What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-03-03 · 147 added, 124 removed, 381 unchanged (42% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the other sections of this report, including the Financial Statements and related notes contained in Item 8 of this Annual Report on Form 10-K.

This management’s discussion and analysis provides a narrative on the Company’s financial performance and condition that should be read in conjunction with the other sections of this report, including the Financial Statements and related notes contained in Item 8 of this Annual Report on Form 10-K.

In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations.

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We are one of the largest U.S.

contractors servicing the T&D sector of the electric utility industry and provide T&D services throughout the United States and western Canada.

contractors servicing the T&D sector of the electric utility industry and provide T&D services throughout the United States and in Ontario, Canada.

Our T&D customers include many of the leading companies in the electric utility industry.

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We had revenues for the year ended December 31, 2021 of $2.50 billion compared to $2.25 billion for the year ended December 31, 2020.

For the year ended December 31, 2020, net income attributable to MYR Group Inc.

was $58.8 million compared to $37.7 million for the year ended December 31, 2019.

For the year ended December 31, 2021, net income was $85.0 million compared to $58.8 million for the year ended December 31, 2020.

Overview-Segments

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We also provide many services to our customers under multi-year master service agreements (“MSAs”) and other variable-term service agreements.

For the year ended December 31, 2020, our T&D revenues were $1.15 billion, or 51.4%, of our revenue, compared to $1.13 billion, or 54.8%, of our revenue for the year ended December 31, 2019 and $893.1 million, or 58.3%, of our revenue for the year ended December 31, 2018.

For the year ended December 31, 2021, our T&D revenues were $1.30 billion, or 52.1%, of our revenue, compared to $1.15 billion, or 51.4%, of our revenue for the year ended December 31, 2020 and $1.13 billion, or 54.8%, of our revenue for the year ended December 31, 2019.

Revenues from transmission projects represented 62.0%, 64.6%, and 68.1% of T&D segment revenue for the years ended December 31, 2021, 2020 and 2019, respectively.

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The majority of C&I contracts cover electrical contracting services for airports, hospitals, data centers, hotels, stadiums, convention centers, renewable energy projects, manufacturing plants, processing facilities, water treatment facilities, mining facilities and transportation control and management systems.

For the year ended December 31, 2020, our C&I revenues were $1.09 billion, or 48.6%, of our revenue, compared to $936.7 million, or 45.2%, of our revenue for the year ended December 31, 2019 and $638.1 million, or 41.7%, of our revenue for the year ended December 31, 2018.

For the year ended December 31, 2021, our C&I revenues were $1.20 billion, or 47.9%, of our revenue, compared to $1.09 billion, or 48.6%, of our revenue for the year ended December 31, 2020 and $936.7 million, or 45.2%, of our revenue for the year ended December 31, 2019.

Measured by revenues in our C&I segment, we provided 80.5%, 82.7% and 74.8% of our services under fixed-price contracts for the years ended December 31, 2021, 2020 and 2019, respectively.

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Storm restoration service work is unpredictable and can affect results of operations.

Our business is directly impacted by the level of spending on T&D infrastructure and the level of C&I electrical construction activity across the United States and western Canada.

Our business is directly impacted by the level of spending on T&D infrastructure and the level of C&I electrical construction activity across the United States and Canada.

We are optimistic about infrastructure spending and believe that industry activity will continue in both our transmission and distribution market segments and the drivers for utility investment will remain intact.

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Although competition remains strong, we see these trends as positive factors for us in the future.

Since March 2020, the COVID-19 pandemic has had a significant impact on the global economy, including the US and Canadian economies.

As the situation continues to evolve, we are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it impacts our customers, subcontractors, suppliers, vendors and employees.

The COVID-19 pandemic caused a slowdown of certain projects due to specific state, local, municipal and customer mandated stay-at-home orders and new project requirements that were established to protect construction workers and the general public, most of which continue to impact our C&I segment.

Although the majority of stay-at-home orders have been phased-out, we continue to experience impacts associated with the COVID-19 project-specific protocols.

We expect the project-specific requirements to remain in place which will continue to impact project schedules and workflow going forward.

We are unable to predict the ultimate impact that COVID-19 will have on our business, employees, liquidity, financial condition, results of operations and cash flows.

Most of the Company’s operations are considered critical and essential businesses, making our projects generally exempt from stay-at-home or similar orders in certain parts of the United States and western Canada.

However, if this pandemic persists for an extended timeframe our business could be more significantly impacted as a result of prolonged unfavorable economic conditions.

The Company began implementing changes in March of 2020 in an effort to protect our employees and customers and to support appropriate health and safety protocols, including implementing alternative and flexible work arrangements where possible.

As the conditions surrounding the ongoing COVID-19 pandemic remain fluid, and if disruptions do re-emerge, they could materially adversely impact our business.

Our key estimates that could potentially be impacted include estimates of costs to complete contracts, the recoverability of goodwill and intangibles and allowance for doubtful accounts.

We continue to expect long-term growth in the transmission market, although the timing of large bids and subsequent construction will likely continue to be highly variable from year to year.

