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, clean energy projects and electric vehicle charging infrastructure. T&D services 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, signalization and electric vehicle charging infrastructure.
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, shareholders’ 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, 2022 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, 2022, included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 22, 2023 (the "2022 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. As of March 31, 2023, the Company did not have a controlling interest in any current joint venture partnerships. 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 intercompany loans that are not deemed long-term investment accounts are recorded in the “other expense, net” line on the Company’s consolidated statements of operations. Foreign currency gains, recorded in other expense, net, for the three months ended March 31, 2023 and 2022 were not significant. Foreign currency translation gains and losses, arising from intercompany loans that are deemed long-term investment accounts, 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 March 31, 2023 and December 31, 2022, the Company had recognized revenues of $25.2 million and $19.6 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 March 31, 2023, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.6%, which resulted in decreases in operating income of $5.1 million, net income of $3.6 million and diluted earnings per common share of $0.21.
During the three months ended March 31, 2022, changes in estimates pertaining to certain projects increased consolidated gross margin by 0.5%, which resulted in increases in operating income of $3.8 million, net income of $2.7 million and diluted earnings per common share of $0.16.
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 are either not applicable to the Company or will have minimal impact on its consolidated financial statements when adopted.
2. Contract Assets and Liabilities
Contracts with customers usually stipulate the timing of payment, which is defined by the terms found within the various contracts under which work was performed during the period. Therefore, contract assets and liabilities are created when the timing of costs incurred on work performed does not coincide with the billing terms, which frequently include retention provisions contained in each contract.
The Company’s consolidated balance sheets present contract assets, which contain unbilled revenue and contract retainages associated with contract work that has been completed and billed but not paid by customers, pursuant to retainage provisions, that are generally due once the job is completed and approved. The allowance for doubtful accounts associated with contract assets was $0.5 million as of March 31, 2023 and December 31, 2022, respectively.
Contract assets consisted of the following:
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(in thousands) | | March 31, 2023 | | December 31, 2022 | | Change |
Unbilled revenue, net | | $ | 177,725 | | | $ | 156,266 | | | $ | 21,459 | |
Contract retainages, net | | 154,791 | | | 144,349 | | | 10,442 | |
Contract assets, net | | $ | 332,516 | | | $ | 300,615 | | | $ | 31,901 | |
The Company’s consolidated balance sheets present contract liabilities that contain deferred revenue and an accrual for contracts in a loss provision.
Contract liabilities consisted of the following:
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(in thousands) | | March 31, 2023 | | December 31, 2022 | | Change |
Deferred revenue | | $ | 218,106 | | | $ | 223,654 | | | $ | (5,548) | |
Accrued loss provision | | 2,648 | | | 3,401 | | | (753) | |
Contract liabilities | | $ | 220,754 | | | $ | 227,055 | | | $ | (6,301) | |
The following table provides information about contract assets and contract liabilities from contracts with customers:
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(in thousands) | | March 31, 2023 | | December 31, 2022 | | Change |
Contract assets, net | | $ | 332,516 | | | $ | 300,615 | | | $ | 31,901 | |
Contract liabilities | | (220,754) | | | (227,055) | | | 6,301 | |
Net contract assets | | $ | 111,762 | | | $ | 73,560 | | | $ | 38,202 | |
The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing of the Company’s billings in relation to its performance of work. The amounts of revenue recognized in the period that were included in the opening contract liability balances were $60.2 million and $17.9 million for the three months ended March 31, 2023 and 2022, respectively.
The net asset position for contracts in process consisted of the following:
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(in thousands) | | March 31, 2023 | | December 31, 2022 |
Costs and estimated earnings on uncompleted contracts | | $ | 5,350,169 | | | $ | 5,390,535 | |
Less: billings to date | | 5,390,550 | | | 5,457,923 | |
| | $ | (40,381) | | | $ | (67,388) | |
The net asset position for contracts in process is included within the contract asset and contract liability in the accompanying consolidated balance sheets as follows:
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(in thousands) | | March 31, 2023 | | December 31, 2022 |
Unbilled revenue | | $ | 177,725 | | | $ | 156,266 | |
Deferred revenue | | (218,106) | | | (223,654) | |
| | $ | (40,381) | | | $ | (67,388) | |
3. Lease Obligations
From time to time, the Company enters into non-cancelable leases for some of our facility, vehicle and equipment needs. These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of facilities, vehicles and equipment rather than purchasing them. The Company’s leases have remaining terms ranging from one to seven years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases within one year. Currently, all the Company’s leases contain fixed payment terms. The Company may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease. Additionally, all of the Company's month-to-month leases are cancelable, by the Company or the lessor, at any time and are not included in our right-of-use asset or liability. At March 31, 2023, the Company had several leases with residual value guarantees. Typically, the Company has purchase options on the equipment underlying its long-term leases and many of its short-term rental arrangements. The Company may exercise some of these purchase options when the need for equipment is ongoing and the purchase option price is attractive. Leases are accounted for as operating or finance leases, depending on the terms of the lease.
