The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 conducts operations through its 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 Transmission 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; 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. The C&I customers include general contractors, commercial and industrial
facility owners, local governments and developers in the west, midwest and northeast United States and western Canada. The C&I
segment provides services such as the design, installation, maintenance and repair of commercial and industrial wiring, installation
of traffic networks and the installation of bridge, roadway and tunnel lighting.
Basis of Presentation
Interim Consolidated Financial Information
The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial reporting and 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 and cash flows with respect to the interim consolidated financial statements, have
been included. The consolidated balance sheet as of December 31, 2017 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, 2017, included in the Company’s Annual Report on Form 10-K, which was filed
with the SEC on March 7, 2018.
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 consolidated balance sheets. For joint ventures 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. The Company includes only its percentage ownership of each joint venture
in its backlog. 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. See Note 12– Noncontrolling Interests to the Financial Statements for further information related to joint ventures
in which the Company has a majority controlling interest.
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 for
the nine months ended September 30, 2018 and losses for the nine months ended September 30, 2017, 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 consolidated statements of comprehensive income.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
As of September 30, 2018 and December 31, 2017, the Company held its cash in checking accounts or in highly liquid money market
funds. The Company’s banking arrangements allow the Company to fund outstanding checks when presented to financial institutions
for payment. The Company funds all intraday bank balances overdrafts during the same business day. Checks issued and outstanding
in excess of bank balance are recorded in accounts payable in the Consolidated Balance Sheets and are reflected as other financing
activities in the Consolidated Statements of Cash Flows. As of September 30, 2018 the Company had checks issued and outstanding
in excess of our bank balance of $9.2 million. The Company had no checks issued and outstanding in excess of our bank balance as
of December 31, 2017.
Accounts Receivable
The Company does not charge interest to
its customers and carries its customer receivables at their face amounts, less an allowance for doubtful accounts. Included in
accounts receivable are balances billed to customers pursuant to retainage provisions in certain contracts that are due upon completion
of the contract and acceptance by the customer, or earlier as provided by the contract. Based on the Company’s experience
in recent years, the majority of customer balances at each balance sheet date are collected within twelve months. As is common
practice in the industry, the Company classifies all accounts receivable, including retainage, as current assets. The contracting
cycle for certain long-term contracts may extend beyond one year, and accordingly, collection of retainage on those contracts may
extend beyond one year. The Company expects a majority of the retainage recorded at September 30, 2018 to be collected within one
year.
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 on 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 accounts receivable
reserves. 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 this accrual based on current gross
margin rates to be consistent with its cost method of revenue recognition.
In the nine months ended September 30, 2018
and September 30, 3017, the Company recognized revenues of $8.8 million and $6.5 million, respectively, related to significant
change orders and/or claims that had been included as contract price adjustments on certain contracts which were in the process
of being negotiated in the normal course of business.
The percentage of completion 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, 2018, changes in estimates pertaining to certain projects decreased consolidated gross margin
by 0.6%, which resulted in decreases in operating income of $2.1 million, net income of $1.6 million and diluted earnings per common
share of $0.09. During the nine months ended September 30, 2018, changes in estimates pertaining to certain projects decreased
consolidated gross margin by 0.4%, which resulted in decreases in operating income of $3.9 million, net income of $2.8 million
and diluted earnings per common share of $0.17.
During the three months ended September
30, 2017, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.9%, which resulted in decreases
in operating income of $3.2 million, net income of $1.9 million and diluted earnings per common share of $0.12. During the nine
months ended September 30, 2017, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.7%,
which resulted in decreases in operating income of $7.7 million, net income of $4.6 million and diluted earnings per common share
of $0.28.
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 May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The amendments under this pronouncement changed how an entity recognizes
revenue from contracts it enters to transfer goods, services or nonfinancial assets to its customers. These changes created a comprehensive
framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersede
virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance
in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the
amendments require expanded disclosure to enable the users of the financial statements to understand the nature, timing and uncertainty
of revenue and cash flow arising from contracts with customers. On January 1, 2018, the Company adopted this ASU on a modified
retrospective basis. Results for reporting periods beginning after January 1, 2018 are presented under
Revenue from Contracts
with Customers (Topic 606)
, while prior period amounts were not adjusted and continue to be reported in accordance with the
Company’s historical accounting under
Revenue Recognition Topic 605
. See Note 3–Revenue Recognition to the Financial
Statements for further information related to the Company’s accounting policy and transition disclosures associated with
the adoption of this pronouncement.
In January 2017, the FASB issued ASU No.
2017-01
, Business Combinations (Topic 805): Clarifying the Definition of a Business
, which clarified the definition of a
business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for
as acquisitions (or disposals) of assets or businesses. The Company adopted this ASU on a prospective basis in January 2018 and
there was no effect on the Company’s financial position, results of operations or cash flows.
In October 2016, the FASB issued ASU No.
2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
, which modified existing guidance
and intended to reduce the diversity in practice with respect to the accounting for income tax consequences of intra-entity transfers
of assets. This update requires entities to immediately recognize the tax consequences on intercompany asset transfers (excluding
inventory) at the transaction date, and eliminated the recognition exception within previous guidance. The Company adopted this
ASU using a modified retrospective approach in January 2018 and there was no effect on the Company’s financial position,
results of operations or cash flows.
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic 230)
:
Classification of Certain Cash Receipts and Cash Payments
, which intended
to reduce diversity in practice in how eight specific transactions are classified in the statement of cash flows. The Company adopted
this ASU on a retrospective basis in January 2018 and there was no effect on the Company’s financial position, results of
operations or cash flows.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU No.
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 update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The guidance requires application on a prospective basis. The Company does not expect that this pronouncement will have a significant
impact on its financial statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
. The amendments under this pronouncement will change the way all leases with durations in excess
of one year are treated. Under this guidance, lessees will be required to recognize virtually all leases on the balance sheet as
a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents
the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents
the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics,
leases are classified as financing leases or operating leases. Financing lease liabilities, which contain provisions similar to
capitalized leases, are amortized like capital leases under current accounting, as amortization expense and interest expense in
the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease
expense in the statement of operations. This update is effective for annual reporting periods, and interim periods within those
reporting periods, beginning after December 15, 2018.