The electric grid is aging and requires significant upgrades and maintenance to meet current and future demands for electricity.

Over the past several years, many utilities have begun to implement plans to improve reliability of their transmission systems and reduce congestion.

These utilities have started or planned new construction, line upgrades and maintenance projects on their transmission systems.

We believe that our customers remain committed to the expansion and strengthening of their transmission infrastructure, with planning, engineering and funding for many of their projects already in place.

State renewable portfolio standards, which set required or voluntary standards for how much electricity is to be generated from renewable energy sources, as well as general environmental concerns, continue to drive the development of renewable energy projects.

The economic feasibility of renewable energy projects, and therefore the attractiveness of investment in the projects, may depend on the availability of tax incentive programs or the ability of the projects to take advantage of such incentives.

Renewable energy-related construction contracts, depending on the type, may benefit both the T&D and C&I business segments.

We believe proposed legislative actions aimed at supporting infrastructure improvements in the United States may positively impact long-term demand, particularly in connection with electric power infrastructure, transportation and renewable energy spending.

We believe the proposed legislative actions are likely to provide greater long-term opportunity in both of our reporting segments.

However both of our segments and supporting operations may be subject to delays and pricing volatility due to the continued market disruption from the COVID-19 pandemic and regulatory slowdowns.

These delays and pricing volatility could result in decelerations in project opportunities and awards.

We believe there is an ongoing need for utilities to sustain investment in their transmission systems to improve reliability, reduce congestion and connect to new sources of renewable generation.

Consequently, we believe we will continue to see significant bidding activity on large transmission projects over the next two years.

Consequently, we believe we will continue to see significant bidding activity on large transmission projects going forward.

The timing of multi-year transmission project awards and substantial construction activity is difficult to predict due to regulatory requirements and the permitting needed to commence construction.

Significant construction on any large, multi-year projects awarded in the second half of 2021 will not likely occur until 2022.

Significant construction on any large, multi-year projects awarded in 2022 will likely not begin until 2023.

Bidding and construction activity for small to medium-size transmission projects and upgrades remain active, and we expect this trend to continue, primarily due to reliability and economic drivers.

However, in light of the uncertain COVID-19 environment, there may be a potential slowdown of construction activity in the transmission market, the recovery of which will be dependent upon the pace and timing of the United States overall recovery from the COVID-19 pandemic.

Because of reduced spending by United States utilities on their distribution systems for several years, we believe there is a need for sustained investment by utilities on their distribution systems to properly maintain or meet reliability requirements.

As a result of reduced spending by United States utilities on their distribution systems for several years, we believe there is a need for sustained investment by utilities on their distribution systems to properly maintain or meet reliability requirements.

In 2021, we continued to see increased bidding activity in some of our electric distribution markets, as economic conditions improved in those areas.

We believe the increased hurricane activity over the past several years and recent destruction caused by wildfires will cause a push to strengthen utility distribution systems against catastrophic damage.

We believe the increased hurricane activity and destruction caused by wildfires will cause a push to strengthen utility distribution systems against catastrophic damage.

Several industry and market trends are also prompting customers in the electric utility industry to seek outsourcing partners rather than performing projects internally.

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We believe electric utility employee retirements could increase with further economic recovery, which may result in an increase in outsourcing opportunities.

We expect to see an incremental increase in distribution opportunities in the United States in 2021, however, in light of the uncertain COVID-19 environment, there may be a potential slowdown of construction activity in distribution systems, the recovery of which will be dependent upon the pace and timing of the United States overall recovery from the COVID-19 pandemic.

Amid the ongoing COVID-19 pandemic, we expect C&I bidding opportunities to be impacted and market uncertainty could contribute to an overall deceleration in projects coming out to bid.

Recovery of the C&I market will be heavily dependent on overall economic recovery.

We are hopeful that stimulus packages will provide greater opportunity and are encouraged by the possible approval of a long-awaited infrastructure bill.

We expect to see an incremental increase in distribution opportunities in the United States and in Ontario, Canada in 2022.

We expect C&I bidding opportunities to continue to be impacted by various recent market disruptions, and as a result the ultimate recovery of the C&I market will be heavily dependent on the timing and pace of the United States and Canada economic recoveries.

We believe that the primary markets we serve may be somewhat less vulnerable to economic slowing, such as health care, transportation, data centers, warehousing, renewable energy and water projects.

We are hopeful that the service industry and small project market could quickly rebound in the near future as pent-up demand will need to be addressed.

We are hopeful that the service industry and small project market could quickly rebound as pent-up demand will need to be addressed.

In addition, the United States has experienced a decade of economic expansion which has challenged the capacity of public water and transportation infrastructure forcing states and municipalities to seek creative means to fund needed expansion.

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In an effort to support our growth strategy and maximize stockholder returns, we seek to efficiently manage our capital.

Through 2020, we continued to implement strategies that further expand our capabilities and allow opportunities to provide prudent capital returns.

Through 2021, we continued to implement strategies that further expand our capabilities and effectively allocate capital.

