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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, 2022
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 | x | | 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 21, 2022, there were 16,600,754 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,
2022 | | December 31,
2021 |
| | (unaudited) | | |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 35,767 | | | $ | 82,092 | |
Accounts receivable, net of allowances of $2,393 and $2,441, respectively | | 443,414 | | | 375,353 | |
Contract assets, net of allowances of $486 and $385, respectively | | 310,429 | | | 225,075 | |
| Current portion of receivable for insurance claims in excess of deductibles | | 8,927 | | | 11,078 | |
| Refundable income taxes | | 3,572 | | | 9,228 | |
| Prepaid expenses and other current assets | | 32,749 | | | 45,564 | |
| Total current assets | | 834,858 | | | 748,390 | |
Property and equipment, net of accumulated depreciation of $341,461 and $322,128, respectively | | 217,840 | | | 196,092 | |
| Operating lease right-of-use assets | | 31,405 | | | 20,971 | |
| Goodwill | | 115,151 | | | 66,065 | |
Intangible assets, net of accumulated amortization of $23,208 and $16,779, respectively | | 89,124 | | | 49,054 | |
| Receivable for insurance claims in excess of deductibles | | 34,865 | | | 32,443 | |
| Investment in joint ventures | | 3,138 | | | 3,978 | |
| Other assets | | 3,575 | | | 4,099 | |
| Total assets | | $ | 1,329,956 | | | $ | 1,121,092 | |
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current liabilities: | | | | |
| Current portion of long-term debt | | $ | 5,060 | | | $ | 1,039 | |
| Current portion of operating lease obligations | | 9,819 | | | 7,765 | |
| Current portion of finance lease obligations | | 1,161 | | | — | |
| Accounts payable | | 281,708 | | | 200,744 | |
| Contract liabilities | | 174,626 | | | 167,931 | |
| Current portion of accrued self-insurance | | 24,046 | | | 24,242 | |
| Accrued income taxes | | 1,084 | | | 2,021 | |
| Other current liabilities | | 87,510 | | | 94,857 | |
| Total current liabilities | | 585,014 | | | 498,599 | |
| Deferred income tax liabilities | | 37,304 | | | 24,620 | |
| Long-term debt | | 80,852 | | | 3,464 | |
| Accrued self-insurance | | 52,449 | | | 50,816 | |
| Operating lease obligations, net of current maturities | | 21,606 | | | 13,230 | |
| Finance lease obligations, net of current maturities | | 2,551 | | | — | |
| Other liabilities | | 14,303 | | | 11,261 | |
| Total liabilities | | 794,079 | | | 601,990 | |
| 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, 2022 and December 31, 2021 | | — | | | — | |
Common stock—$0.01 par value per share; 100,000,000 authorized shares; 16,607,373 and 16,870,636 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | | 166 | | | 168 | |
| Additional paid-in capital | | 159,784 | | | 163,754 | |
| Accumulated other comprehensive income (loss) | | (7,599) | | | 173 | |
| Retained earnings | | 383,526 | | | 355,007 | |
| | | | |
| | | | |
| Total stockholders’ equity | | 535,877 | | | 519,102 | |
| Total liabilities and stockholders’ equity | | $ | 1,329,956 | | | $ | 1,121,092 | |
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) | | 2022 | | 2021 | | 2022 | | 2021 |
| Contract revenues | | $ | 799,848 | | | $ | 610,182 | | | $ | 2,144,586 | | | $ | 1,852,241 | |
| Contract costs | | 713,502 | | | 526,259 | | | 1,896,893 | | | 1,610,343 | |
| Gross profit | | 86,346 | | | 83,923 | | | 247,693 | | | 241,898 | |
| Selling, general and administrative expenses | | 58,891 | | | 53,072 | | | 164,471 | | | 154,609 | |
| Amortization of intangible assets | | 827 | | | 578 | | | 6,847 | | | 1,734 | |
| Gain on sale of property and equipment | | (347) | | | (679) | | | (1,747) | | | (2,473) | |
| Income from operations | | 26,975 | | | 30,952 | | | 78,122 | | | 88,028 | |
| Other income (expense): | | | | | | | | |
| Interest income | | 44 | | | 23 | | | 58 | | | 51 | |