The following is a summary of the lease-related assets and liabilities recorded:
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| | | | March 31, 2023 | | December 31, 2022 |
(in thousands) | | Classification on the Consolidated Balance Sheet | | |
Assets | | | | | | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | | $ | 29,437 | | | $ | 30,544 | |
Finance lease right-of-use assets | | Property and equipment, net of accumulated depreciation | | 2,919 | | | 3,238 | |
Total right-of-use lease assets | | | | $ | 32,356 | | | $ | 33,782 | |
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Liabilities | | | | | | |
Current | | | | | | |
Operating lease obligations | | Current portion of operating lease obligations | | $ | 10,010 | | | $ | 9,711 | |
Finance lease obligations | | Current portion of finance lease obligations | | 1,105 | | | 1,127 | |
Total current obligations | | | | 11,115 | | | 10,838 | |
Non-current | | | | | | |
Operating lease obligations | | Operating lease obligations, net of current maturities | | 19,435 | | | 20,845 | |
Finance lease obligations | | Finance lease obligations, net of current maturities | | 2,039 | | | 2,313 | |
Total non-current obligations | | | | 21,474 | | | 23,158 | |
Total lease obligations | | | | $ | 32,589 | | | $ | 33,996 | |
The following is a summary of the lease terms and discount rates:
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| March 31, 2023 | | December 31, 2022 |
Weighted-average remaining lease term - finance leases | 1.7 years | | 1.9 years |
Weighted-average remaining lease term - operating leases | 3.5 years | | 3.6 years |
Weighted-average discount rate - finance leases | 3.0 | % | | 3.0 | % |
Weighted-average discount rate - operating leases | 3.8 | % | | 3.8 | % |
The following is a summary of certain information related to the lease costs for finance and operating leases:
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(in thousands) | | Three months ended March 31, | | |
| | 2023 | | 2022 | | | | |
Lease cost: | | | | | | | | |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | $ | 1,206 | | | $ | 609 | | | | | |
Interest on lease liabilities | | 24 | | | 28 | | | | | |
Operating lease cost | | 3,590 | | | 3,122 | | | | | |
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Variable lease costs | | 89 | | | 91 | | | | | |
Total lease cost | | $ | 4,909 | | | $ | 3,850 | | | | | |
The following is a summary of other information and supplemental cash flow information related to finance and operating leases:
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| | Three months ended March 31, |
(in thousands) | | 2023 | | 2022 |
Other information: | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash flows from operating leases | | $ | 3,616 | | | $ | 3,179 | |
Right-of-use asset obtained in exchange for new operating lease obligations | | $ | 1,616 | | | $ | 4,392 | |
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The future undiscounted minimum lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s consolidated balance sheets, under financial leases, less interest, and under operating leases, less imputed interest, as of March 31, 2023 were as follows:
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(in thousands) | | Finance Lease Obligations | | Operating Lease Obligations | | Total Lease Obligations |
Remainder of 2023 | | $ | 889 | | | $ | 9,997 | | | $ | 10,886 | |
2024 | | 2,044 | | | 9,663 | | | 11,707 | |
2025 | | 316 | | | 7,019 | | | 7,335 | |
2026 | | — | | | 5,359 | | | 5,359 | |
2027 | | — | | | 1,626 | | | 1,626 | |
2028 | | — | | | 1,127 | | | 1,127 | |
Thereafter | | — | | | 1,787 | | | 1,787 | |
Total minimum lease payments | | 3,249 | | | 36,578 | | | 39,827 | |
Financing component | | (105) | | | (7,133) | | | (7,238) | |
Net present value of minimum lease payments | | 3,144 | | | 29,445 | | | 32,589 | |
Less: current portion of finance and operating lease obligations | | (1,105) | | | (10,010) | | | (11,115) | |
Long-term finance and operating lease obligations | | $ | 2,039 | | | $ | 19,435 | | | $ | 21,474 | |
The financing component for finance lease obligations represents the interest component of finance leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the lease payments to their present value.