On January 4, 2022, we acquired all issued and outstanding shares of capital stock of Powerline Plus Ltd.

and its affiliate (collectively, the “Powerline Plus Companies"), which expanded our distribution operations in Canada.

On July 15, 2019, we completed the acquisition of substantially all the assets of CSI Electrical Contractors, Inc.

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Additionally, we ended 2021 with $362.7 million available under our credit facility.

We believe that our financial position, positive cash flows and other operational strengths will enable us to manage the challenges and uncertainties in the markets we serve, including new challenges and uncertainties associated with the ongoing COVID-19 pandemic, and give us the flexibility to successfully execute our strategies.

We continue to manage our increasing costs for supporting our operations, including increasing insurance, equipment, labor and material costs.

We believe that our financial position, positive cash flows and other operational strengths will enable us to manage the challenges and uncertainties in the markets we serve and give us the flexibility to successfully execute our strategies.

We continue to invest in developing key management and craft personnel in both our T&D and C&I markets and in procuring the specific specialty equipment and tooling needed to win and execute projects of all sizes and complexity.

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We plan to continue to evaluate our needs for additional equipment and tooling.

Our investment strategy is based on our belief that spending in transmission and distribution projects will continue to remain strong over the next several years as electric utilities, cooperatives and municipalities make up for the lack of infrastructure spending in the past, combined with the overall need to integrate new generation into the electric power grid, and our belief that distribution demand will increase over the next several years.

Understanding Backlog

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When comparing a service contract between periods, factors affecting the gross margins associated with the revenues generated by the contract may include pricing under the contract, the volume of work performed under the contract, the mix of the type of work specifically being performed, the availability of labor resources at expected labor rates and the productivity of the crews performing the work.

Productivity can be influenced by many factors including the experience level of the crew, whether the work is on an open or encumbered right of way, weather conditions, geographical conditions, trade stacking, performance of other sub-trades, schedule changes, effects of environmental restrictions and regulatory and permitting delays.

Revenue Mix and Contract Terms.

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Thus, the mix between new construction work, at fixed-price, and maintenance and repair work, at cost-plus, in a given period will impact gross margin in that period.

The timing of accounting recognition of such savings can

impact our margins.

The timing of accounting recognition of such savings can impact our margins.

In addition, change orders and claims can impact our margins.

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Losses up to the deductible amounts are accrued based upon estimates of the ultimate liability for claims reported and an estimate of claims incurred but not yet reported.

Fleet Utilization, Estimation, and Bidding.

We operate a centrally-managed fleet in the United States in an effort to achieve the highest equipment utilization.

Fleet Availability, Cost, Utilization, Estimation, and Bidding.

We operate a centrally-managed fleet in the United States in an effort to control rising costs and achieve efficient equipment utilization.

We also develop internal equipment rates which provide our business units with appropriate cost information to estimate bids for new projects.

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Net income 85,006 3.4 58,759 2.6

net income (loss) attributable to noncontrolling interest — — (1,476) (0.1)

net loss attributable to noncontrolling interest (4) — — —

Net income attributable to MYR Group Inc.

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Revenues increased $250.9 million, or 11.2%, to $2.50 billion for the year ended December 31, 2021 from $2.25 billion for the year ended December 31, 2020.

The increase was primarily due to incremental revenues from the CSI acquisition, partially offset by impacts related to the COVID-19 pandemic primarily associated with our C&I segment.

The increase was primarily due to an increase in revenue on various-sized C&I projects in certain geographic areas and an increase in revenue on distribution projects and large-sized T&D projects.

Additionally, revenues during the year ended December 31, 2020 were negatively impacted by a slight slowdown of C&I work in certain geographic areas related to the COVID-19 pandemic.

Gross margin.

Gross margin increased to 13.0% for the year ended December 31, 2021 from 12.3% for the year ended December 31, 2020.

The increase in gross margin was primarily due to an increase in higher margin and storm-related work as well as better-than-anticipated productivity on certain projects.

These increases were partially offset by labor inefficiencies as well as unfavorable settlements on certain projects.

Additionally, gross margin during the year ended December 31, 2019 was negatively impacted by projects at lower than historical margins and inefficiencies associated with a joint venture project, that has since been completed.

Changes in estimates resulted in gross margin decreases of 0.8% for the years ended December 31, 2020 and 2019, respectively.

The increase in gross margin was primarily due to better-than-anticipated productivity on certain projects, favorable job close-outs and favorable change order adjustments on certain projects.

These improvements were partially offset by labor and equipment inefficiencies on certain projects and unfavorable change order adjustments on certain projects.

Changes in estimates of gross profit on certain projects resulted in a gross margin increase of 0.4% and a decrease of 0.8% for the years ended December 31, 2021 and 2020, respectively.

Gross profit.

Gross profit increased $61.7 million, or 28.8%, to $275.9 million for year ended December 31, 2020 from $214.2 million for the year ended December 31, 2019, due to higher margins and revenues.

Gross profit increased $49.1 million, or 17.8%, to $325.0 million for year ended December 31, 2021 from $275.9 million for the year ended December 31, 2020, due to higher revenues and margins.

Selling, general and administrative expenses.