| Interest expense | | (1,134) | | | (305) | | | (2,235) | | | (1,458) | |
| Other income, net | | 223 | | | 69 | | | 2,485 | | | 190 | |
| Income before provision for income taxes | | 26,108 | | | 30,739 | | | 78,430 | | | 86,811 | |
| Income tax expense | | 7,672 | | | 7,568 | | | 19,622 | | | 22,493 | |
| Net income | | $ | 18,436 | | | $ | 23,171 | | | $ | 58,808 | | | $ | 64,318 | |
| | | | | | | | |
| | | | | | | | |
| Income per common share: | | | | | | | | |
| —Basic | | $ | 1.11 | | | $ | 1.37 | | | $ | 3.50 | | | $ | 3.82 | |
| —Diluted | | $ | 1.09 | | | $ | 1.35 | | | $ | 3.45 | | | $ | 3.75 | |
| Weighted average number of common shares and potential common shares outstanding: | | | | | | | | |
| —Basic | | 16,659 | | | 16,868 | | | 16,822 | | | 16,828 | |
| —Diluted | | 16,853 | | | 17,167 | | | 17,044 | | | 17,132 | |
| | | | | | | | |
| Net income | | $ | 18,436 | | | $ | 23,171 | | | $ | 58,808 | | | $ | 64,318 | |
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation adjustment | | (5,946) | | | (589) | | | (7,772) | | | 77 | |
| Other comprehensive income (loss) | | (5,946) | | | (589) | | | (7,772) | | | 77 | |
| Total comprehensive income | | $ | 12,490 | | | $ | 22,582 | | | $ | 51,036 | | | $ | 64,395 | |
| | | | | | | | |
| | | | | | | | |
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, 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 related to tax withholding for stock-based compensation | | — | | | (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 related to tax withholding for stock-based compensation | | — | | | (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 loss | | — | | | — | | | — | | | — | | | (589) | | | — | | | (589) | | | — | | | (589) | |
| | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2021 | | $ | — | | | 16,870 | | | $ | 168 | | | $ | 161,593 | | | $ | 100 | | | $ | 334,315 | | | $ | 496,176 | | | $ | 4 | | | $ | 496,180 | |
| | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | | $ | — | | | 16,871 | | | $ | 168 | | | $ | 163,754 | | | $ | 173 | | | $ | 355,007 | | | $ | 519,102 | | | $ | — | | | $ | 519,102 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 20,688 | | | 20,688 | | | — | | | 20,688 | |
| | | | | | | | | | | | | | | | | | |
| Stock issued under compensation plans, net | | — | | | 193 | | | 2 | | | 2 | | | — | | | — | | | 4 | | | — | | | 4 | |
| Stock-based compensation expense | | — | | | — | | | — | | | 1,624 | | | — | | | — | | | 1,624 | | | — | | | 1,624 | |
| Shares repurchased related to tax withholding for stock-based compensation | | — | | | (69) | | | — | | | (6,124) | | | — | | | (667) | | | (6,791) | | | — | | | (6,791) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | 1,651 | | | — | | | 1,651 | | | — | | | 1,651 | |
| | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2022 | | — | | | 16,995 | | | 170 | | | 159,256 | | | 1,824 | | | 375,028 | | | 536,278 | | | — | | | 536,278 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 19,684 | | | 19,684 | | | — | | | 19,684 | |
| Stock issued under compensation plans, net | | — | | | 9 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation expense | | — | | | — | | | — | | | 2,064 | | | — | | | — | | | 2,064 | | | — | | | 2,064 | |
| | | | | | | | | | | | | | | | | | |
| Settlement of stock repurchase program | | — | | | (280) | | | (3) | | | (2,629) | | | — | | | (20,835) | | | (23,467) | | | — | | | (23,467) | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | (3,477) | | | — | | | (3,477) | | | — | | | (3,477) | |
| | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2022 | | — | | | 16,724 | | | 167 | | | 158,691 | | | (1,653) | | | 373,877 | | | 531,082 | | | — | | | 531,082 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 18,436 | | | 18,436 | | | — | | | 18,436 | |
| Stock issued under compensation plans, net | | — | | | — | | | — | | | 26 | | | — | | | — | | | 26 | | | — | | | 26 | |
| Stock-based compensation expense | | — | | | — | | | — | | | 2,178 | | | — | | | — | | | 2,178 | | | — | | | 2,178 | |