Certain subsidiaries of the Company have operating leases for facilities from third party companies that are owned, in whole or part, by employees of the subsidiaries. The terms and rental rates of these leases are at or below market rental rates. As of March 31, 2023, the minimum lease payments required under these leases totaled $6.4 million, which are due over the next 3.8 years.
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 March 31, 2023 and December 31, 2022, the Company determined that the carrying value of cash and cash equivalents approximated fair value based on Level 1 inputs. As of March 31, 2023 and December 31, 2022, the fair value of the Company’s long-term debt and finance lease obligations was based on Level 2 inputs. The Company’s long-term debt was based on variable and fixed interest rates at March 31, 2023 and December 31, 2022, 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 value of the Company’s finance lease obligations also approximated fair value.
As of March 31, 2023, the fair value of the Company’s contingent earn-out consideration liability associated with the acquisition of Powerline Plus Ltd. and its affiliate PLP Redimix Ltd. (collectively, the “Powerline Plus Companies") was based on Level 3 inputs. The contingent earn-out consideration recorded represents the estimated fair value of future amounts potentially payable to the former owners of the acquired Powerline Plus Companies and was initially determined using a Monte Carlo simulation valuation methodology based on probability-weighted performance projections and other inputs, including a discount rate and an expected volatility factor. The fair value of this contingent earn-out consideration liability will be evaluated on an ongoing basis by management. Accordingly, the level of inputs used for these fair value measurements is the lowest level (Level 3). Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. As of the acquisition date, the fair value of the contingent earn-out consideration was $0.9 million. As of March 31, 2023 and December 31, 2022, the fair value of the contingent earn-out consideration was $0.2 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 $16.6 million. There were no changes in contingent earn-out consideration during the three months ended March 31, 2023 and 2022. Any changes in contingent earn-out consideration are recorded in other income.
5. Debt
The table below reflects the Company’s total debt, including borrowings under its credit agreement and master loan agreements for equipment notes:
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(dollar amounts in thousands) | | Inception Date | | Stated Interest Rate (per annum) | | Payment Frequency | | Term (years) | | Outstanding Balance as of March 31, 2023 | | Outstanding Balance as of December 31, 2022 |
Credit Agreement | | | | | | | | | | | | |
Revolving loans | | 9/13/2019 | | Variable | | Variable | | 5 | | $ | — | | | $ | 12,915 | |
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Equipment Notes | | | | | | | | | | | | |
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Equipment Note 8 | | 12/27/2019 | | 2.75% | | Semi-annual | | 5 | | 3,464 | | | 3,464 | |
Equipment Note 10 | | 8/26/2022 | | 4.32% | | Semi-annual | | 5 | | 22,142 | | | 24,119 | |
Other equipment note | | 4/11/2022 | | 4.55% | | Monthly | | 5 | | 52 | | | 55 | |
| | | | | | | | | | 25,658 | | | 27,638 | |
Total debt | | | | | | | | | | 25,658 | | | 40,553 | |
Less: current portion of long-term debt | | | | | | | | (5,160) | | | (5,074) | |
Long-term debt | | | | | | | | | | $ | 20,498 | | | $ | 35,479 | |
Credit Agreement
On September 13, 2019, the Company entered into a five-year amended and restated credit agreement (the “Credit Agreement”) with a syndicate of banks led by JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provides for a $375 million facility (the “Facility”), subject to certain financial covenants as defined in the Credit Agreement, that may be used for revolving loans of which $150 million may be used for letters of credit. 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 $75 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 $200 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 refinancing existing indebtedness, working capital, capital expenditures, acquisitions, share 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 0.75%; or (2) Adjusted LIBO Rate (as defined in the Credit Agreement) plus an applicable margin ranging from 1.00% to 1.75%. Once LIBOR is no longer available, the Company will amend the Credit Agreement to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”) or will elect the Alternate Base Rate. 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 (as defined in the Credit Agreement) 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 1.00% to 1.75% for non-performance letters of credit or 0.50% to 0.875% for performance letters of credit, based on the Company’s consolidated Leverage Ratio. The Company is subject to a commitment fee of 0.15% to 0.25%, 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 2.50 or the Company's consolidated Liquidity (as defined in the Credit Agreement) is less than $50 million. The weighted average interest rate on borrowings outstanding on the Facility for the three months ended March 31, 2023 was 5.70% per annum.