SG&A, was $207.2 million for the year ended December 31, 2021, an increase of $18.7 million from $188.5 million for the year ended December 31, 2020.

The year-over-year increase was primarily due to the acquisition of CSI and higher employee incentive compensation costs.

The year-over-year increase was primarily due to higher employee incentive compensation costs, contingent compensation expense related to prior acquisitions and an increase in employee-related expenses to support the growth in our operations.

Gain on sale of property and equipment.

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Interest expense was $1.8 million for the year ended December 31, 2021 compared to $4.6 million for the year ended December 31, 2020.

This decrease was primarily attributable to a decrease in our outstanding debt and a decrease in our weighted average interest rate during the year ended December 31, 2020 as compared to the year ended December 31, 2019, partially offset by prepayment penalties from early retirements of equipment notes.

Other expense, net.

Other expense was $0.6 million for the year ended December 31, 2020 compared to other expense of $0.5 million for the year ended December 31, 2019.

The change was primarily attributable to contingent consideration related to margin guarantees on certain contracts associated with the acquisition of CSI recognized in the year ended December 31, 2020.

This decrease was primarily attributable to a decrease in our outstanding debt during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Income tax expense.

Income tax expense was $31.3 million for the year ended December 31, 2021, with an effective tax rate of 26.9%, compared to $22.6 million for the year ended December 31, 2020, with an effective tax rate of 27.8%.

The decrease in the tax rate for the year ended December 31, 2020 was primarily due to a favorable impact from stock compensation excess tax benefits, partially offset by the impact of the global intangible low tax income (“GILTI”).

Net income attributable to MYR Group Inc.

increased to $58.8 million for the year ended December 31, 2020 from $37.7 million for the year ended December 31, 2019.

The decrease in the tax rate for the year ended December 31, 2021 was primarily due to the impact of the global intangible low tax income (“GILTI”) during the year ended December 31, 2020.

Net income increased to $85.0 million for the year ended December 31, 2021 from $58.8 million for the year ended December 31, 2020.

The increase was primarily for the reasons stated above.

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Revenues for our T&D segment for the year ended December 31, 2021 were $1.30 billion compared to $1.15 billion for the year ended December 31, 2020, an increase of $147.2 million, or 12.8%.

The increase in revenue was primarily related to an increase in revenue on distribution projects which include an increase in storm work related to certain weather events, partially offset by a decrease in revenue on transmission projects.

Revenues from transmission projects represented 64.6% and 68.1% of T&D segment revenue for the years ended December 31, 2020 and 2019, respectively.

Additionally, for the year ended December 31, 2020, measured by revenue in our T&D segment, we provided 43.9% of our T&D services under fixed-price contracts, as compared to 49.7% for the year ended December 31, 2019.

The increase in revenue was primarily related to an increase in revenue on distribution projects and large-sized projects.

Operating income for our T&D segment for the year ended December 31, 2021 was $132.7 million compared to $109.4 million for the year ended December 31, 2020, an increase of $23.3 million, or 21.3%.

The increase in T&D operating income from the prior year was primarily due to better-than-anticipated productivity on certain projects, and an increase in higher margin and storm related work.

These increases were partially offset by labor and material inefficiencies and inclement weather experienced on certain projects.

The increase in T&D operating income from the prior year was primarily due to higher revenues, favorable job close-outs, better-than-anticipated productivity on certain projects and a favorable change order on a project, partially offset by labor and equipment inefficiencies.

Operating income, as a percentage of revenues, for our T&D segment increased to 10.2% for the year ended December 31, 2021 from 9.5% for the year ended December 31, 2020.

Commercial & Industrial

Revenues for our C&I segment for the year ended December 31, 2020 were $1.09 billion compared to $936.7 million for the year ended December 31, 2019, an increase of $156.3 million, or 16.7%, primarily due to incremental revenues from the CSI acquisition, partially offset by impacts related to the COVID-19 pandemic.

Measured by revenue in our C&I segment, we provided 82.5% of our services under fixed-price contracts for the year ended December 31, 2020, compared to 75.2% for the year ended December 31, 2019.

Revenues for our C&I segment for the year ended December 31, 2021 were $1.20 billion compared to $1.09 billion for the year ended December 31, 2020, an increase of $103.7 million, or 9.5%, primarily due to an increase in revenue on various-sized projects in certain geographic areas.

Additionally, revenues during the year ended December 31, 2020 were negatively impacted by a slight slowdown of work in certain geographic areas related to the COVID-19 pandemic.

Operating income for our C&I segment for the year ended December 31, 2021 was $54.4 million compared to $37.2 million for the year ended December 31, 2020, an increase of $17.2 million, or 46.1%.

The year-over-year increase in operating income was primarily due to higher revenues, an increase in higher margin work on certain projects and better-than-anticipated productivity on certain projects, partially offset by labor inefficiencies as well as unfavorable settlements on certain projects.

As a percentage of revenues, operating income for our C&I segment was 3.4% and 3.3% for the years ended December 31, 2020 and 2019, respectively.