The Company continues to evaluate the impact
that this pronouncement, and all amendments relating to this pronouncement, will have on its policies and procedures pertaining
to its existing and future lease arrangements, disclosure requirements and on the Company’s financial statements. The Company
has appointed a committee to transition its policies and procedures based on the requirements of this pronouncement and has purchased
lease software to support the additional requirements relating to this pronouncement. The Company expects that most existing operating
lease commitments that extend beyond twelve months at the time of adoption will be recognized as lease liabilities and right-of-use
assets upon adoption. While the Company is still evaluating the requirements of this update, it currently does not expect the adoption
to have a material impact on the recognition, measurement or presentation of lease expenses within the Consolidated Statements
of Operations and Comprehensive Income or Consolidated Statements of Cash Flows. See Note 9–Lease Obligations to the Financial
Statements for further information related to the Company’s future minimum lease payments and the timing of those payments.
2. Acquisition
On July 2, 2018, the Company completed the
acquisition of substantially all of the assets of Huen Electric, Inc., an electrical contracting firm based in Illinois, Huen Electric
New Jersey Inc., an electrical contracting firm based in New Jersey, and Huen New York, Inc., an electrical contracting firm based
in New York (collectively, the “Huen Companies”). The Huen Companies will provide a wide range of commercial and industrial
electrical construction capabilities under the Company’s C&I segment in Illinois, New Jersey and New York. The total
consideration paid was approximately $47.1 million, subject to working capital and net asset adjustments, which was funded through
borrowings on the line of credit. Total consideration paid may include a portion subject to potential net asset adjustments which
are expected to be finalized by the end of 2018. The Company’s preliminary estimate of these net asset adjustments was approximately
$10.7 million as of the July 2, 2018 closing date and as of September 30, 2018, which will increase the total consideration to be
paid, and is recorded in accounts payable on the consolidated balance sheets.
The purchase agreement also includes contingent
consideration provisions for margin guarantee adjustments based upon performance subsequent to the acquisition on certain contracts.
The contracts are valued at fair value at the acquisition date, causing no margin guarantee estimate. 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 certain contracts of
approximately $2.3 million were recorded in other expense for the three and nine months ended September 30, 2018. Future margin
guarantee adjustments, if any, are expected to be recognized through 2019. 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 the Huen Companies. These payments are recognized as compensation expense in the consolidated statements of operations as incurred.
For the three months ended September 30, 2018 the Company recognized $0.2 million of compensation expense associated with these
contingent payments.
The results of operations for Huen Companies
are included in the Company’s consolidated statement of operations and the C&I segment from the date of acquisition.
Costs of approximately $0.4 million related to the acquisition were included in selling, general and administrative expenses in
the consolidated statement of operations for the nine months ended September 30, 2018.
The following table summarizes the preliminary
allocation of the opening balance sheet from the date of acquisition through September 30, 2018:
(in thousands)
|
|
(as of
acquisition date)
July 2, 2018
|
|
|
|
|
|
Consideration paid
|
|
$
|
47,082
|
|
Preliminary estimated net asset adjustments
|
|
|
10,749
|
|
Total consideration, net of net asset adjustments
|
|
$
|
57,831
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
33,903
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
10,570
|
|
Other current and long term assets
|
|
|
88
|
|
Property and equipment
|
|
|
3,188
|
|
Accounts payable
|
|
|
(9,592
|
)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(6,394
|
)
|
Other current liabilities
|
|
|
(6,571
|
)
|
Net identifiable assets and liabilities
|
|
|
25,192
|
|
Unallocated intangible assets
|
|
|
9,800
|
|
Total acquired assets and liabilities
|
|
|
34,992
|
|
Fair value of acquired noncontrolling interests
|
|
|
(1,272
|
)
|
Goodwill
|
|
$
|
24,111
|
|
The Company has developed
preliminary estimates of fair value of the assets acquired and liabilities assumed for the purposes of allocating the
purchase price. In conjunction with the acquisition of the Huen Companies, the Company acquired a majority-ownership of an
ongoing joint venture. The assets acquired within the joint venture are recorded at their fair value at the time of the
acquisition, relate to a specific contract, and no assets or liabilities outside of the operations of the contract existed at
the acquisition date. 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 three companies will function
as individual districts within the Company’s operating structure. Further adjustments are expected to the allocation as
third party valuations of identifiable intangible assets, including backlog, customer relationships, trade name and
off-market component, are determined, and as net asset adjustments are finalized. Additionally, the Company will perform an
analysis of the purchase price allocation and make appropriate adjustments based on the analysis. All of the goodwill and
identifiable intangible assets are expected to be tax deductible per applicable Internal Revenue Service regulations.
The following unaudited supplemental pro
forma results of operations have been provided for illustrative purposes only and do not purport to be indicative of the actual
results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined
companies in the future. Future results may vary significantly from the results reflected in the following pro forma financial
information because of future events and transactions, as well as other factors:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Contract revenues
|
|
$
|
399,537
|
|
|
$
|
399,015
|
|
|
$
|
1,166,273
|
|
|
$
|
1,119,375
|
|
Net income
|
|
$
|
8,373
|
|
|
$
|
6,952
|
|
|
$
|
24,986
|
|
|
$
|
11,724
|
|
Net income attributable to MYR Group, Inc.
|
|
$
|
8,373
|
|
|
$
|
6,952
|
|
|
$
|
24,268
|
|
|
$
|
10,898
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
|
|
$
|
0.51
|
|
|
$
|
0.43
|
|
|
$
|
1.48
|
|
|
$
|
0.67
|
|
—Diluted
|
|
$
|
0.50
|
|
|
$
|
0.42
|
|
|
$
|
1.46
|
|
|
$
|
0.66
|
|
Weighted average number of common shares and potential common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic
|
|
|
16,492
|
|
|
|
16,314
|
|
|
|
16,423
|
|
|
|
16,263
|
|
—Diluted
|
|
|
16,630
|
|
|
|
16,474
|
|
|
|
16,580
|
|
|
|
16,476
|
|
The pro forma combined results of operations
for the three and nine months ended September 30, 2018 and 2017 were prepared by adjusting the historical results of the Company
to include the historical results of the Huen Companies, as if the acquisition occurred on January 1, 2017. These pro forma results
were adjusted for the following:
|
·
|
To include additional depreciation associated with the estimated step-up in fair value of the property and equipment acquired.
|
|
·
|
To record the net reduction in lease expense associated with the revised real estate lease contracts that were completed at
the time of the acquisition.
|
|
·
|
To record transaction costs associated with the acquisition.
|
|
·
|
To record the estimated amortization related to the acquired intangible assets discussed above.
|
|
·
|
To record the additional interest expense related to the incremental borrowings of $47.1 million on the Company’s credit
facility with an interest rate of 2.90% for the three and nine months ended September 30, 2018 and 2.00% for the three and nine
months ended September 30, 2017.
|
|
·
|
To reflect the income tax effect of pro forma adjustments at the statutory tax rate.
|
|
·
|
To record estimated compensation payments contingent on the successful achievement of certain performance targets.
|
Revenues of approximately $37.8 million
and income before income taxes of approximately $0.2 million, were included in the Company’s consolidated results of operations
for the three and nine months ended September 30, 2018 related to the acquisition of the Huen Companies.
