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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, 2021
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.) |
| | | | |
| 12150 East 112th Avenue | | |
| Henderson, | CO | | 80640 |
(Address of principal executive offices) | | (Zip Code) |
(303) 286-8000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________________
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 22, 2021, there were 16,869,947 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 I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MYR GROUP INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
(in thousands, except share and per share data) | | September 30, 2021 | | December 31, 2020 |
| | (unaudited) | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 73,006 | | | $ | 22,668 | |
Accounts receivable, net of allowances of $2,166 and $1,696, respectively | | 362,032 | | | 385,938 | |
Contract assets, net of allowances of $376 and $359, respectively | | 219,445 | | | 185,803 | |
Current portion of receivable for insurance claims in excess of deductibles | | 10,639 | | | 11,859 | |
Refundable income taxes | | 8,934 | | | 1,534 | |
Other current assets | | 26,579 | | | 28,882 | |
Total current assets | | 700,635 | | | 636,684 | |
Property and equipment, net of accumulated depreciation of $313,999 and $294,366, respectively | | 184,863 | | | 185,114 | |
Operating lease right-of-use assets | | 21,447 | | | 22,291 | |
Goodwill | | 66,065 | | | 66,065 | |
Intangible assets, net of accumulated amortization of $16,201 and $14,467, respectively | | 49,632 | | | 51,365 | |
Receivable for insurance claims in excess of deductibles | | 33,536 | | | 27,043 | |
Investment in joint ventures | | 3,786 | | | 3,040 | |
Other assets | | 3,863 | | | 4,257 | |
Total assets | | $ | 1,063,827 | | | $ | 995,859 | |
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Current portion of long-term debt | | $ | 1,025 | | | $ | 4,381 | |
Current portion of operating lease obligations | | 7,451 | | | 6,612 | |
Current portion of finance lease obligations | | — | | | 318 | |
Accounts payable | | 193,218 | | | 162,580 | |
Contract liabilities | | 149,847 | | | 158,396 | |
Current portion of accrued self-insurance | | 23,945 | | | 24,395 | |
Other current liabilities | | 80,215 | | | 86,718 | |
Total current liabilities | | 455,701 | | | 443,400 | |
Deferred income tax liabilities | | 19,682 | | | 18,339 | |
Long-term debt | | 3,986 | | | 25,039 | |
Accrued self-insurance | | 51,449 | | | 45,428 | |
Operating lease obligations, net of current maturities | | 14,015 | | | 15,730 | |
| | | | |
Other liabilities | | 22,814 | | | 18,631 | |
Total liabilities | | 567,647 | | | 566,567 | |
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, 2021 and December 31, 2020 | | — | | | — | |
Common stock—$0.01 par value per share; 100,000,000 authorized shares; 16,869,947 and 16,734,239 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | 168 | | | 167 | |
Additional paid-in capital | | 161,593 | | | 158,618 | |
Accumulated other comprehensive income | | 100 | | | 23 | |
Retained earnings | | 334,315 | | | 270,480 | |
Total stockholders’ equity attributable to MYR Group Inc. | | 496,176 | | | 429,288 | |
Noncontrolling interest | | 4 | | | 4 | |
Total stockholders’ equity | | 496,180 | | | 429,292 | |
Total liabilities and stockholders’ equity | | $ | 1,063,827 | | | $ | 995,859 | |
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) | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
Contract revenues | | $ | 610,182 | | | $ | 607,901 | | | $ | 1,852,241 | | | $ | 1,639,422 | |
Contract costs | | 526,259 | | | 531,429 | | | 1,610,343 | | | 1,440,013 | |
Gross profit | | 83,923 | | | 76,472 | | | 241,898 | | | 199,409 | |
Selling, general and administrative expenses | | 53,072 | | | 51,443 | | | 154,609 | | | 137,688 | |
Amortization of intangible assets | | 578 | | | 578 | | | 1,734 | | | 3,009 | |
Gain on sale of property and equipment | | (679) | | | (478) | | | (2,473) | | | (1,967) | |
Income from operations | | 30,952 | | | 24,929 | | | 88,028 | | | 60,679 | |
Other income (expense): | | | | | | | | |
Interest income | | 23 | | | — | | | 51 | | | 6 | |
Interest expense | | (305) | | | (1,113) | | | (1,458) | | | (3,941) | |
Other income (expense), net | | 69 | | | 18 | | | 190 | | | (556) | |
Income before provision for income taxes | | 30,739 | | | 23,834 | | | 86,811 | | | 56,188 | |
Income tax expense | | 7,568 | | | 6,542 | | | 22,493 | | | 15,579 | |
Net income | | $ | 23,171 | | | $ | 17,292 | | | $ | 64,318 | | | $ | 40,609 | |
| | | | | | | | |
| | | | | | | | |
Income per common share: | | | | | | | | |
—Basic | | $ | 1.37 | | | $ | 1.04 | | | $ | 3.82 | | | $ | 2.44 | |
—Diluted | | $ | 1.35 | | | $ | 1.02 | | | $ | 3.75 | | | $ | 2.42 | |
Weighted average number of common shares and potential common shares outstanding: | | | | | | | | |
—Basic | | 16,868 | | | 16,698 | | | 16,828 | | | 16,670 | |
—Diluted | | 17,167 | | | 16,882 | | | 17,132 | | | 16,798 | |
| | | | | | | | |
Net income | | $ | 23,171 | | | $ | 17,292 | | | $ | 64,318 | | | $ | 40,609 | |
Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustment | | (589) | | | (5) | | | 77 | | | 43 | |
Other comprehensive income (loss): | | (589) | | | (5) | | | 77 | | | 43 | |
Total comprehensive income | | $ | 22,582 | | | $ | 17,287 | | | $ | 64,395 | | | $ | 40,652 | |
| | | | | | | | |
| | | | | | | | |
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, 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 loss | | — | | | — | | | — | | | — | | | (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 | |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | — | | | 16,734 | | | $ | 167 | | | $ | 158,618 | | | $ | 23 | | | $ | 270,480 | | | $ | 429,288 | | | $ | 4 | | | $ | 429,292 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 19,928 | | | 19,928 | | | — | | | 19,928 | |
| | | | | | | | | | | | | | | | | | |
Stock issued under compensation plans, net | | — | | | 123 | | | 1 | | | 109 | | | — | | | — | | | 110 | | | — | | | 110 | |
Stock-based compensation expense | | — | | | — | | | — | | | 1,487 | | | — | | | — | | | 1,487 | | | — | | | 1,487 | |
Shares repurchased | | — | | | (41) | | | — | | | (2,231) | | | — | | | (387) | | | (2,618) | | | — | | | (2,618) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 253 | | | — | | | 253 | | | — | | | 253 | |
Stock issued - other | | — | | | 1 | | | — | | | 12 | | | — | | | — | | | 12 | | | — | | | 12 | |
Balance at March 31, 2021 | | — | | | 16,817 | | | 168 | | | 157,995 | | | 276 | | | 290,021 | | | 448,460 | | | 4 | | | 448,464 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 21,219 | | | 21,219 | | | — | | | 21,219 | |
Stock issued under compensation plans, net | | — | | | 60 | | | 1 | | | 318 | | | — | | | — | | | 319 | | | — | | | 319 | |
Stock-based compensation expense | | — | | | — | | | — | | | 1,948 | | | — | | | — | | | 1,948 | | | — | | | 1,948 | |
Shares repurchased | | — | | | (10) | | | (1) | | | (637) | | | — | | | (96) | | | (734) | | | — | | | (734) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | 413 | | | — | | | 413 | | | — | | | 413 | |
| | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | — | | | 16,867 | | | 168 | | | 159,624 | | | 689 | | | 311,144 | | | 471,625 | | | 4 | | | 471,629 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 23,171 | | | 23,171 | | | — | | | 23,171 | |
Stock issued under compensation plans, net | | — | | | 3 | | | — | | | 54 | | | — | | | — | | | 54 | | | — | | | 54 | |
Stock-based compensation expense | | — | | | — | | | — | | | 1,915 | | | — | | | — | | | 1,915 | | | — | | | 1,915 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | (589) | | | — | | | (589) | | | — | | | (589) | |
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2021 | | $ | — | | | 16,870 | | | $ | 168 | | | $ | 161,593 | | | $ | 100 | | | $ | 334,315 | | | $ | 496,176 | | | $ | 4 | | | $ | 496,180 | |
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) | | 2021 | | 2020 |
| | | | |
Cash flows from operating activities: | | | | |
Net income | | $ | 64,318 | | | $ | 40,609 | |
Adjustments to reconcile net income to net cash flows provided by operating activities: | | | | |
Depreciation and amortization of property and equipment | | 32,884 | | | 32,021 | |
Amortization of intangible assets | | 1,734 | | | 3,009 | |
Stock-based compensation expense | | 5,350 | | | 3,804 | |
Deferred income taxes | | 1,364 | | | 712 | |
Gain on sale of property and equipment | | (2,473) | | | (1,967) | |
Other non-cash items | | 1,171 | | | 654 | |
Changes in operating assets and liabilities, net of acquisitions: | | | | |
Accounts receivable, net | | 23,929 | | | (12,869) | |
Contract assets, net | | (33,642) | | | (4,754) | |
Receivable for insurance claims in excess of deductibles | | (5,273) | | | 3,103 | |
Other assets | | (5,786) | | | 7,074 | |
Accounts payable | | 29,874 | | | 7,596 | |
Contract liabilities | | (8,515) | | | 20,161 | |
Accrued self insurance | | 5,571 | | | (2,257) | |
Other liabilities | | (2,291) | | | 31,730 | |
Net cash flows provided by operating activities | | 108,215 | | | 128,626 | |
Cash flows from investing activities: | | | | |
Proceeds from sale of property and equipment | | 2,489 | | | 2,147 | |
| | | | |
Purchases of property and equipment | | (32,701) | | | (27,470) | |
Net cash flows used in investing activities | | (30,212) | | | (25,323) | |
Cash flows from financing activities: | | | | |
Net repayments under revolving lines of credit | | — | | | (65,189) | |
| | | | |
Payment of principal obligations under equipment notes | | (24,409) | | | (30,441) | |
Payment of principal obligations under finance leases | | (336) | | | (914) | |
Proceeds from exercise of stock options | | 483 | | | 306 | |
| | | | |
Repurchase of common shares | | (3,352) | | | (426) | |
Other financing activities | | 11 | | | 60 | |
Net cash flows used in financing activities | | (27,603) | | | (96,604) | |
Effect of exchange rate changes on cash | | (62) | | | (150) | |
Net increase in cash and cash equivalents | | 50,338 | | | 6,549 | |
Cash and cash equivalents: | | | | |
Beginning of period | | 22,668 | | | 12,397 | |
End of period | | $ | 73,006 | | | $ | 18,946 | |
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.