| | | | | | | | | | | | | | | | | | |
| Settlement of stock repurchase program | | — | | | (117) | | | (1) | | | (1,111) | | | — | | | (8,787) | | | (9,899) | | | — | | | (9,899) | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | (5,946) | | | — | | | (5,946) | | | — | | | (5,946) | |
| | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2022 | | $ | — | | | 16,607 | | | $ | 166 | | | $ | 159,784 | | | $ | (7,599) | | | $ | 383,526 | | | $ | 535,877 | | | $ | — | | | $ | 535,877 | |
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) | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | |
| Net income | | $ | 58,808 | | | $ | 64,318 | |
| Adjustments to reconcile net income to net cash flows provided by operating activities: | | | | |
| Depreciation and amortization of property and equipment | | 36,317 | | | 32,884 | |
| Amortization of intangible assets | | 6,847 | | | 1,734 | |
| Stock-based compensation expense | | 5,866 | | | 5,350 | |
| Deferred income taxes | | (1) | | | 1,364 | |
| Gain on sale of property and equipment | | (1,747) | | | (2,473) | |
| Other non-cash items | | 3,230 | | | 1,171 | |
| Changes in operating assets and liabilities, net of acquisition: | | | | |
| Accounts receivable, net | | (56,125) | | | 23,929 | |
| Contract assets, net | | (74,775) | | | (33,642) | |
| Receivable for insurance claims in excess of deductibles | | (271) | | | (5,273) | |
| Other assets | | 23,326 | | | (5,786) | |
| Accounts payable | | 71,758 | | | 29,874 | |
| Contract liabilities | | 5,582 | | | (8,515) | |
| Accrued self-insurance | | 1,462 | | | 5,571 | |
| Other liabilities | | (6,551) | | | (2,291) | |
| Net cash flows provided by operating activities | | 73,726 | | | 108,215 | |
| Cash flows from investing activities: | | | | |
| Proceeds from sale of property and equipment | | 1,649 | | | 2,489 | |
| Cash paid for acquired business, net of cash acquired | | (110,660) | | | — | |
| Purchases of property and equipment | | (48,522) | | | (32,701) | |
| Net cash flows used in investing activities | | (157,533) | | | (30,212) | |
| Cash flows from financing activities: | | | | |
| Net borrowings under revolving lines of credit | | 57,748 | | | — | |
| Borrowings under equipment notes | | 24,187 | | | — | |
| Payment of principal obligations under equipment notes | | (522) | | | (24,409) | |
| Payment of principal obligations under finance leases | | (1,272) | | | (336) | |
| Proceeds from exercise of stock options | | 30 | | | 483 | |
| Repurchase of common stock | | (31,654) | | | — | |
| | | | |
| Payments related to tax withholding for stock-based compensation | | (6,791) | | | (3,352) | |
| Other financing activities | | — | | | 11 | |
| Net cash flows provided by (used in) financing activities | | 41,726 | | | (27,603) | |
| Effect of exchange rate changes on cash | | (4,244) | | | (62) | |
| Net increase (decrease) in cash and cash equivalents | | (46,325) | | | 50,338 | |
| Cash and cash equivalents: | | | | |
| Beginning of period | | 82,092 | | | 22,668 | |
| End of period | | $ | 35,767 | | | $ | 73,006 | |
| | | | |
| Supplemental cash flow information: | | | | |
| Noncash financing activities: | | | | |
| Share repurchases not settled | | $ | 1,712 | | | $ | — | |
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. 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 on electric transmission, distribution networks, substation facilities and clean energy projects include design, engineering, procurement, construction, upgrade, maintenance and repair services. 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. Typical C&I contracts cover electrical contracting services for airports, hospitals, data centers, hotels, stadiums, commercial and industrial facilities, clean energy projects, manufacturing plants, processing facilities, water/waste-water treatment facilities, mining facilities, intelligent transportation systems, roadway lighting and signalization.