3. Revenue Recognition
Adoption and Accounting Policy
On January 1, 2018, the Company adopted
ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
using the modified retrospective method for contracts
that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under
this new pronouncement, while prior period amounts are not adjusted and continue to be reported under the accounting standard
Revenue
Recognition Topic 605,
which was in effect for prior periods. The Company recorded an increase to opening retained earnings
of $0.7 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, representing revenues which
would have been recognized in prior periods under Topic 606. The impact of adopting Topic 606 to revenue for the three months ended
September 30, 2018 was not significant. The impact of adopting Topic 606 for the nine months ended September 30, 2018 was an increase
of $0.3 million to revenue. The cumulative adjustment and the impact experienced during the nine months ended September 30, 2018
were due to accelerated recognition of contract provisions related to variable consideration previously not permitted to be recognized
under Topic 605 until no remaining contingency existed related to this consideration.
Under Topic 606, the Company recognizes
revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration the Company expects
to be entitled to in exchange for goods or services provided. Revenue associated with contracts with customers is recognized over
time as the Company’s performance creates or enhances customer controlled assets or creates or enhances an asset with no
alternative use, for which the Company has an enforceable right to receive compensation as defined under the contract. To determine
the amount of revenue to recognize over time, the Company estimates profit by determining the difference between total estimated
revenue and total estimated cost of a contract. In addition, the Company estimates a cost accrual every quarter that represents
unbilled invoicing activity for services performed by subcontractors and suppliers during the quarter, and estimates revenue from
the contract cost portion of this accrual based on current gross margin rates to be consistent with its cost method of revenue
recognition. The estimated value of unbilled amounts are determined using a regression analysis that estimates value based on our
historical experience, and is adjusted for large individual projects. The profit and corresponding revenue is recognized over the
contract term based on costs incurred under the cost-to-cost method. The Company utilized the cost-to-cost method as we believe
cost incurred best represent the amount of work completed and remaining on our projects, and is the most common basis for computing
percentage of completion in our industry. For purposes of recognizing revenue, the Company follows the five-step approach outlined
in ASC 606-10-25.
As the cost-to-cost method is driven by
incurred cost, the Company calculates the percentage of completion by dividing costs incurred to date by the total estimated cost.
The percentage of completion is then multiplied by estimated revenues to determine inception-to-date revenue. Revenue recognized
for the period is the current inception-to-date recognized revenue less the prior period inception-to-date recognized revenue.
If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined
and the amount of the loss is updated in subsequent reporting periods. Revenue recognition also includes an amount related to a
contract asset or contract liability. If the recognized revenue is greater than the amount billed to the customer, a contract asset
is recorded in costs and estimated earnings in excess of billings on uncompleted contracts. Conversely, if the amount billed to
the customer is greater than the recognized revenue, a contract liability is recorded in billings in excess of costs and estimated
earnings on uncompleted contracts. Contract costs incurred to date and expected total contract costs are continuously monitored
during the term of the contract. Changes in the job performance, job conditions and final contract settlements are factors that
influence management’s assessment of total contract value and the total estimated costs to complete those contracts, and
therefore, profit and revenue recognition. Additionally, the Company estimates costs to complete on fixed price contracts which
are determined on an individual contract basis by evaluating each project’s status as of the balance sheet date, and using
our historical experience with the level of effort required to complete the underlying project. Claims and change orders are also
measured based on our historical experience with individual customers and similar contracts, and are evaluated by management individually.
The Company includes these estimated amounts of variable consideration to the extent that it is probable there will not be a significant
reversal of revenue.
Some of the Company’s contracts may
have contract terms that include variable consideration such as safety or performance bonuses or liquidated damages. In accordance
with ASC 606-10-32, the Company estimates the variable consideration using one of two methods. In contracts in which there is a
binary outcome, the most likely amount method is used. In instances in which there is a range of possible outcomes, the expected
value method is used. In accordance with ASC 606-10-32-11, the Company includes the estimated amount of variable consideration
in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative recognized
revenue will not result when the final outcome of the variable consideration is determined. In contracts in which a significant
reversal may occur, the Company uses constraint in recognizing revenue on variable consideration. Although the Company often enters
into contracts that contain liquidated damage clauses, the Company rarely incurs them, and as such, the Company does not include
amounts associated with liquidated damage clauses until it is probable that liquidated damages will occur. These items are continually
monitored by multiple levels of management throughout the reporting period.
A portion of the work the Company performs
requires financial assurances in the form of performance and payment bonds or letters of credit at the time of execution of the
contract. Most contracts include retention provisions of up to 10%, which are generally withheld from each progress payment as
retainage until the contract work has been completed and approved.
Disaggregation of Revenue
A majority of the Company’s revenues
are earned through contracts with customers that normally provide for payment upon completion of specified work or units of work
as identified in the contract. Although there is considerable variation in the terms of these contracts they are primarily structured
as fixed-price contracts, under which the Company agrees to do the entire project for a fixed amount, or unit-price contracts,
under which the Company agrees to do the work at a fixed price per unit of work as specified in the contract. The Company also
enters into time-and-equipment and time-and-materials contracts under which the Company is paid for labor and equipment at negotiated
hourly billing rates and for other expenses, including materials, as incurred. Finally, the Company sometimes enters into cost-plus
contracts, where the Company is paid for costs plus a negotiated margin. On occasion, time-and-equipment, time-and-materials and
cost-plus contracts require the Company to include a guaranteed not-to-exceed maximum price.
Historically, fixed-price and unit-price
contracts have had the highest potential margins; however, they have had a greater risk in terms of profitability because cost
overruns may not be recoverable. Time-and-equipment, time-and-materials and cost-plus contracts have historically had less margin
upside, but generally have had a lower risk of cost overruns. The Company also provides services under master service agreements
(“MSAs”) and other variable-term service agreements. MSAs normally cover maintenance, upgrade and extension services,
as well as new construction. Work performed under MSAs is typically billed on a unit-price, time-and-materials or time-and-equipment
basis. MSAs are typically one to three years in duration; however, most of the Company’s contracts, including MSAs, may be
terminated by the customer on short notice, typically 30 to 90 days, even if the Company is not in default under the contract.
Under MSAs, customers generally agree to use the Company for certain services in a specified geographic region. Most MSAs include
no obligation for the contract counterparty to assign specific volumes of work to the Company and do not require the counterparty
to use the Company exclusively, although in some cases the MSA contract gives the Company a right of first refusal for certain
work. Additional information related to the Company’s market types is provided in Note 11–Segment Information to the
Financial Statements.
The components of the Company’s revenue
by contract type for the three and nine months ended September 30, 2018 were as follows:
|
|
Three months ended September 30, 2018
|
|
|
|
T&D
|
|
|
C&I
|
|
|
Total
|
|
(in thousands)
|
|
|
Amount
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
|
Percent
|
|
Fixed price
|
|
$
|
82,058
|
|
|
|
36.9
|
%
|
|
$
|
132,439
|
|
|
|
74.8
|
%
|
|
$
|
214,497
|
|
|
|
53.7
|
%
|
Unit Price
|
|
|
42,751
|
|
|
|
19.2
|
|
|
|
14,256
|
|
|
|
8.1
|
|
|
|
57,007
|
|
|
|
14.3
|
|
T&E
|
|
|
76,520
|
|
|
|
34.4
|
|
|
|
9,431
|
|
|
|
5.3
|
|
|
|
85,951
|
|
|
|
21.5
|
|
Other
|
|
|
21,202
|
|
|
|
9.5
|
|
|
|
20,880
|
|
|
|
11.8
|
|
|
|
42,082
|
|
|
|
10.5
|
|
|
|
$
|
222,531
|
|
|
|
100.0
|
%
|
|
$
|
177,006
|
|
|
|
100.0
|
%
|
|
$
|
399,537
|
|
|
|
100.0
|
%
|
|
|
Nine months ended September 30, 2018
|
|
|
|
T&D
|
|
|
C&I
|
|
|
Total
|
|
(in thousands)
|
|
|
Amount
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
|
Percent
|
|
Fixed price
|
|
$
|
238,723
|
|
|
|
37.5
|
%
|
|
$
|
312,033
|
|
|
|
69.5
|
%
|
|
$
|
550,756
|
|
|
|
50.8
|
%
|
Unit Price
|
|
|
130,058
|
|
|
|
20.5
|
|
|
|
39,314
|
|
|
|
8.8
|
|
|
|
169,372
|
|
|
|
15.6
|
|
T&E
|
|
|
224,938
|
|
|
|
35.4
|
|
|
|
27,830
|
|
|
|
6.2
|
|
|
|
252,768
|
|
|
|
23.3
|
|
Other
|
|
|
42,123
|
|
|
|
6.6
|
|
|
|
69,805
|
|
|
|
15.5
|
|
|
|
111,928
|
|
|
|
10.3
|
|
|
|
$
|
635,842
|
|
|
|
100.0
|
%
|
|
$
|
448,982
|
|
|
|
100.0
|
%
|
|
$
|
1,084,824
|
|
|
|
100.0
|
%
|
The components of the Company’s revenue
by market type for the three and nine months ended September 30, 2018 were as follows:
|
|
Three months ended September 30, 2018
|
|
Nine months ended September 30, 2018
|
(in thousands)
|
|
Amount
|
|
|
Percent
|
|
|
Segment
|
|
Amount
|
|
|
Percent
|
|
|
Segment
|
Transmission
|
|
$
|
121,619
|
|
|
|
30.4
|
%
|
|
T&D
|
|
$
|
377,780
|
|
|
|
34.8
|
%
|
|
T&D
|
Distribution
|
|
|
100,912
|
|
|
|
25.3
|
|
|
T&D
|
|
|
258,062
|
|
|
|
23.8
|
|
|
T&D
|
Electrical Construction
|
|
|
177,006
|
|
|
|
44.3
|
|
|
C&I
|
|
|
448,982
|
|
|
|
41.4
|
|
|
C&I
|
Total Revenue
|
|
$
|
399,537
|
|
|
|
100.0
|
%
|
|
|
|
$
|
1,084,824
|
|
|
|
100.0
|
%
|
|
|
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 following table provides
information about receivables, contract assets and contract liabilities from contracts with customers:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
124,057
|
|
|
$
|
78,260
|
|
|
$
|
45,797
|
|
Contract liabilities
|
|
|
(46,186
|
)
|
|
|
(28,919
|
)
|
|
|
(17,267
|
)
|
Net contract assets (liabilities)
|
|
$
|
77,871
|
|
|
$
|
49,341
|
|
|
$
|
28,530
|
|
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
performance and customer payment. The amounts of revenue recognized in the period that was included in the opening contract liability
balances was $35.3 million and $37.3 million for the three and nine months ended September 30, 2018, respectively. This revenue
consists primarily of work performed on previous billings to customers.
Remaining Performance Obligations
On September 30, 2018, the Company had $1.02
billion of remaining performance obligations. The Company’s remaining performance obligations includes projects that have
a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms
and conditions. The following table summarizes that amount of remaining performance obligations that the Company expects to be
realized as of September 30, 2018 and the amount of the remaining performance obligations that the Company reasonably estimates
will not be recognized within the next twelve months. The Company expects a vast majority of the remaining performance obligations
to be recognized within twenty-four months, although the timing of the Company’s performance is not always under its control.
Additionally, the difference between the remaining performance obligations and backlog is due to the exclusion of a portion of
the Company’s MSAs under certain contract types from the Company’s remaining performance obligations as these contracts
can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer.
Additional information related to backlog is provided in “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
|
|
Remaining Performance Obligations as of September 30, 2018
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
|
Amount estimated to not be
recognized within 12 months
|
|
|
|
|
|
|
|
|
T&D
|
|
$
|
403,046
|
|
|
$
|
63,683
|
|
C&I
|
|
|
615,575
|
|
|
|
132,551
|
|
Total
|
|
$
|
1,018,621
|
|
|
$
|
196,234
|
|
4. Fair Value Measurements
The Company uses the three-tier hierarchy
of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of availability in
external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices
in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
As of September 30, 2018 and December 31,
2017, the Company determined that the carrying value of cash and cash equivalents approximated fair value based on Level 1 inputs.
As of September 30, 2018 and December 31, 2017, the fair values of the Company’s long-term debt and capital lease obligations
were based on Level 2 inputs. The Company’s long-term debt was based on variable and fixed interest rates at September 30,
2018 and December 31, 2017, for new issues with similar remaining maturities, and approximated carrying value. In addition, based
on borrowing rates currently available to the Company for borrowings with similar terms, the carrying values of the Company's capital
lease obligations also approximated fair value.
5. Contracts in Process
The net asset position for contracts in
process consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Costs and estimated earnings on uncompleted contracts
|
|
$
|
2,437,192
|
|
|
$
|
1,978,981
|
|
Less: Billings to date
|
|
|
2,359,321
|
|
|
|
1,929,640
|
|
|
|
$
|
77,871
|
|
|
$
|
49,341
|
|
The net asset position for contracts in
process included in the accompanying consolidated balance sheets was as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
124,057
|
|
|
$
|
78,260
|
|
Billings in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(46,186
|
)
|
|
|
(28,919
|
)
|
|
|
$
|
77,871
|
|
|
$
|
49,341
|
|
6. Debt
The
table below reflects the Company's total debt, including borrowings under its credit agreement and
master loan agreement
for
equipment notes:
|
|
|
|
Stated Interest
|
|
Payment
|
|
Term
|
|
Outstanding
Balance as of
September 30,
|
|
|
Outstanding
Balance as of
December 31,
|
|
(dollar amounts in thousands)
|
|
Inception Date
|
|
Rate (per annum)
|
|
Frequency
|
|
(years)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving loans
|
|
6/30/2016
|
|
Variable
|
|
Variable
|
|
5
|
|
$
|
64,380
|
|
|
$
|
78,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Note 1
|
|
9/28/2018
|
|
4.16%
|
|
Semi-annual
|
|
5
|
|
|
12,655
|
|
|
|
—
|
|
Equipment Note 2
|
|
9/28/2018
|
|
4.23%
|
|
Semi-annual
|
|
7
|
|
|
12,279
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
24,934
|
|
|
|
—
|
|
Total Debt
|
|
|
|
|
|
|
|
|
|
|
89,314
|
|
|
|
78,960
|
|
Less: Current Portion of long-term debt
|
|
|
|
|
|
|
|
|
(2,941
|
)
|
|
|
—
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
86,373
|
|
|
$
|
78,960
|
|
Credit Agreement
On June 30, 2016, the Company entered into
a five-year amended and restated credit agreement as amended from time to time, (the “Credit Agreement”) with a syndicate
of banks led by JPMorgan Chase Bank, N.A. and Bank of America, N.A, that provided for a $250 million facility (the “Facility”),
which could be used for revolving loans and letters of credit. On September 28, 2018, the Company amended the Credit Agreement.
This amendment, among other things, reduces the amount of the Facility available to be used for letters of credit to a maximum
of $150 million. The Facility also allows for revolving loans and letters of credit in Canadian dollars and other currencies, up
to the U.S. dollar equivalent of $50 million. The Company has an expansion option to increase the commitments under the Facility
or enter into incremental term loans, subject to certain conditions, by up to an additional $100 million upon receipt of additional
commitments from new or existing lenders. Subject to certain exceptions, the Facility is secured by substantially all of the assets
of the Company and its domestic subsidiaries and by a pledge of substantially all of the capital stock of the Company’s domestic
subsidiaries and 65% of the capital stock of the direct foreign subsidiaries of the Company. Additionally, subject to certain exceptions,
the Company’s domestic subsidiaries also guarantee the repayment of all amounts due under the Credit Agreement. If an event
of default occurs and is continuing, on the terms and subject to the conditions set forth in the Credit Agreement, amounts outstanding
under the Facility may be accelerated and may become or be declared immediately due and payable. Borrowings under the Credit Agreement
are used for working capital, capital expenditures, acquisitions, stock repurchases and other general corporate purposes.
Amounts borrowed under the Credit Agreement
bear interest, at the Company’s option, at a rate equal to either (1) the Alternate Base Rate (as defined in the Credit Agreement),
plus an applicable margin ranging from 0.00% to 1.00%; or (2) Adjusted LIBO Rate (as defined in the Credit Agreement) plus an applicable
margin ranging from 1.00% to 2.00%. The applicable margin is determined based on the Company’s consolidated leverage ratio
(the “Leverage Ratio”) which is defined in the Credit Agreement as Consolidated Total Indebtedness divided by Consolidated
EBITDA (as defined in the Credit Agreement). Letters of credit issued under the Facility are subject to a letter of credit fee
of 1.125% to 2.125% for non-performance letters of credit or 0.625% to 1.125% for performance letters of credit, based on the Company’s
consolidated Leverage Ratio. The Company is subject to a commitment fee of 0.20% to 0.375%, based on the Company’s consolidated
Leverage Ratio, on any unused portion of the Facility. The Credit Agreement restricts certain types of payments when the Company’s
consolidated Leverage Ratio exceeds 2.25. The weighted average interest rate on borrowings outstanding on the Facility for the
nine months ended September 30, 2018 was 2.90% per annum.
Under the Credit Agreement, the Company
is subject to certain financial covenants and must maintain a maximum consolidated Leverage Ratio of 3.0 and a minimum interest
coverage ratio of 3.0, which is defined in the Credit Agreement as Consolidated EBITDA (as defined in the Credit Agreement) divided
by interest expense (as defined in the Credit Agreement). The Credit Agreement also contains a number of covenants, including limitations
on asset sales, investments, indebtedness and liens. In connection with any permitted acquisition where the total consideration
exceeds $50 million, the Company may request that the maximum permitted consolidated Leverage Ratio increase from 3.0 to 3.5. Any
such increase shall begin in the quarter in which such permitted acquisition is consummated and shall continue in effect for four
consecutive fiscal quarters. The Company was in compliance with all of its financial covenants under the Credit Agreement as of
September 30, 2018.
As of September 30, 2018, the Company had
irrevocable standby letters of credit outstanding under the Facility of approximately $21.2 million, including $17.6 million related
to the Company’s payment obligation under its insurance programs and approximately $3.6 million related to contract performance
obligations. As of December 31, 2017, the Company had irrevocable standby letters of credit outstanding under the Facility of approximately
$20.9 million, including $17.6 million related to the Company’s payment obligation under its insurance programs and approximately
$3.3 million related to contract performance obligations.