Under the Credit Agreement, the Company is subject to certain financial covenants and is limited to 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 covenants including limitations on asset sales, investments, indebtedness and liens. The Company was in compliance with all of its financial covenants under the Credit Agreement as of March 31, 2023.
As of March 31, 2023, the Company had no debt outstanding under the Facility and letters of credit outstanding under the Facility of approximately $11.7 million, which were almost entirely related to the Company's payment obligation under its insurance programs.
As of December 31, 2022, the Company had $12.9 million of debt outstanding under the Facility and letters of credit outstanding under the Facility of approximately $12.8 million, which were almost entirely related to the Company's payment obligation under its insurance programs.
The Company had remaining deferred debt issuance costs totaling $0.4 million as of March 31, 2023, related to the line of credit. As permitted, 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
The Company has entered into Master Equipment Loan and Security Agreements (the “Master Loan Agreements”) with multiple finance companies. The Master Loan Agreements may be used for the financing of equipment between the Company and the lenders pursuant to one or more equipment notes ("Equipment Note"). Each Equipment Note executed under the Master Loan Agreements constitutes a separate, distinct and independent financing of equipment and a contractual obligation of the Company, which may contain prepayment clauses.
As of March 31, 2023, the Company had two Equipment Notes outstanding under the Master Loan Agreements that are collateralized by equipment and vehicles owned by the Company. As of March 31, 2023, the Company had one other equipment note outstanding that is collateralized by a vehicle owned by the Company. The following table sets forth our remaining principal payments for all of the Company’s outstanding equipment notes as of March 31, 2023:
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(in thousands) | | Future Equipment Notes Principal Payments |
Remainder of 2023 | | $ | 3,095 | |
2024 | | 6,578 | |
2025 | | 4,364 | |
2026 | | 4,555 | |
2027 | | 7,066 | |
2028 | | — | |
| | |
Total future principal payments | | 25,658 | |
Less: current portion of equipment notes | | (5,160) | |
Long-term principal obligations | | $ | 20,498 | |
6. Revenue Recognition
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 perform a defined scope of a 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 at rates agreed to in the contract. 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 10–Segment Information.
The components of the Company’s revenue by contract type for the three months ended March 31, 2023 and 2022 were as follows:
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| | Three months ended March 31, 2023 |
| | T&D | | C&I | | Total |
(dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Fixed price | | $ | 229,234 | | | 51.5 | % | | $ | 305,621 | | | 83.4 | % | | $ | 534,855 | | | 65.9 | % |
Unit price | | 113,709 | | 25.5 | | | 17,642 | | 4.8 | | | 131,351 | | 16.2 | |
T&E | | 102,381 | | | 23.0 | | | 43,029 | | | 11.8 | | | 145,410 | | | 17.9 | |
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| | $ | 445,324 | | | 100.0 | % | | $ | 366,292 | | | 100.0 | % | | $ | 811,616 | | | 100.0 | % |
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| | Three months ended March 31, 2022 |
| | T&D | | C&I | | Total |
(dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Fixed price | | $ | 150,904 | | | 41.4 | % | | $ | 218,577 | | | 80.4 | % | | $ | 369,481 | | | 58.0 | % |
Unit price | | 104,321 | | | 28.6 | | | 14,803 | | | 5.4 | | | 119,124 | | | 18.7 | |
T&E | | 109,631 | | | 30.0 | | | 38,388 | | | 14.2 | | | 148,019 | | | 23.3 | |
| | | | | | | | | | | | |
| | $ | 364,856 | | | 100.0 | % | | $ | 271,768 | | | 100.0 | % | | $ | 636,624 | | | 100.0 | % |
The components of the Company’s revenue by market type for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2023 | | Three months ended March 31, 2022 |
(dollars in thousands) | | Amount | | Percent | | Segment | | Amount | | Percent | | Segment |
Transmission | | $ | 298,098 | | | 36.7 | % | | T&D | | $ | 221,607 | | | 34.8 | % | | T&D |
Distribution | | 147,226 | | | 18.2 | | | T&D | | 143,249 | | | 22.5 | | | T&D |
Electrical construction | | 366,292 | | | 45.1 | | | C&I | | 271,768 | | | 42.7 | | | C&I |
Total revenue | | $ | 811,616 | | | 100.0 | % | | | | $ | 636,624 | | | 100.0 | % | | |
Remaining Performance Obligations
As of March 31, 2023, the Company had $2.51 billion of remaining performance obligations. The Company’s remaining performance obligations include 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 the amount of remaining performance obligations as of March 31, 2023 that the Company expects to be realized and the amount of the remaining performance obligations that the Company reasonably estimates will not be recognized within the next twelve months.
| | | | | | | | | | | | | | | | | | | | |
| | Remaining Performance Obligations at March 31, 2023 | | |
(in thousands) | | Total | | Amount estimated to not be recognized within 12 months | | Total at December 31, 2022 |
T&D | | $ | 1,136,374 | | | $ | 234,241 | | | $ | 898,617 | |
C&I | | 1,371,231 | | | 277,611 | | | 1,428,257 | |
Total | | $ | 2,507,605 | | | $ | 511,852 | | | $ | 2,326,874 | |
The Company expects the 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.”
7. Income Taxes
The U.S. federal statutory tax rate was 21% for each of the three months ended March 31, 2023 and 2022. The Company’s effective tax rate for the three months ended March 31, 2023 was 14.4% of pretax income compared to the effective tax rate for the three months ended March 31, 2022 of 15.4%.
The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three months ended March 31, 2023 and March 31, 2022, was primarily due to a favorable impact from stock compensation excess tax benefits partially offset by state income taxes, Canadian taxes and other permanent difference items.
The Company had unrecognized tax benefits of approximately $0.5 million as of March 31, 2023 and December 31, 2022, respectively, 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 related to unrecognized tax benefits was not significant for the three months ended March 31, 2023 and 2022.
The Company is subject to taxation in various jurisdictions. The Company’s 2019 through 2021 tax returns 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 2018 through 2021.
8. Commitments and Contingencies
Purchase Commitments
As of March 31, 2023, the Company had approximately $26.0 million in outstanding purchase orders for certain construction equipment, with cash payments scheduled to occur in 2023 and 2024.
Insurance and Claims Accruals
The Company carries insurance policies, which are subject to certain deductibles and limits, 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 stop-loss limits of up to $0.2 million for qualified individuals. Losses up to the deductible and stop-loss 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 Company’s 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 March 31, 2023, an aggregate of approximately $2.03 billion 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 $733.3 million as of March 31, 2023.
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, 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
Most 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 status of some multi-employer pension plans to which its subsidiaries contribute have been classified as “critical”, 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 present business. 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 condition, results of operations or cash flows.
9. Stock-Based Compensation
The Company maintains two equity compensation plans under which stock-based compensation has been granted: the 2017 Long-Term Incentive Plan (Amended and Restated as of April 23, 2020) (the “LTIP”) and the 2007 Long-Term Incentive Plan (Amended and Restated as of May 1, 2014) (the “2007 LTIP”). Upon the initial adoption of the LTIP in 2017, awards were no longer granted under the 2007 LTIP. The LTIP was approved by our shareholders and 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 awards, (g) phantom stock, (h) stock bonuses, (i) dividend equivalents, or (j) any combination of such grants. The Company has outstanding grants of non-qualified stock options, time-vested stock awards in the form of restricted stock units and internal metric-based and market-based performance stock units.
During the three months ended March 31, 2023, the Company granted time-vested stock awards covering 44,628 shares of common stock under the LTIP, which vest ratably over three years for employee awards, at a weighted average grant date fair value of $116.47. During the three months ended March 31, 2023, time-vested stock awards covering 53,389 shares of common stock vested at a weighted average grant date fair value of $53.85.
During the three months ended March 31, 2023, the Company granted 32,994 performance share awards under the LTIP at target, which will cliff vest, if earned, on December 31, 2025, at a weighted average grant date fair value of $136.54. The number of shares ultimately earned under a performance award may vary from zero to 200% of the target shares granted, based upon the Company’s performance compared to certain metrics. The metrics used were determined at the time of the 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 targets, or on a market-based metric, such as the Company’s stock performance compared to a peer group. Performance awards granted cliff vest following the performance period if the stated performance targets and minimum service requirements are attained and are paid in shares of the Company’s common stock.
During the three months ended March 31, 2023, plan participants exercised options to purchase 827 shares of the Company’s common stock with a weighted average exercise price of $24.68. During the three months ended March 31, 2023, 42 options expired. As of March 31, 2023, the Company had no remaining outstanding and exercisable options and no awards outstanding under the 2007 Plan.
The Company recognizes stock-based compensation expense related to 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, which is generally three years.
For performance awards, the Company recognizes stock-based compensation expense based on the grant date fair value of the award. The fair value of internal metric-based performance awards is determined by the closing stock price of the Company’s common stock on the date of the grant. The fair value of market-based performance awards is computed using a Monte Carlo simulation. Performance awards are 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 shares expected to vest at each reporting date.
10. Segment Information
MYR Group is a holding company of specialty contractors serving electrical utility infrastructure and commercial construction markets in the United States and 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 include safety costs, professional fees, IT expenses and management fees. The accounting policies of the segments are the same as those described in the Note 1–Organization, Business and Significant Accounting Policies to the 2022 Annual Report.
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, clean energy projects and electric vehicle charging infrastructure. The T&D segment also provides emergency restoration services in response to hurricane, wildfire, ice or other 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, the installation of intelligent transportation systems, roadway lighting, signalization and electric vehicle charging infrastructure. 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 and transportation control and management systems. 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 March 31, | | |
(in thousands) | | 2023 | | 2022 | | | | |
Contract revenues: | | | | | | | | |
T&D | | $ | 445,324 | | | $ | 364,856 | | | | | |
C&I | | 366,292 | | 271,768 | | | | |
| | $ | 811,616 | | | $ | 636,624 | | | | | |
Income from operations: | | | | | | | | |
T&D | | $ | 32,821 | | | $ | 30,431 | | | | | |
C&I | | 10,627 | | | 10,090 | | | | | |
General Corporate | | (16,022) | | | (15,619) | | | | | |
| | $ | 27,426 | | | $ | 24,902 | | | | | |
11. Earnings Per Share
The Company computes earnings per share 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 and the weighted average number of common shares used to compute basic and diluted earnings per share were as follows:
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(in thousands, except per share data) | | 2023 | | 2022 | | | | |
Numerator: | | | | | | | | |
Net income | | $ | 23,163 | | | $ | 20,688 | | | | | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average common shares outstanding | | 16,618 | | | 16,916 | | | | | |
Weighted average dilutive securities | | 206 | | 217 | | | | |
Weighted average common shares outstanding, diluted | | 16,824 | | | 17,133 | | | | | |
| | | | | | | | |
Income per common share: | | | | | | | | |
Basic | | $ | 1.39 | | | $ | 1.22 | | | | | |
Diluted | | $ | 1.38 | | | $ | 1.21 | | | | | |
For the three months ended March 31, 2023 and 2022, 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 unvested time-vested stock awards were included in the computation of weighted average dilutive securities.
The following table summarizes the shares of common stock underlying the Company’s unvested time-vested stock awards and performance awards that were excluded from the calculation of dilutive securities:
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(in thousands) | | 2023 | | 2022 | | | | |
Time-vested stock awards | | 45 | | | 36 | | | | | |
Performance awards | | 33 | | | 32 | | | | | |
Share Repurchases
During the three months ended March 31, 2023 the Company repurchased 76,150 shares of stock, for approximately $7.9 million, from its employees to satisfy tax obligations on shares vested under the LTIP.
On November 2, 2022, the Company announced that its Board of Directors had authorized a $75.0 million share repurchase program (the "Repurchase Program"), which became effective on November 8, 2022. The Repurchase Program will expire on May 8, 2023, or when the authorized funds are exhausted, whichever is earlier. During the three months ended March 31, 2023, the Company had no repurchases of its common stock under the Repurchase Program. As of March 31, 2023, the Company had $75.0 million of remaining availability to repurchase shares of the Company’s common stock under the Repurchase Program.