,476)
Total comprehensive income attributable to MYR Group Inc.	$	17,287	$	10,356	$	40,652	$	24,716

The accompanying notes are an integral part of these consolidated financial statements.

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MYR GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Preferred		Common Stock			Additional Paid-In		Accumulated Other Comprehensive		Retained		MYR Group Inc. Stockholders’		Noncontrolling
(in thousands)	Stock		Shares	Amount		Capital		Income (Loss)		Earnings		Equity		Interest		Total

Balance at December 31, 2018	—		16,565	$	165	$	148,276	$	(193)	$	174,736	$	322,984	$	1,480	$	324,464
Net income (loss)	—		—	—		—		—		7,353		7,353		(733)		6,620
Stock issued under compensation plans, net	—		68	—		282		—		—		282		—		282
Stock-based compensation expense	—		—	—		951		—		—		951		—		951
Shares repurchased	—		(23)	—		(571)		—		(207)		(778)		—		(778)
Other comprehensive loss	—		—	—		—		(77)		—		(77)		—		(77)
Stock issued - other	—		—	12		—		—		—		12		—		12
Balance at March 31, 2019	—		16,610	177		148,938		(270)		181,882		330,727		747		331,474
Net income (loss)	—		—	—		—		—		7,207		7,207		(849)		6,358
Stock issued under compensation plans, net	—		33	1		1		—		—		2		—		2
Stock-based compensation expense	—		—	—		1,202		—		—		1,202		—		1,202


Other comprehensive income	—		—	—		—		(123)		—		(123)		—		(123)
Stock issued - other	—		1	(12)		36		—		—		24		—		24
Balance at June 30, 2019	—		16,644	166		150,177		(393)		189,089		339,039		(102)		338,937
Net income	—		—	—		—		—		10,355		10,355		106		10,461
Stock issued under compensation plans, net	—		—	—		41		—		—		41		—		41
Stock-based compensation expense	—		2	—		1,108		—		—		1,108		—		1,108
Other comprehensive income	—		—	—		—		1		—		1		—		1
Stock issued - other	—		1	—		24		—		—		24		—		24
Balance at September 30, 2019	$	—	16,647	$	166	$	151,350	$	(392)	$	199,444	$	350,568	$	4	$	350,572

Balance at December 31, 2019	—		16,649	$	166	$	152,532	$	(446)	$	212,219	$	364,471	$	4	$	364,475
Net income	—		—	—		—		—		9,932		9,932		—		9,932
Adjustment to adopt ASC 326	—		—	—		—		—		(268)		(268)		—		(268)
Stock issued under compensation plans, net	—		55	—		82		—		—		82		—		82
Stock-based compensation expense	—		—	—		1,080		—		—		1,080		—		1,080
Shares repurchased	—		(20)	—		(241)		—		(185)		(426)		—		(426)
Other comprehensive income	—		—	—		—		87		—		87		—		87
Stock issued - other	—		1	—		24		—		—		24		—		24
Balance at March 31, 2020	—		16,685	166		153,477		(359)		221,698		374,982		4		374,986
Net income	—		—	—		—		—		13,385		13,385		—		13,385
Stock issued under compensation plans, net	—		23	1		—		—		—		1		—		1
Stock-based compensation expense	—		—	—		1,093		—		—		1,093		—		1,093
Other comprehensive income	—		—	—		—		(39)		—		(39)		—		(39)
Stock issued - other	—		1	—		24		—		—		24		—		24
Balance at June 30, 2020	—		16,709	167		154,594		(398)		235,083		389,446		4		389,450
Net income	—		—	—		—		—		17,292		17,292		—		17,292
Stock issued under compensation plans, net	—		10	—		224		—		—		224		—		224
Stock-based compensation expense	—		—	—		1,631		—		—		1,631		—		1,631
Other comprehensive income	—		—	—		—		(5)		—		(5)		—		(5)
Stock issued - other	—		—	—		12		—		—		12		—		12
Balance at September 30, 2020	$	—	16,719	$	167	$	156,461	$	(403)	$	252,375	$	408,600	$	4	$	408,604

The accompanying notes are an integral part of these consolidated financial statements.

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MYR GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended September 30,
(in thousands)	2020		2019

Cash flows from operating activities:
Net income	$	40,609	$	23,439
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization of property and equipment	32,021		30,153
Amortization of intangible assets	3,009		2,888
Stock-based compensation expense	3,804		3,261
Deferred income taxes	712		339
Gain on sale of property and equipment	(1,967)		(2,548)
Other non-cash items	654		631
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	(12,869)		(27,327)
Contract assets, net	(4,754)		(38,910)
Receivable for insurance claims in excess of deductibles	3,103		1,626
Other assets	7,074		(771)
Accounts payable	7,596		37,874
Contract liabilities	20,161		(397)
Accrued self insurance	(2,257)		(358)
Other liabilities	31,730		1,845
Net cash flows provided by operating activities	128,626		31,745
Cash flows from investing activities:
Proceeds from sale of property and equipment	2,147		2,898
Cash paid for acquired business	—		(79,720)
Purchases of property and equipment	(27,470)		(39,354)
Net cash flows used in investing activities	(25,323)		(116,176)
Cash flows from financing activities:
Net borrowings (repayments) under revolving lines of credit	(65,189)		67,668
Borrowings under equipment notes	—		24,037
Payment of principal obligations under equipment notes	(30,441)		(3,307)
Payment of principal obligations under finance leases	(914)		(857)
Proceeds from exercise of stock options	306		325
Debt refinancing costs	—		(1,132)
Repurchase of common shares	(426)		(778)
Other financing activities	60		60
Net cash flows provided by (used in) financing activities	(96,604)		86,016
Effect of exchange rate changes on cash	(150)		53
Net increase in cash and cash equivalents	6,549		1,638
Cash and cash equivalents:
Beginning of period	12,397		7,507
End of period	$	18,946	$	9,145

The accompanying notes are an integral part of these consolidated financial statements.

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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 two business segments: Transmission and Distribution (“T&D”), and Commercial and Industrial (“C&I”). 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. T&D provides a broad range of services, which include design, engineering, procurement, construction, upgrade, maintenance and repair services, with a particular focus on construction, maintenance and repair. C&I customers include general contractors, commercial and industrial facility owners, government agencies and developers. C&I provides a broad range of services, which include the design, installation, maintenance and repair of commercial and industrial wiring, the installation of traffic networks and the installation of bridge, roadway and tunnel lighting.

Since March of 2020, the COVID-19 pandemic has had a significant impact on the global economy, including the US and Canadian economies. 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 impacts our customers, subcontractors, suppliers, vendors and employees. The COVID-19 pandemic caused a slowdown of certain 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 have impacted our C&I segment. Although the majority of stay-at-home orders have been phased out, 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 an extended timeframe our business could be more significantly impacted as a result of prolonged unfavorable economic conditions. The Company began implementing changes in March of 2020 in an effort to protect our employees and customers and to support appropriate health and safety protocols, including implementing alternative and flexible work arrangements where possible. As the conditions surrounding the ongoing COVID-19 pandemic remain fluid, and if disruptions do re-emerge, 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.

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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 nine months ended September 30, 2020 were not significant. Foreign currency gains, recorded in other income, net, for the nine months ended September 30, 2019 were $0.1 million. Effective foreign currency transaction gains and losses, arising primarily from long-term monetary assets and liabilities, are recorded in the foreign currency translation adjustment line on the consolidated statements of comprehensive income.

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 September 30, 2020 and 2019, the Company had recognized revenues of $19.1 million and $31.1 million, respectively, related to significant change orders and/or claims that had been included as contract price adjustments on certain contracts, some of which are multi-year projects. These change orders and/or claims are in the process of being negotiated in the normal course of business, and a portion of these recognized revenues had been included in multiple periods.

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 September 30, 2020, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.3%, which resulted in decreases in operating income of $1.9 million, net income attributable to MYR Group Inc. of $1.5 million and diluted earnings per common share attributable to MYR Group Inc. of $0.09. During the nine months ended September 30, 2020, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.4%, which resulted in decreases in operating income of $7.6 million, net income attributable to MYR Group Inc. of $5.5 million and diluted earnings per common share attributable to MYR Group Inc. of $0.33.

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During the three months ended September 30, 2019, changes in estimates pertaining to certain projects increased consolidated gross margin by 0.2%, which resulted in increases in operating income of $0.9 million, net income attributable to MYR Group Inc. of $0.8 million and diluted earnings per common share attributable to MYR Group Inc. of $0.05. During the nine months ended September 30, 2019, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.5%, which resulted in decreases in operating income of $7.8 million, net income attributable to MYR Group Inc. of $3.3 million and diluted earnings per common share attributable to MYR Group Inc. of $0.20.

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 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 $0.3 million cumulative-effect adjustment to retained earnings associated with the increase in the Company’s allowance for doubtful accounts. Additionally, in connection with the adoption of this ASU the Company adjusted its presentation for allowance for doubtful accounts associated with unbilled revenue, which represents a portion of the Company’s contract assets, and were previously classified as accounts receivable net of allowances. Total allowance for doubtful accounts associated with contract assets as of September 30, 2020 and at the time of adopting this ASU were $0.5 million and $0.4 million, respectively. The Company’s consolidated balance sheet as of December 31, 2019 and consolidated statements of cash flows for the year ended December 31, 2019 have not been adjusted for this change in treatment of allowance for doubtful accounts associated with unbilled revenue. See Note 3–Contract Assets and Liabilities for further information related to the Company’s contract assets.

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 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.

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 does not expect that this pronouncement will have a significant impact on its financial statements.

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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 $1.0 million, was $80.7 million, which was funded through borrowings under the Company’s credit facility. The Company finalized the purchase price accounting relating to the acquisition of CSI in 2019.

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 $0.6 million, all of which occurred prior to June 30, 2020 were recorded in other expense for the nine months ended September 30, 2020. Future margin guarantee adjustments, if any, are expected to be recognized through 2020. The Company could also be required to make compensation payments contingent on the successful achievement of certain performance targets and continued employment of certain key executives of CSI. These payments are recognized as compensation expense on the Company’s consolidated statements of operations as incurred. For the three and nine months ended September 30, 2020, the Company recognized $1.4 million and $2.5 million, respectively, of compensation expense associated with these contingent payments.

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 $0.5 million as of September 30, 2020 and $0.1 million as of December 31, 2019.

Contract assets consisted of the following:


(in thousands)	September 30, 2020		December 31, 2019		Change

Unbilled revenue, net	$	128,785	$	126,087	$	2,698
Contract retainages, net	92,806		91,022		1,784
Contract assets, net	$	221,591	$	217,109	$	4,482

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:


(in thousands)	September 30, 2020		December 31, 2019		Change

Deferred revenue	$	123,301	$	102,673	$	20,628
Accrued loss provision	2,310		2,813		(503)
Contract liabilities	$	125,611	$	105,486	$	20,125

Table of Contents

The following table provides information about contract assets and contract liabilities from contracts with customers:


(in thousands)	September 30, 2020		December 31, 2019		Change

Contract assets, net	$	221,591	$	217,109	$	4,482
Contract liabilities	(125,611)		(105,486)		(20,125)
Net contract assets (liabilities)	$	95,980	$	111,623	$	(15,643)

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 $31.3 million and $57.7 million for the three and nine months ended September 30, 2020, respectively. The amounts of revenue recognized in the period that were included in the opening contract liability balances were $11.9 million and $39.4 million for the three and nine months ended September 30, 2019, respectively. This revenue consists primarily of work performed on previous billings to customers.

The net asset position for contracts in process consisted of the following:


(in thousands)	September 30, 2020		December 31, 2019

Costs and estimated earnings on uncompleted contracts	$	3,710,876	$	3,532,886
Less: billings to date	3,705,392		3,509,472
	$	5,484	$	23,414

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:


(in thousands)	September 30, 2020		December 31, 2019

Unbilled revenue	$	128,785	$	126,087
Deferred revenue	(123,301)		(102,673)
	$	5,484	$	23,414

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 one to six years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases within one year. Currently, all the Company’s leases contain fixed payment terms. The Company may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease. Additionally, all of the Company's month-to-month leases are cancelable, by the Company or the lessor, at any time and are not included in our right-of-use asset or liability. At September 30, 2020, the Company had several leases with residual value guarantees, due to the acquisition of CSI. Typically, the Company has purchase options on the equipment underlying its long-term leases and many of its short-term rental arrangements. The Company may exercise some of these purchase options when the need for equipment is on-going and the purchase option price is attractive. Leases are accounted for as operating or finance leases, depending on the terms of the lease.

Table of Contents

The following is a summary of the lease-related assets and liabilities recorded:


		September 30, 2020		December 31, 2019
(in thousands)	Classification on the Consolidated Balance Sheet
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	22,620	$	22,958
Finance lease right-of-use assets	Property and equipment, net of accumulated depreciation	664		1,478
Total right-of-use lease assets		$	23,284	$	24,436

Liabilities
Current
Operating lease obligations	Current portion of operating lease obligations	$	6,468	$	6,205
Finance lease obligations	Current portion of finance lease obligations	607		1,135
Total current obligations		7,075		7,340
Non-current
Operating lease obligations	Operating lease obligations, net of current maturities	16,230		16,884
Finance lease obligations	Finance lease obligations, net of current maturities	—		338
Total non-current obligations		16,230		17,222
Total lease obligations		$	23,305	$	24,562

The following is a summary of the lease terms and discount rates:


	September 30, 2020	December 31, 2019
Weighted-average remaining lease term - finance leases	0.6 years