The Company has remaining deferred debt
issuance costs totaling $0.6 million as of September 30, 2018, related to the line of credit. As permitted under ASU No. 2015-15,
debt issuance costs have been deferred and are presented as an asset within other assets, which is amortized as interest expense
over the term of the line of credit.
Equipment Notes
On September 28, 2018, the Company entered
into a Master Equipment Loan and Security Agreement (the “Master Loan Agreement”) with Banc of America Leasing &
Capital, LLC (“BofA”). The Master Loan Agreement may be used for the financing of equipment between the Company and
BofA pursuant to one or more "Equipment Notes". Each Equipment Note executed under the Master Loan Agreement constitutes
a separate, distinct and independent financing of equipment and a contractual obligation of the Company, which may contain prepayment
clauses.
On September 28, 2018, the Company executed
two Equipment Notes under the Master Loan Agreement that are collateralized by equipment and vehicles owned by the Company. The
following table sets forth our remaining principal payments for the Company’s outstanding Equipment Notes as of September
30, 2018:
|
|
Future
|
|
|
|
|
Equipment Notes
|
|
(In thousands)
|
|
|
Principal Payments
|
|
|
|
|
|
|
Remainder of 2018
|
|
$
|
—
|
|
2019
|
|
|
2,941
|
|
2020
|
|
|
3,066
|
|
2021
|
|
|
3,195
|
|
2022
|
|
|
3,329
|
|
2023
|
|
|
6,002
|
|
Thereafter
|
|
|
6,401
|
|
Total future principal payments
|
|
$
|
24,934
|
|
Less: Current portion of equipment notes
|
|
|
(2,941
|
)
|
Long-term principal obligations
|
|
$
|
21,993
|
|
7. Income Taxes
The U.S. federal statutory tax rate was
21% for the three and nine months ended September 30, 2018 and 35% for the three and nine months ended September 30, 2017. The
Company’s effective tax rate for the three and nine months ended September 30, 2018 was 26.6% and 28.0%, respectively, of
pretax income compared to the effective tax rate for the three and nine months ended September 30, 2017 of 44.8% and 45.6%, respectively.
The difference between the U.S. federal
statutory tax rate and the Company’s effective tax rate for the three months ended September 30, 2018, was primarily due
to state income taxes and, for the nine months ended September 30, 2018, the difference was primarily due to state income taxes
and the inability to utilize losses experienced in certain Canadian operations.
The difference between the U.S. federal
statutory tax rate and the Company’s effective tax rate for the three months ended September 30, 2017 was primarily caused
by
the inability to utilize losses experienced in certain Canadian operations
.
The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the nine months ended
September 30, 2017 was caused by
the inability to utilize losses experienced
in certain Canadian operations, partially offset by
excess tax benefits of approximately $1.0 million pertaining to the
vesting of stock awards and the exercise of stock options.
The Company had unrecognized tax benefits
of approximately $0.4 million as of September 30, 2018 and $0.8 million as of December 31, 2017, which were included in other liabilities
in the accompanying consolidated balance sheets.
The Company’s policy is to recognize
interest and penalties related to income tax liabilities as a component of income tax expense in the consolidated statements of
operations. The amount of interest and penalties charged to income tax expense because of the unrecognized tax benefits was not
significant for the three and nine months ended September 30, 2018 and 2017.
The Company is subject to taxation in various
jurisdictions. The Company’s tax returns for 2015, 2016 and 2017 are subject to examination by U.S. federal authorities.
The Company’s tax returns are subject to examination by various state authorities for the years 2013 through 2017.
8. Commitments and Contingencies
Purchase Commitments
As of September 30, 2018, the Company had
approximately $16.8 million in outstanding purchase orders for certain construction equipment, with cash outlay scheduled to occur
over the next twelve months.
Insurance and Claims Accruals
The Company carries insurance policies,
which are subject to certain deductibles, for workers’ compensation, general liability, automobile liability and other insurance
coverage. The deductible per occurrence for each line of coverage is up to $1.0 million, except for wildfire coverage which has
a deductible of $2.0 million. The Company’s health benefit plans are subject to deductibles of up to $0.2 million for qualified
individuals. Losses up to the deductible amounts are accrued based upon the Company’s estimates of the ultimate liability
for claims reported and an estimate of claims incurred but not yet reported.
The insurance and claims accruals are based
on known facts, actuarial estimates and historical trends. While recorded accruals are based on the ultimate liability, which includes
amounts in excess of the deductible, a corresponding receivable for amounts in excess of the deductible is included in current
and long-term assets in the consolidated balance sheets.
Performance and Payment Bonds and Parent Guarantees
In certain circumstances, the Company is
required to provide performance and payment bonds in connection with its future performance on certain contractual commitments.
The Company has indemnified its sureties for any expenses paid out under these bonds. As of September 30, 2018, an aggregate of
approximately $591.2 million in original face amount of bonds issued by the Company’s sureties were outstanding. The Company
estimated the remaining cost to complete these bonded projects was approximately $333.7 million as of September 30, 2018.
From time to time the Company guarantees
the obligations of wholly owned subsidiaries, including obligations under certain contracts with customers, certain lease agreements,
and, in some states, obligations in connection with obtaining contractors’ licenses. Additionally, from time to time the
Company is required to post letters of credit to guarantee the obligations of wholly owned subsidiaries, which reduces the borrowing
availability under the Facility.
Indemnities
From time to time, pursuant to its service
arrangements, the Company indemnifies its customers for claims related to the services it provides under those service arrangements.
These indemnification obligations may subject the Company to indemnity claims and liabilities and related litigation. The Company
is not aware of any material unrecorded liabilities for asserted claims in connection with these indemnification obligations.
Collective Bargaining Agreements
Many of the Company’s subsidiaries’
craft labor employees are covered by collective bargaining agreements. The agreements require the subsidiaries to pay specified
wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If a subsidiary withdraws from
any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the subsidiary could incur liabilities
for additional contributions related to these plans. Although the Company has been informed that the underfunding of some of the
multi-employer pension plans to which its subsidiaries contribute have been classified as “critical” status, the Company
is not currently aware of any potential liabilities related to this issue.
Litigation and Other Legal Matters
The Company is from time-to-time party to
various lawsuits, claims, and other legal proceedings that arise in the ordinary course of business. These actions typically seek,
among other things, compensation for alleged personal injury, breach of contract, property damages, punitive damages, civil penalties
or other losses, or injunctive or declaratory relief.
The Company is routinely subject to other
civil claims, litigation and arbitration, and regulatory investigations arising in the ordinary course of our business, as well
as in respect of our divested businesses. These claims, lawsuits and other proceedings include claims related to the Company’s
current services and operations, as well as our historic operations.
With respect to all such lawsuits, claims
and proceedings, the Company records reserves when it is probable that a liability has been incurred and the amount of loss can
be reasonably estimated. The Company does not believe that any of these proceedings, separately or in the aggregate, would be expected
to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
9. Lease Obligations
From time to time, the Company enters into
leasing arrangements for real estate, vehicles and construction equipment, including master leasing arrangements for vehicles and
construction equipment. Some of the leases entered into under these agreements met the requirements for capitalization and were
recorded as capital leases, while others were treated as operating leases. As of September 30, 2018, the Company had no outstanding
commitments to enter into future leases under its master lease agreements.
Capital Leases
The Company leases some vehicles and certain
equipment under capital leases. The economic substance of the leases is a financing transaction for acquisition of the vehicles
and equipment. Accordingly, these leases are included in the balance sheets in property and equipment, net of accumulated depreciation,
with a corresponding amount recorded in current portion of capital lease obligations or capital lease obligations, net of current
maturities, as appropriate. The capital lease assets are amortized over the life of the lease or, if shorter, the life of the leased
asset, on a straight-line basis and included in depreciation expense in the statements of operations. The interest associated with
capital lease obligations is included in interest expense in the statements of operations.
As of September 30, 2018, the Company had
approximately $2.9 million of capital lease obligations outstanding, $1.1 million of which was classified as a current liability.
As of December 31, 2017, the Company had approximately $3.7 million of capital lease obligations outstanding, $1.1 million of which
was classified as a current liability.
As of September 30, 2018 and December 31,
2017, $2.9 million and $3.7 million, respectively, of leased assets were capitalized in construction equipment, net of accumulated
depreciation.
Operating Leases
The Company, from time to time, leases real
estate, construction equipment and office equipment under operating leases with remaining terms ranging from one to six years.
Future Minimum Lease Payments
The future minimum lease payments required
under capital leases and operating leases, together with the present value of capital leases, as of September 30, 2018 were as
follows
:
|
|
Capital
|
|
|
Operating
|
|
(In thousands)
|
|
Lease
Obligations
|
|
|
Lease
Obligations
|
|
|
|
|
|
|
|
|
Remainder of 2018
|
|
$
|
296
|
|
|
$
|
1,236
|
|
2019
|
|
|
1,185
|
|
|
|
4,081
|
|
2020
|
|
|
1,185
|
|
|
|
2,988
|
|
2021
|
|
|
363
|
|
|
|
2,270
|
|
2022
|
|
|
—
|
|
|
|
1,692
|
|
Thereafter
|
|
|
—
|
|
|
|
771
|
|
Total minimum lease payments
|
|
$
|
3,029
|
|
|
$
|
13,038
|
|
Interest
|
|
|
(123
|
)
|
|
|
|
|
Net present value of minimum lease payments
|
|
|
2,906
|
|
|
|
|
|
Less: Current portion of capital lease obligations
|
|
|
1,110
|
|
|
|
|
|
Long-term capital lease obligations
|
|
$
|
1,796
|
|
|
|
|
|
10. Stock-Based Compensation
The Company maintains two equity compensation
plans under which stock-based compensation has been granted: the 2017 Long-Term Incentive Plan, (the “LTIP”) and the
2007 Long-Term Incentive Plan (the “2007 Plan”). Upon the adoption of the LTIP during the second quarter of 2017, awards
were no longer granted under the 2007 Plan. The LTIP provides for grants of (a) incentive stock options qualified as such under
U.S. federal income tax laws, (b) stock options that do not qualify as incentive stock options, (c) stock appreciation rights,
(d) restricted stock awards, (e) restricted stock units, (f) performance share awards, (g) phantom stock units, (h) stock bonuses,
(i) dividend equivalents, and (j) any combination of such grants.
The company grants time-vested stock awards
in the form of restricted stock awards, restricted stock units or equity-settled phantom stock. During the nine months ended September
30, 2018, the Company granted 93,280 shares of time-vested stock awards under the LTIP, which primarily vest ratably over three
years, at a weighted average grant date fair value of $30.22. Additionally, 96,840 shares of time-vested stock awards vested during
the nine months ended September 30, 2018, at a weighted average grant date fair value of $28.91.
During the nine months ended September 30,
2018, the Company granted 66,764 performance share awards under the LTIP at target, which cliff vest on December 31, 2020, at a
weighted average grant date fair value of $34.52. The number of shares actually earned under a performance award may vary from
zero to 200% of the target shares awarded, based upon the Company’s performance compared to certain metrics. The metrics
used were determined at grant by the Compensation Committee of the Board of Directors and were either based on internal measures,
such as the Company’s financial performance compared to target, or on a market-based metric, such as the Company’s
stock performance compared to a peer group. Performance awards cliff vest upon attainment of the stated performance targets and
minimum service requirements and are paid in common shares of the Company’s stock. In the first quarter of 2018, management
concluded that it was probable that the minimum performance criteria would not be met for certain performance shares that were
granted during 2016. As a result, the Company reversed $0.4 million in stock compensation from previous accruals.
During the nine months ended September 30,
2018, plan participants exercised 87,557 stock options with a weighted average exercise price of $21.55.
The Company recognizes stock-based compensation
expense related to restricted stock awards, phantom stock awards and restricted stock units based on the grant date fair value,
which was the closing price of the Company’s stock on the date of grant. The fair value is expensed over the service period.
The Company recognizes stock-based compensation expense related to market-based performance awards based on the grant date fair
value, which is computed using a Monte Carlo simulation. The fair value is expensed over the service period, which is approximately
2.8 years. The Company recognizes stock-based compensation expense related to internal measure-based performance awards based on
the grant date fair value, which was the closing price of the Company’s stock on the date of grant. The fair value is expensed
over the service period of approximately 2.8 years, and the Company adjusts the stock-based compensation expense related to internal
metric-based performance awards according to its determination of the potential achievement of the performance target at each reporting
date. The fair value of restricted stock units that were granted to directors during the second quarter of 2018 will be expensed
over an amortization period of 1.0 year. The fair value of restricted stock units granted to directors in 2017 was expensed on
the date of the grant because the award agreements contain provisions which call for the vesting of all shares awarded upon change
in control or resignation from the board for any reason except breach of fiduciary duty.