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, 2021 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, 2021, included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 23, 2022 (the "2021 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.
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 (loss) 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 (expense), 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, 2022 were not significant. Foreign currency losses, recorded in other income, net, for the nine months ended September 30, 2021 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 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, acquisition-related contingent earn-out consideration liabilities, 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, 2022 and 2021, the Company had recognized revenues of $23.9 million and $4.0 million, respectively, related to large 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, 2022, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.3%, which resulted in decreases in operating income of $2.4 million, net income of $1.7 million and diluted earnings per common share of $0.10. During the nine months ended September 30, 2022, changes in estimates pertaining to certain projects did not have a significant impact on gross margin and resulted in increases in operating income of $0.3 million, net income of $0.1 million and diluted earnings per common share of $0.01.
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.
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 Issued Accounting Pronouncements
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. Under the new guidance the acquirer is required to recognize contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if the acquirer had originated the contracts. The update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period, for any period for which financial statements have not yet been issued. However, adoption in an interim period other than the first fiscal quarter requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period in which the new guidance is adopted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
2. Acquisition
Powerline Plus Ltd
On January 4, 2022, the Company acquired all issued and outstanding shares of capital stock of Powerline Plus Ltd. and its affiliate PLP Redimix Ltd. (collectively, the “Powerline Plus Companies"), a full-service electrical distribution construction company based in Toronto, Ontario. Consideration paid, funded through a combination of cash on hand and borrowings under the Facility (as defined below), including $0.1 million of net asset and other adjustments, was $110.7 million, net of cash acquired.
Additionally, the acquisition includes contingent earn-out consideration that may be payable if the Powerline Plus Companies achieve certain performance targets over a three-year post-acquisition period. As of the acquisition date, the fair value of the contingent earn-out consideration was $0.9 million. The future payout of the contingent earn-out consideration, if any, is unlimited and could be significantly higher than the acquisition date fair value. If the minimum thresholds of the performance targets are achieved the contingent earn-out consideration payment will be approximately $16.4 million. Changes in contingent earn-out consideration, subsequent to the acquisition, of approximately $0.5 million were recorded in other income, for the three and nine months ended September 30, 2022. The results of the Powerline Plus Companies are included in the Company’s consolidated financial statements beginning on the transaction date. During the three and nine months ended September 30, 2022, the Company recognized approximately $0.2 million and $0.4 million, respectively, of acquisition-related costs associated with this acquisition.
The purchase agreement also includes contingent consideration provisions for down-side margin guarantee adjustments based upon certain 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. Unfavorable 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 margin guarantee adjustments on contracts, subsequent to the acquisition, were recorded in other income and were not significant for the three and nine months ended September 30, 2022. Future margin guarantee adjustments, if any, are expected to be recognized through 2022 and possibly in early 2023.
The following table summarizes the preliminary allocation of the opening balance sheet as of the date of the Powerline Plus Companies acquisition through September 30, 2022: | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | January 4, 2022 acquisition date (initial estimates) | | Measurement
Period
Adjustments | | January 4, 2022 acquisition date (as adjusted through September 30, 2022) |
| Cash paid | | $ | 114,429 | | | $ | — | | | $ | 114,429 | |
| Contingent consideration - fair value at acquisition date | | 10,608 | | | (9,743) | | | 865 | |
| Net asset and other adjustments | | 563 | | | (479) | | | 84 | |
| Total consideration, net of estimated net asset adjustments | | 125,600 | | | (10,222) | | | 115,378 | |
| Less: Acquired cash | | (3,853) | | | — | | | (3,853) | |
| Total consideration less cash acquired, net of net asset and other adjustments | | $ | 121,747 | | | $ | (10,222) | | | $ | 111,525 | |
| | | | | | |
| Cash and cash equivalents | | $ | 3,853 | | | $ | — | | | $ | 3,853 | |
| Accounts receivable | | 12,131 | | | (52) | | | 12,079 | |
| Contract assets, net | | 12,443 | | | 148 | | | 12,591 | |
| Refundable income taxes | | 394 | | | 482 | | | 876 | |
| Prepaid expenses and other current assets | | 1,233 | | | (121) | | | 1,112 | |
| Property and equipment | | 10,366 | | | 1,577 | | | 11,943 | |
| Operating lease right-of-use assets | | 6,631 | | | — | | | 6,631 | |
| Intangible assets | | — | | | 49,735 | | | 49,735 | |
| Accounts payable | | (8,095) | | | (466) | | | (8,561) | |
| Contract liabilities | | (1,597) | | | (95) | | | (1,692) | |
| | | | | | |
| Current portion of operating lease obligations | | (1,224) | | | — | | | (1,224) | |
| Current portion of finance lease obligations | | (1,492) | | | — | | | (1,492) | |
| Deferred income tax liabilities | | (1,358) | | | (13,991) | | | (15,349) | |
| Operating lease obligations, net of current maturities | | (4,897) | | | — | | | (4,897) | |
| Finance lease obligations, net of current maturities | | (3,243) | | | — | | | (3,243) | |
| Net identifiable assets and liabilities | | 25,145 | | | 37,217 | | | 62,362 | |
| Unallocated intangible assets | | 56,650 | | | (56,650) | | | — | |
| Total acquired assets and liabilities | | 81,795 | | | (19,433) | | | 62,362 | |
| Goodwill | | $ | 43,805 | | | $ | 9,211 | | | $ | 53,016 | |
The following table summarizes the estimated fair values of identifiable intangible assets and the related weighted average amortization periods as of the acquisition date of the Powerline Plus Companies.
| | | | | | | | | | | | | | |
| | Estimated Fair Value at Acquisition Date | | Weighted Average Amortization Period at Acquisition Date |
| | (in thousands) | | (in years) |
| Amortizable Intangible Assets | | | | |
| Customer relationships | | $ | 39,757 | | | 15.0 |
| Backlog | | 4,007 | | | 1.0 |
| Total amortizable intangible assets | | 43,764 | | | 14.9 |
| Indefinite-lived Intangible Assets | | | | |
| Trade name | | 5,971 | | | Indefinite |
| Total intangible assets | | $ | 49,735 | | | |
The Company has developed preliminary estimates of fair value of the assets acquired and liabilities assumed for the purposes of allocating the purchase price. During the nine months ended September 30, 2022, the Company recorded certain measurement period adjustments related to various working capital, property and equipment, intangible asset and deferred tax accounts determined during our purchase price allocation procedures. The goodwill to be recognized, which represents the excess of the purchase price over the net amount of the fair values assigned to assets acquired and liabilities assumed, is primarily attributable to the value of an assembled workforce and other non-identifiable assets. No synergies were anticipated in the acquisition as the Powerline Plus Companies will function as an individual business within the Company’s operating structure. The Company will finalize the allocation of the purchase price once the final review of third-party valuations is completed. A portion of the goodwill will be tax deductible per applicable Canadian Revenue Authority regulations.
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, 2022 and $0.4 million as of December 31, 2021.
Contract assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | September 30,
2022 | | December 31,
2021 | | Change |
| Unbilled revenue, net | | $ | 185,707 | | | $ | 134,187 | | | $ | 51,520 | |
| Contract retainages, net | | 124,722 | | | 90,888 | | | 33,834 | |
| Contract assets, net | | $ | 310,429 | | | $ | 225,075 | | | $ | 85,354 | |
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,
2022 | | December 31,
2021 | | Change |
| Deferred revenue | | $ | 172,356 | | | $ | 165,699 | | | $ | 6,657 | |
| Accrued loss provision | | 2,270 | | | 2,232 | | | 38 | |
| Contract liabilities | | $ | 174,626 | | | $ | 167,931 | | | $ | 6,695 | |
The following table provides information about contract assets and contract liabilities from contracts with customers:
