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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
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: 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, | IL | | 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 | x |
| 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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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(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:
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(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 | |
The following table provides information about contract assets and contract liabilities from contracts with customers:
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(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:
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(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:
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(in thousands) | | September 30, 2020 | | December 31, 2019 |
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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.
The following is a summary of the lease-related assets and liabilities recorded:
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| | | | 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 | |
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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:
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| September 30, 2020 | | December 31, 2019 |
Weighted-average remaining lease term - finance leases | 0.6 years | | |