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, 2020 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, 2020, included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 3, 2021 (the "2020 Annual Report").
Joint Ventures and Noncontrolling Interests
The Company accounts for investments in joint ventures using the proportionate consolidation method for income statement reporting and under the equity method for balance sheet reporting, unless the Company has a controlling interest causing the joint venture to be consolidated with equity owned by other joint venture partners recorded as noncontrolling interests. Under the proportionate consolidation method, joint venture activity is allocated to the appropriate line items found on the consolidated statements of operations in proportion to the percentage of participation the Company has in the joint venture. Under the equity method the net investment in joint ventures is stated as a single item on the Company’s consolidated balance sheets. If an investment in a joint venture contains a recourse or unfunded commitments to provide additional equity, distributions and/or losses in excess of the investment, a liability is recorded in other current liabilities on the Company’s consolidated balance sheets.
For joint ventures in which the Company does not have a controlling interest, the Company’s share of any profits and assets and its share of any losses and liabilities are recognized based on the Company’s stated percentage partnership interest in the joint venture, and are normally recorded by the Company one month in arrears. The investments in joint ventures are recorded at cost and the carrying amounts are adjusted to recognize the Company’s proportionate share of cumulative income or loss, additional contributions made and dividends and capital distributions received. The Company records the effect of any impairment or any other-than-temporary decrease in the value of the joint venture investment as incurred, which may or may not be one month in arrears, depending on when the Company obtains the joint venture activity information. Additionally, the Company continually assesses the fair value of its investment in unconsolidated joint ventures despite using information that is one month in arrears for regular reporting purposes. The Company includes only its percentage ownership of each joint venture in its backlog.
The Company is 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 majority controlled joint venture made no distributions to its partners, and the Company made no capital contributions to the joint venture, during the three and nine months ended September 30, 2021. Additionally, there have been no changes in ownership during the three and nine months ended September 30, 2021. The project associated with this joint venture was substantially completed in 2019.
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 Company’s consolidated statements of operations. Foreign currency losses, recorded in other income, net, for the nine months ended September 30, 2021 were $0.1 million. Foreign currency gains, recorded in other income, net, for the nine months ended September 30, 2020 were not significant. 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 Company’s 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, 2021 and 2020, the Company had recognized revenues of $4.0 million and $19.1 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, 2021, changes in estimates pertaining to certain projects increased consolidated gross margin by 1.4%, which resulted in increases in operating income of $8.2 million, net income of $5.9 million and diluted earnings per common share of $0.35. During the nine months ended September 30, 2021, changes in estimates pertaining to certain projects increased consolidated gross margin by 0.4%, which resulted in increases in operating income of $7.2 million, net income of $5.2 million and diluted earnings per common share of $0.30.
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 of $1.5 million and diluted earnings per common share 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 of $5.5 million and diluted earnings per common share of $0.33.
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 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 Company adopted this ASU in January 2021 and there was no effect on the consolidated financial statements or disclosures.
2. 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 $0.4 million as of September 30, 2021 and December 31, 2020.