The year-over-year increase in operating income was primarily due to higher revenues, better-than-anticipated productivity on certain projects and a favorable change order on a project.

These increases were partially offset by labor and equipment inefficiencies and unfavorable change order adjustments on certain projects.

Operating income, as a percentage of revenues, for our C&I segment increased to 4.5% for the year ended December 31, 2021 from 3.4% for the year ended December 31, 2020.

The increase in corporate expenses for the year ended December 31, 2021 was primarily attributable to higher incentive compensation and other employee-related expenses to support operations.

Liquidity and Capital Resources

Non-GAAP Measures

EBITDA is a non-GAAP measure used by management that we define as net income attributable to MYR Group Inc.

plus net income from noncontrolling interests, interest expense net of interest income, income tax expense and depreciation and amortization, as shown in the following table.

EBITDA does not purport to be an alternative to net income attributable to MYR Group Inc.

as a measure of operating performance or to net cash flows provided by operating activities as a measure of liquidity.

We believe that EBITDA is useful to investors and other external users of our Consolidated Financial Statements in evaluating our operating performance and cash flow because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods, book value of assets, useful lives placed on assets, capital structure and the method by which assets were acquired.

Because not all companies define EBITDA as we do, this presentation of EBITDA may not be comparable to other similarly-titled measures of other companies.

We use, and we believe investors benefit from, the presentation of EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations.

Using EBITDA as a performance measure has material limitations as compared to net income, or other financial measures as defined under GAAP, as it excludes certain recurring items, which may be meaningful to investors.

EBITDA excludes interest expense net of interest income;

however, as we have borrowed money to finance transactions and operations, or invested available cash to generate interest income, interest expense and interest income are elements of our cost structure and can affect our ability to generate revenue and returns for our stockholders.

Further, EBITDA excludes depreciation and amortization;

however, as we use capital and intangible assets to generate revenues, depreciation and amortization are a necessary element of our costs and ability to generate revenue.

Finally, EBITDA excludes income taxes;

however, as we are organized as a corporation, the payment of taxes is a necessary element of our operations.

As a result of these exclusions from EBITDA, any measure that excludes interest expense net of interest income, depreciation and amortization and income taxes has material limitations as compared to net income.

When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA to net income in each period, to allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after-tax basis.

Using both EBITDA and net income to evaluate the business allows management and investors to (a) assess our relative performance against our competitors and (b) monitor our capacity to generate returns for our stockholders.

The following table provides a reconciliation of net income attributable to MYR Group Inc.

For the year ended December 31,

(in thousands) 2021 2020 2019

Net income attributable to MYR Group Inc.

$ 85,010 $ 58,759 $ 37,690

Net loss - noncontrolling interests (4) — (1,476)

Net income 85,006 58,759 36,214

Interest expense, net 1,729 4,554 6,221

Income tax expense 31,300 22,626 14,228

Depreciation and amortization 46,205 46,453 44,516

EBITDA $ 164,240 $ 132,392 $ 101,179

We also use EBITDA as a liquidity measure.

Certain material covenants contained within our credit agreement (the “Credit Agreement”) are based on EBITDA with certain additional adjustments as defined in the Credit Agreement.

Non-compliance with these financial covenants under the Credit Agreement — our interest coverage ratio 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) and our 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) — could result in our lenders requiring us to immediately repay all amounts borrowed.

If we anticipated a potential covenant violation, we would seek relief from our lenders, likely causing us to incur additional cost, and such relief might not be available, or if available, might not be on terms as favorable as those in the Credit Agreement.

In addition, if we cannot satisfy these financial covenants, we would be prohibited under the Credit Agreement from engaging in certain activities, such as incurring additional indebtedness, making certain payments, and acquiring or disposing of assets.

Based on the information above, management believes that the presentation of EBITDA as a liquidity measure is useful to investors and relevant to their assessment of our capacity to service or incur debt, fund capital expenditures, finance acquisitions and expand our operations.

The following table provides a reconciliation of net cash flows provided by operating activities to EBITDA:

For the year ended December 31,

(in thousands) 2021 2020 2019

Net cash flows provided by operating activities $ 137,228 $ 175,167 $ 64,899

Add/(subtract)

Changes in operating assets and liabilities 6,554 (67,770) 21,322

Adjustments to reconcile net income to net cash flows provided by operating activities (58,776) (48,638) (50,007)

Depreciation and amortization 46,205 46,453 44,516

Income tax expense 31,300 22,626 14,228

Interest expense, net 1,729 4,554 6,221

EBITDA $ 164,240 $ 132,392 $ 101,179

Working Capital

Working capital is a non-GAAP measure, we believe that working capital is useful to investors and other external users of our Consolidated Financial Statements in evaluating our operating performance.

The Company defines working capital as total current assets less total current liabilities.

The following table provides the Company’s calculation of working capital:

As of December 31,

(in thousands) 2021 2020 2019

Total current assets $ 748,390 $ 636,684 $ 639,184

total current liabilities (498,599) (443,400) (396,814)

Working capital $ 249,791 $ 193,284 $ 242,370

Liquidity, Capital Resources and Material Cash Requirements

As of December 31, 2021 and 2020, we had working capital of $249.8 million and $193.3 million, respectively.