11. Segment Information
MYR Group is a holding company of specialty
contractors serving electrical utility infrastructure and commercial construction markets in the United States and western Canada.
The Company has two reporting segments, each a separate operating segment, which are referred to as T&D and C&I. Performance
measurement and resource allocation for the reporting segments are based on many factors. The primary financial measures used to
evaluate the segment information are contract revenues and income from operations, excluding general corporate expenses. General
corporate expenses include corporate facility and staffing costs, which includes safety costs, professional fees, IT expenses,
management fees, and intangible amortization. The accounting policies of the segments are the same as those described in the Summary
of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Transmission and Distribution: The T&D
segment provides a broad range of services on electric transmission and distribution networks and substation facilities which include
design, engineering, procurement, construction, upgrade, maintenance and repair services with a particular focus on construction,
maintenance and repair. T&D services include the construction and maintenance of high voltage transmission lines, substations
and lower voltage underground and overhead distribution systems. The T&D segment also provides emergency restoration services
in response to hurricane, ice or other storm-related damage. T&D customers include investor-owned utilities, cooperatives,
private developers, government-funded utilities, independent power producers, independent transmission companies, industrial facility
owners and other contractors.
Commercial and Industrial: The C&I segment
provides services such as the design, installation, maintenance and repair of commercial and industrial wiring, installation of
traffic networks and the installation of bridge, roadway and tunnel lighting. Typical C&I contracts cover electrical contracting
services for airports, hospitals, data centers, hotels, stadiums, convention centers, manufacturing plants, processing facilities,
waste-water treatment facilities, mining facilities and transportation control and management systems. C&I segment services
are generally performed in the west, midwest and northeast United States and in western Canada. The C&I segment generally provides
electric construction and maintenance services as a subcontractor to general contractors in the C&I industry, but also contracts
directly with facility owners. The C&I segment has a diverse customer base with many long-standing relationships.
The information in the following table is
derived from the segment’s internal financial reports used for corporate management purposes:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T&D
|
|
$
|
222,531
|
|
|
$
|
215,970
|
|
|
$
|
635,842
|
|
|
$
|
651,498
|
|
C&I
|
|
|
177,006
|
|
|
|
157,532
|
|
|
|
448,982
|
|
|
|
378,318
|
|
|
|
$
|
399,537
|
|
|
$
|
373,502
|
|
|
$
|
1,084,824
|
|
|
$
|
1,029,816
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T&D
|
|
$
|
13,935
|
|
|
$
|
9,251
|
|
|
$
|
38,494
|
|
|
$
|
22,467
|
|
C&I
|
|
|
10,227
|
|
|
|
10,503
|
|
|
|
25,198
|
|
|
|
19,668
|
|
General Corporate
|
|
|
(10,025
|
)
|
|
|
(8,334
|
)
|
|
|
(30,791
|
)
|
|
|
(26,633
|
)
|
|
|
$
|
14,137
|
|
|
$
|
11,420
|
|
|
$
|
32,901
|
|
|
$
|
15,502
|
|
For the three and nine months ended September
30, 2018, contract revenues attributable to the Company’s Canadian operations were $12.8 million and $42.0 million, respectively,
predominantly in the C&I segment. For the three and nine months ended September 30, 2017, contract revenues attributable to
the Company’s Canadian operations were $25.4 million and $61.8 million, respectively, predominantly in the C&I segment.
12. Noncontrolling Interests
On July 2, 2018, through the acquisition
of certain assets of the Huen Companies, the Company became the majority controlling interest in a joint venture. As a result,
the Company has consolidated the carrying value of the joint ventures assets and liabilities and results of operations in the Company’s
consolidated financial statements. The equity owned by the other joint venture partners has been recorded as noncontrolling interests
in the Company’s consolidated balance sheets, and their portions, if material, of net income and other comprehensive income
shown as net income or other comprehensive income attributable to noncontrolling interests in the Company’s consolidated
statements of operations and other comprehensive income. Additionally the joint venture associated with the Company’s noncontrolling
interests is a partnership, and consequently, the tax effect of only the Company’s share of the joint venture income is recognized
by the Company.
The acquired joint venture made 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, 2018. Additionally, there have been no changes in ownership during the three and nine months ended September 30, 2018. The
project is expected to be completed in 2019. The balance of the Company’s noncontrolling interest consists of the preliminary
fair value of noncontrolling interest acquired on July 2, 2018 with the Huen Companies. Net income attributable to the noncontrolling
interest, subsequent to the acquisition through September 30, 2018, was not material.
13. Earnings Per Share
The Company computes earnings per share
attributable to its shareholders using the treasury stock method. Under the treasury stock method, basic earnings per share are
computed by dividing net income available to shareholders by the weighted average number of common shares outstanding during the
period, and diluted earnings per share are computed by dividing net income available to shareholders by the weighted average number
of common shares outstanding during the period plus all potentially dilutive common stock equivalents, except in cases where the
effect of the common stock equivalent would be anti-dilutive.
Net income available to common shareholders
and the weighted average number of common shares used to compute basic and diluted earnings per share were as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,957
|
|
|
$
|
5,145
|
|
|
$
|
20,436
|
|
|
$
|
7,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
16,492
|
|
|
|
16,314
|
|
|
|
16,423
|
|
|
|
16,263
|
|
Weighted average dilutive securities
|
|
|
138
|
|
|
|
160
|
|
|
|
157
|
|
|
|
213
|
|
Weighted average common shares outstanding, diluted
|
|
|
16,630
|
|
|
|
16,474
|
|
|
|
16,580
|
|
|
|
16,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.32
|
|
|
$
|
1.24
|
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
0.31
|
|
|
$
|
1.23
|
|
|
$
|
0.46
|
|
For the three and nine months ended September
30, 2018 and 2017, certain common stock equivalents were excluded from the calculation of dilutive securities because their inclusion
would either have been anti-dilutive or, for stock options, the exercise prices of those stock options were greater than the average
market price of the Company’s common stock for the period. All of the Company’s non-participating unvested restricted
shares were included in the computation of weighted average dilutive securities.
The following table summarizes the shares
of common stock underlying the Company’s unvested stock options and performance awards that were excluded from the calculation
of dilutive securities:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
1
|
|
|
|
44
|
|
|
|
1
|
|
|
|
44
|
|
Performance awards
|
|
|
2
|
|
|
|
21
|
|
|
|
68
|
|
|
|
127
|
|