Contract assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | September 30, 2021 | | December 31, 2020 | | Change |
| | | | | | |
Unbilled revenue, net | | $ | 132,599 | | | $ | 97,543 | | | $ | 35,056 | |
Contract retainages, net | | 86,846 | | | 88,260 | | | (1,414) | |
Contract assets, net | | $ | 219,445 | | | $ | 185,803 | | | $ | 33,642 | |
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, 2021 | | December 31, 2020 | | Change |
| | | | | | |
Deferred revenue | | $ | 146,604 | | | $ | 155,570 | | | $ | (8,966) | |
Accrued loss provision | | 3,243 | | | 2,826 | | | 417 | |
Contract liabilities | | $ | 149,847 | | | $ | 158,396 | | | $ | (8,549) | |
The following table provides information about contract assets and contract liabilities from contracts with customers:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | September 30, 2021 | | December 31, 2020 | | Change |
| | | | | | |
Contract assets, net | | $ | 219,445 | | | $ | 185,803 | | | $ | 33,642 | |
Contract liabilities | | (149,847) | | | (158,396) | | | 8,549 | |
Net contract assets (liabilities) | | $ | 69,598 | | | $ | 27,407 | | | $ | 42,191 | |
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 $13.8 million and $98.0 million for the three and nine months ended September 30, 2021, respectively. 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. 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, 2021 | | December 31, 2020 |
| | | | |
Costs and estimated earnings on uncompleted contracts | | $ | 3,969,565 | | | $ | 3,921,376 | |
Less: billings to date | | 3,983,570 | | | 3,979,403 | |
| | $ | (14,005) | | | $ | (58,027) | |
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, 2021 | | December 31, 2020 |
| | | | |
Unbilled revenue | | $ | 132,599 | | | $ | 97,543 | |
Deferred revenue | | (146,604) | | | (155,570) | |
| | $ | (14,005) | | | $ | (58,027) | |
3. 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, 2021, the Company had several leases with residual value guarantees. 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:
| | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2021 | | December 31, 2020 |
(in thousands) | | Classification on the Consolidated Balance Sheet | | |
Assets | | | | | | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | | $ | 21,447 | | | $ | 22,291 | |
Finance lease right-of-use assets | | Property and equipment, net of accumulated depreciation | | — | | | 390 | |
Total right-of-use lease assets | | | | $ | 21,447 | | | $ | 22,681 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating lease obligations | | Current portion of operating lease obligations | | $ | 7,451 | | | $ | 6,612 | |
Finance lease obligations | | Current portion of finance lease obligations | | — | | | 318 | |
Total current obligations | | | | 7,451 | | | 6,930 | |
Non-current | | | | | | |
Operating lease obligations | | Operating lease obligations, net of current maturities | | 14,015 | | | 15,730 | |
| | | | | | |
Total non-current obligations | | | | 14,015 | | | 15,730 | |
Total lease obligations | | | | $ | 21,466 | | | $ | 22,660 | |
The following is a summary of the lease terms and discount rates:
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
Weighted-average remaining lease term - finance leases | zero years | | 0.4 years |
Weighted-average remaining lease term - operating leases | 3.0 years | | 3.4 years |
Weighted-average discount rate - finance leases | — | % | | 2.6 | % |
Weighted-average discount rate - operating leases | 3.9 | % | | 3.9 | % |
The following is a summary of certain information related to the lease costs for finance and operating leases:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Three months ended September 30, | | Nine months ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Lease cost: | | | | | | | | |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | $ | 11 | | | $ | 240 | | | $ | 386 | | | $ | 737 | |
Interest on lease liabilities | | — | | | 7 | | | — | | | 27 | |
Operating lease cost | | 2,515 | | | 2,327 | | | 7,474 | | | 6,875 | |
| | | | | | | | |
Variable lease costs | | 78 | | | 106 | | | 233 | | | 259 | |
Total lease cost | | $ | 2,604 | | | $ | 2,680 | | | $ | 8,093 | | | $ | 7,898 | |
The following is a summary of other information and supplemental cash flow information related to finance and operating leases:
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
(in thousands) | | 2021 | | 2020 |
Other information: | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows from operating leases | | $ | 7,635 | | | $ | 6,676 | |
Right-of-use asset obtained in exchange for new operating lease obligations | | $ | 5,687 | | | $ | 5,592 | |
The future undiscounted minimum lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s consolidated balance sheets under operating leases, less imputed interest, as of September 30, 2021 were as follows:
| | | | | | | | | | | | |
(in thousands) | | | | Operating Lease Obligations | | |
| | | | | | |
Remainder of 2021 | | | | $ | 2,642 | | | |
2022 | | | | 9,430 | | | |
2023 | | | | 6,953 | | | |
2024 | | | | 3,847 | | | |
2025 | | | | 1,685 | | | |
2026 | | | | 977 | | | |
Thereafter | | | | 10 | | | |
Total minimum lease payments | | | | 25,544 | | | |
Financing component | | | | (4,078) | | | |
Net present value of minimum lease payments | | | | 21,466 | | | |
Less: current portion of finance and operating lease obligations | | | | (7,451) | | | |
Long-term finance and operating lease obligations | | | | $ | 14,015 | | | |
The financing component for operating lease