We define working capital, a non-GAAP measure, as current assets less current liabilities.

During the year ended December 31, 2020, the operating activities of our business provided cash of $175.2 million, compared to $64.9 million for the year ended December 31, 2019.

During the year ended December 31, 2021, our operating activities provided cash of $137.2 million, compared to $175.2 million for the year ended December 31, 2020.

Cash flow from operations is primarily influenced by demand for our services, operating margins, timing of contract performance and the type of services we provide to our customers.

The $110.3 million year-over-year increase in cash provided by operating activities was primarily due to favorable net changes in operating assets and liabilities of $89.1 million, $22.5 million in net income, $1.9 million in depreciation and amortization, and $1.3 million in non-cash stock compensation expense.

The favorable change in operating assets and liabilities was primarily due to net favorable year-over-year changes in various working capital accounts that relate primarily to the timing of costs incurred on work performed that does not coincide with the billing terms (accounts receivable, contract assets, accounts payable and contract liabilities) of $49.6 million and favorable changes of $46.2 million in other liabilities (of which $26.1 million was due to the timing of payroll and the related tax payments, that we elected to defer under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act")), partially offset by a decrease of $5.1 million in other assets.

The increase in cash provided by other liabilities was primarily due to the payment of net asset adjustments related to favorable changes in contract assets and contract liabilities due to the timing of billings and payments under our contracts.

The $37.9 million year-over-year decline in cash provided by operating activities was primarily due to unfavorable net changes in operating assets and liabilities of $74.3 million, partially offset by a $26.2 million increase in net income, a $8.9 million increase in deferred income taxes and a $1.8 million increase in non-cash stock compensation expense.

The unfavorable change in operating assets and liabilities was primarily due to net unfavorable year-over-year changes in various working capital accounts that relate primarily to the timing of costs incurred on work performed that does not coincide with the billing terms (accounts receivable, contract assets, accounts payable and contract liabilities) of $28.8 million, unfavorable changes of $34.8 million in other liabilities was primarily due to payments related to our deferral under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in 2020, timing of other employee related wage and tax payments and higher employee incentive compensation accruals.

In addition we used cash of $9.9 million in prepaid expenses and other assets.

During the years ended December 31, 2021 and 2020, we used net cash of $49.3 million and $40.9 million, respectively, in investing activities.

The $49.3 million of cash used in investing activities in the year ended December 31, 2021 consisted of $52.4 million for capital expenditures, partially offset by $3.1 million of proceeds from the sale of equipment.

The $133.5 million of cash used in investing activities in the year ended December 31, 2019 consisted of $57.8 million for capital expenditures and $79.7 million to acquire CSI, partially offset by $4.0 million of proceeds from the sale of equipment.

Financing activities used cash of $124.3 million, compared to $73.4 million of cash provided, during the years ended December 31, 2020 and 2019, respectively.

The $124.3 million of cash used in financing activities in the year ended December 31, 2020 consisted primarily of $103.8 million of net repayments under our revolving line of credit, $32.6 million of net repayments under our master equipment loan agreements and $1.2 million of repayments of finance lease obligations, $0.7 million of cash used to purchase shares surrendered by employees to satisfy tax obligations under our stock compensation programs during the year ended December 31, 2020, partially offset by $0.7 million of proceeds from the exercise of stock options.

The $73.4 million of cash provided by financing activities in the year ended December 31, 2019 consisted primarily of $45.5 million of net borrowings under our revolving line of credit, primarily to fund the CSI acquisition, $35.1 million of new equipment notes under our master equipment loan agreements and $0.3 million of proceeds from the exercise of stock options, which were partially offset by $4.6 million of repayments of principal obligations under equipment notes, $1.1 million of debt refinancing costs related to the amendment to the Credit Agreement, $1.2 million of repayments of finance lease obligations and share repurchases of $0.8 million, all of which represented shares surrendered to satisfy tax obligations under our stock compensation programs during the year ended December 31, 2019.

We anticipate that our $364.6 million borrowing availability under our revolving line of credit at December 31, 2020 and future cash flow from operations will provide sufficient cash to enable us to meet our future operating needs, debt service requirements, capital expenditures, acquisition and joint venture opportunities, share repurchases, and any new challenges and uncertainties associated with the COVID-19 pandemic.

Although we believe that we have adequate cash and borrowing capacity to meet our liquidity needs, any large projects or acquisitions may require additional capital.

Additionally, in light of the uncertainties around the economic impacts from the ongoing COVID-19 pandemic, we are focused on controlling our costs and capital expenditures to preserve our ability to continue to fund our operations;

however, we continue to invest in developing key management and craft personnel in both our T&D and C&I markets and in procuring the specific specialty equipment and tooling needed to win and execute projects of all sizes and complexity.

The $40.9 million of cash used in investing activities in the year ended December 31, 2020 consisted of $44.4 million for capital expenditures, partially offset by $3.4 million of proceeds from the sale of equipment.

During the years ended December 31, 2021 and 2020, we used cash of $28.1 million, and $124.3 million, respectively in financing activities.

The $28.1 million of cash used in financing activities in the year ended December 31, 2021 consisted primarily of $24.9 million of net repayments under our master equipment loan agreements and $3.4 million of cash used to purchase shares surrendered by employees to satisfy tax obligations under our stock compensation programs during the year ended December 31, 2021.

The $124.3 million of cash used in financing activities in the year ended December 31, 2020 consisted primarily of $103.8 million of net repayments under our revolving line of credit, $32.6 million of net repayments under our master equipment loan agreements, $1.2 million of repayments of finance lease obligations and $0.7 million of cash used to purchase shares surrendered by employees to satisfy tax obligations under our stock compensation programs.

These uses of cash during the year ended December 31, 2020, were partially offset by $0.7 million of cash provided by proceeds from the exercise of stock options.

We believe that our $362.7 million borrowing availability under our revolving line of credit at December 31, 2021, future cash flow from operations and our ability to utilize short- and long-term leases will provide sufficient liquidity for our short- and long-term needs.

Our primary short-term liquidity needs include cash for operations, debt service requirements, capital expenditures, acquisition and joint venture opportunities and $12.6 million of remaining payroll tax deferrals provided under the CARES Act, which will be paid by the end of next year.

We believe that we have an adequate source of liquidity to meet our long-term liquidity needs and foreseeable material cash requirements, including those associated with the acquisition of the Powerline Companies on January 4, 2022, which was funded through a combination of cash on hand and borrowings under our line of credit.

We have not historically paid dividends and currently do not expect to pay dividends.

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We were in compliance with all of the financial covenants under the Credit Agreement as of December 31, 2021.

As of December 31, 2020, we had no debt outstanding under the Facility and letters of credit outstanding of approximately $10.4 million.

As of December 31, 2019, we had $103.8 million of debt outstanding under the Facility and letters of credit outstanding of approximately $10.6 million.

Equipment Notes

We have entered into multiple Master Loan Agreements with multiple banks.

The Master Loan Agreements may be used for financing of equipment between us and the lending banks pursuant to one or more equipment notes (“Equipment Notes”).

Each Equipment Note constitutes a separate, distinct and independent financing of equipment and contractual obligation.

As of December 31, 2020, we had four executed and outstanding Equipment Notes that are collateralized by equipment and vehicles owned by us.

In addition to regularly schedule payments we retired five of our Equipment Notes during the year ended December 31, 2020.

The outstanding balance of these Equipment Notes was $29.4 million as of December 31, 2020.

As of December 31, 2019, we had executed nine Equipment Notes that are collateralized by equipment and vehicles owned by us.

The outstanding balance of these Equipment Notes was $62.0 million as of December 31, 2019.

Off-Balance Sheet Arrangements

As is common in our industry, we enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets.

Our significant off-balance sheet transactions include liabilities associated with letter of credit obligations and bond guarantees entered into in the normal course of business.

We have not engaged in any off-balance sheet financing arrangements through special purpose entities.

Purchase Commitments for Construction Equipment

As of December 31, 2020, we had approximately $9.5 million in outstanding purchase obligations for certain construction equipment to be paid with cash outlays scheduled to occur over the first nine months of 2021.

As of December 31, 2021 and 2020, we had no debt outstanding under the Facility.

Letters of Credit

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Currently, we do not believe that it is likely that any claims will be made under any letter of credit.

At December 31, 2020, we had $10.4 million in letters of credit outstanding under our Credit Agreement, including $9.8 million, at an interest rate of 1.125%, related to the Company’s payment obligation under its insurance programs and approximately $0.6 million, at an interest rate of 0.625%, related to contract performance obligations.

At December 31, 2021, we had $12.3 million in letters of credit outstanding under our Credit Agreement at an interest rate of 1.125%, which are almost entirely related to the Company's payment obligation under its insurance programs.

Equipment Notes

We have entered into multiple Master Loan Agreements with multiple banks.

The Master Loan Agreements may be used for financing of equipment between us and the lending banks pursuant to one or more equipment notes (“Equipment Note”).

Each Equipment Note constitutes a separate, distinct and independent financing of equipment and contractual obligation.

As of December 31, 2021, we had one outstanding Equipment Note collateralized by equipment and vehicles owned by us.

The outstanding balance of this Equipment Note was $4.5 million as of December 31, 2021.

As of December 31, 2021, we had outstanding short-term and long-term Equipment Notes of approximately $1.0 million and $3.5 million, respectively.

In addition to regularly scheduled payments we retired three of our Equipment Notes during the year ended December 31, 2021.

As of December 31, 2020, we had four outstanding Equipment Notes collateralized by equipment and vehicles owned by us.

The outstanding balance of these Equipment Notes was $29.4 million as of December 31, 2020.

As of December 31, 2020, we had outstanding short-term and long-term Equipment Notes of approximately $4.4 million and $25.0 million, respectively.

Lease Obligations

From time-to-time, the Company enters into non-cancelable leases for some of our facility, vehicle and equipment needs.

These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of facilities, vehicles and equipment rather than purchasing them.

The Company’s leases have remaining terms ranging from one to six years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases within one year.

Typically, the Company has purchase options on the equipment underlying its long-term leases and many of its short-term rental arrangements.

The Company may exercise some of these purchase options when the need for equipment is on-going and the purchase option price is attractive.

The outstanding balance of operating lease obligations was $21.0 million as of December 31, 2021.

As of December 31, 2021, we had outstanding short-term and long-term operating lease obligations of approximately $7.8 million and $13.2 million, respectively.

The outstanding balance of operating lease obligations was $22.3 million as of December 31, 2020.

As of December 31, 2020, we had outstanding short-term and long-term operating lease obligations of approximately $6.6 million and $15.7 million, respectively.

As of December 31, 2021, we had no outstanding finance lease obligations.

As of December 31, 2020, our outstanding short-term finance lease obligations was $0.3 million.

Purchase Commitments for Construction Equipment

As of December 31, 2021, we had approximately $9.2 million in outstanding purchase obligations for certain construction equipment to be paid with cash outlays scheduled to occur over the first eight months of 2022.

Performance and Payment Bonds and Parent Guarantees

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Additionally, from time to time we are required to post letters of credit to guarantee the obligations of our wholly owned subsidiaries, which reduces the borrowing availability under our credit facility.

From time to time, pursuant to our service arrangements, we indemnify our customers for claims related to the services we provide under those service arrangements.

These indemnification obligations may subject us to indemnity claims, liabilities and related litigation.

We are not aware of any material unrecorded liabilities for asserted claims in connection with these indemnification obligations.

Contractual Obligations

As of December 31, 2020, our future contractual obligations are as follows:

(in thousands) Total Less than

1 Year 1 – 3 Years 3 – 5 Years More than

5 Years Other

Short and long term debt (1)

$ 29,420 $ 4,381 $ 9,156 $ 9,291 $ 6,592 $ —

Operating lease obligations 26,803 9,111 12,998 3,899 795 —

Finance lease obligations 321 321 — — — —

Purchase obligations 9,491 9,491 — — — —

Income tax contingencies 422 — — — — 422

Total $ 66,457 $ 23,304 $ 22,154 $ 13,190 $ 7,387 $ 422

___________________________

(1) Includes obligations under the Facility and obligations under Equipment Notes.

Excluded from the above table are interest and fees associated with our short term and long term debt and letters of credit outstanding under our Facility, because the applicable interest rates and fees are variable.

We have also excluded our multi-employer pension plan contributions, which are determined annually, based on our union employee payrolls, and which cannot be determined for future periods in advance.

The amount of income tax contingencies has been presented in the “Other” column in the table above due to the fact that the period of future payment cannot be reliably estimated.

For further information, refer to Note 12 — Income Taxes to our Financial Statements.

Concentration of Credit Risk

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As of December 31, 2021 and 2020, none of our customers individually exceeded 10.0% of our accounts receivable.

Inflation did not have a significant effect on our results during the years ended December 31, 2020 or 2019.

New Accounting Pronouncements

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We include these estimated amounts of variable consideration to the extent that it is probable there will not be a significant reversal of revenue.

As of December 31, 2021 and 2020, we recognized revenues of $2.4 million and $14.7 million, respectively, related to significant change orders and/or claims that had been included as contract price adjustments on certain contracts, some of which are multi-year projects.

Some of our contracts may have contract terms that include variable consideration such as safety or performance bonuses or liquidated damages.

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The foregoing factors as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit between periods.

During the year ended December 31, 2021, changes in estimates pertaining to certain projects increased consolidated gross margin by 0.4%.

During the year ended December 31, 2020 and 2019, changes in estimates pertaining to certain projects decreased consolidated gross margin by 0.8%.

We provide warranties to customers on a basis customary to the industry;

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Our deductible for each line of coverage is up to $1.0 million, except for wildfire coverage which has a deductible of $2.0 million.

We also maintain excess umbrella coverage providing higher layers of insurance coverage for losses that exhaust the limits of underlying coverage.

A layer of this umbrella coverage requires us to pay a portion of any loss within a certain loss range and our potential exposure for such losses is up to approximately $3.8 million.

Certain health benefit plans are subject to stop-loss limits of up to $0.2 million, for qualified individuals.

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This method recognizes stock compensation expense on a straight-line basis over the requisite service period for the entire award.

We recognize compensation expense related to performance awards that vest based on internal performance metrics and service conditions on a straight-line basis over the service period, but adjust inception-to-date expense based upon our determination of the expected achievement of the performance target at each reporting date.

We recognize compensation expense related to performance awards with market-based performance metrics on a straight-line basis over the requisite service period.

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As is common practice in the industry, we classify all accounts receivable as current assets.

The allowance for doubtful accounts associated with account receivables was $2.4 million as of December 31, 2021 and $1.7 million as of December 31, 2020.

We grant trade credit, on a non-collateralized basis (with the exception of lien rights against the property in certain cases) to our customers, and we are subject to potential credit risk related to changes in business and overall economic activity.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis