MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements can be identified by the use of forward-looking terminology including “may,” “should,” “likely,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “forecast,” “seek,” “target,” “continue,” “plan,” “intend,” “project,” or other similar words. All statements, other than statements of historical fact included in this Quarterly Report, regarding expectations for future financial performance, business strategies, expectations for our business, future operations, liquidity positions, availability of capital resources, financial position, estimated revenues and losses, projected costs, prospects, plans, objectives and beliefs of management are forward-looking statements.
These forward-looking statements are based on information available as of the date of this Quarterly Report and our management’s current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove correct. Forward-looking statements should not be relied upon as representing our views as of any subsequent date. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:
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our ability to consummate the transactions under the Equity Agreement (defined below) and the Second Amendment (defined below);
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availability of commercially reasonable and accessible sources of liquidity;
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our ability to generate cash flow and liquidity to fund operations;
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the timing and extent of fluctuations in geographic, weather and operational factors affecting our customers, projects and the industries in which we operate;
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our ability to identify acquisition candidates, integrate acquired businesses and realize upon the expected benefits of the acquisition of CCS and William Charles;
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our ability to grow and manage growth profitably;
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the possibility that we may be adversely affected by economic, business, and/or competitive factors;
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market conditions, technological developments, regulatory changes or other governmental policy uncertainty that affects us or our customers;
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our ability to manage projects effectively and in accordance with management estimates, as well as the ability to accurately estimate the costs associated with our fixed price and other contracts, including any material changes in estimates for completion of projects;
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the effect on demand for our services and changes in the amount of capital expenditures by customers due to, among other things, economic conditions, commodity price fluctuations, the availability and cost of financing, and customer consolidation;
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the ability of customers to terminate or reduce the amount of work, or in some cases, the prices paid for services, on short or no notice;
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customer disputes related to the performance of services;
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disputes with, or failures of, subcontractors to deliver agreed-upon supplies or services in a timely fashion;
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our ability to replace non-recurring projects with new projects;
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the impact of U.S. federal, local, state, foreign or tax legislation and other regulations affecting the renewable energy industry and related projects and expenditures;
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the effect of state and federal regulatory initiatives, including costs of compliance with existing and future safety and environmental requirements;
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fluctuations in maintenance, materials, labor and other costs;
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our beliefs regarding the state of the renewable wind energy market generally; and
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the “Risk Factors” described in our Annual Report on Form 10-K for the year ended December 31, 2018, and in our quarterly reports, other public filings and press releases.
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We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Throughout this section, unless otherwise noted “IEA,” “Company,” “we,” “us,” and “our” refer to Infrastructure and Energy Alternatives, Inc. and its consolidated subsidiaries. Certain amounts in this section may not foot due to rounding.
“Emerging Growth Company” Status
The Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the financial position, results of operations, and cash flows of IEA. IEA qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as a company is deemed to be an “emerging growth company,” it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. The JOBS Act also provides that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. Our financial statements may therefore not be comparable to those of companies that have adopted such new or revised accounting
standards. See
Note 2. Summary of Significant Accounting Policies
of the Notes to Condensed Consolidated Financial Statements for more information on “emerging growth company” reduced reporting requirements and when we would cease to be an “emerging growth company.” We continue to monitor our status as an “emerging growth company” and are currently preparing, and expect to be ready, to comply with the additional reporting and regulatory requirements that will be applicable to us when we cease to qualify as an “emerging growth company.”
Overview
We are a leading diversified infrastructure construction company with specialized energy and heavy civil expertise throughout the United States. The Company specializes in providing complete engineering, procurement and construction services throughout the United States for the renewable energy, traditional power and civil infrastructure industries. These services include the design, site development, construction, installation and restoration of infrastructure. We are one of three Tier 1 providers in the wind energy industry and have completed more than 200 wind and solar projects in 35 states. Although the Company has historically focused on the wind industry, its recent acquisitions have expanded our construction capabilities and geographic footprint to create a diverse national platform of specialty construction capabilities in the areas of environmental remediation, industrial maintenance, specialty paving, heavy civil and rail infrastructure construction. We believe we have the ability to continue to expand these services because we are well-positioned to leverage our expertise and relationships in the wind energy business to provide complete infrastructure solutions in all areas.
As previously disclosed, the Company’s results for the year ended December 31, 2018 reflected the effect of multiple severe weather events on the Company’s wind business that began late in the third quarter and continued into the fourth quarter of 2018. These weather conditions had a significant impact on the construction of six wind projects across South Texas, Iowa, and Michigan, resulting in additional labor, equipment and material costs. Although these projects are all now in late stages of completion or completed, and we are collecting and continuing to collect on change orders relating to force majeure provisions of the contracts with respect to certain of these projects, we are continuing to feel the impacts of these events on our business, including with respect to our financial and liquidity positions and operating cash flows. In connection with the effects on the Company's 2018 performance resulting from these adverse weather effects, the Company has engaged its lenders for the purpose of allowing the Company more flexibility in obtaining financing and in avoiding potential non-compliance with its first lien debt coverage ratio in the wake of its 2018 results. The Company and a majority in interest of its lenders have agreed to amend the A&R Credit Agreement to provide among other things, an increase in the first lien coverage ratio for the remainder of 2019 and flexibility for the Company to issue the Series B Preferred Stock. See
“Recent Developments.”
In order to satisfy the conditions to effectiveness of the Third A&R Credit Documents, the Company entered into the Equity Agreement, pursuant to which the Company has agreed to issue and sell to the Commitment Parties, and the Commitment Parties have agreed to purchase from the Company, for an amount in cash equal to $50.0 million in the aggregate, an aggregate of 50,000 shares of newly created Series B preferred stock of the Company, par value $0.0001 per share (the “Series B Preferred Stock”) and warrants exercisable into an aggregate of 3,405,424 shares of the Company’s common stock (the “Warrants”) subject to adjustment. The Company expects the transactions under the Equity Agreement to close around May 20, 2019.
We believe that these steps, if consummated, will improve our liquidity position. There can be no assurance that we will be able to consummate these transactions doing or that doing so will provide sufficient liquidity for the Company's ongoing needs. Please see “Item 1A. Risk Factors” in Part II to this Form 10-Q.
Recent Developments
Second Amendment to Second Amended and Restated Credit and Guarantee Agreement
On May 15, 2019, the Company entered into a Second Amendment to Second Amended and Restated Credit and Guarantee Agreement with lenders constituting Required Lenders under the A&R Credit Agreement by and among the Company, Intermediate Holdings, the Borrower, the Subsidiary Guarantors, the Administrative Agent, the Revolving Agent, the Collateral Agent and the Lenders party thereto (the “Second Amendment”). Pursuant to the Second Amendment, the Required Lenders have agreed to reset the first lien net leverage ratio financial covenant level for the March 31, 2019 fiscal quarter end to 4.75.1.00. The Second Amendment also adds a covenant that requires the Company to enter into the Third A&R Credit Documents (as described below) on or before May 25, 2019. The failure to satisfy this covenant will result in the amendment to the financial covenant becoming null and void, cause the Company to be in technical default of the first lien net leverage ratio as of March 31, 2019 and result in all amounts outstanding under the A&R Credit Agreement to be currently payable.
Equity Commitment Agreement
On May 14, 2019, the Company entered into an Equity Commitment Agreement (the “Equity Agreement”), by and among the Company and the Commitment Parties therto, pursuant to which the Company has agreed to issue and sell to the Commitment Parties, and the Commitment Parties have agreed to purchase from the Company, for an amount in cash equal to $50.0 million, an aggregate of 50,000 shares of newly created Series B preferred stock of the Company, par value $0.0001 per share (the “Series B Preferred Stock”) and warrants exercisable into an aggregate of 3,405,424 shares of the Company’s common stock (the “Warrants”), subject to adjustment. The Company expects the transactions under the Equity Agreement to close around May 20, 2019.
Company Highlights
Our long-term diversification and growth strategy has been to broaden our solar, power generation, and civil infrastructure capabilities and geographic presence and to expand the services we provide within our existing business areas. We took important steps in late 2018 by deepening our capabilities and entering new sectors that are synergistic with our existing capabilities and product offerings.
On March 26, 2018, we consummated the Merger pursuant to an Agreement and Plan of Merger, dated November 3, 2017, by and among M III, IEA Services, a Delaware limited liability company, Infrastructure and Energy Alternatives, LLC (the “Seller”), a Delaware limited liability company and the parent of IEA Services immediately prior to such time, and the other parties thereto, which provided for, among other things, the Merger of IEA Services with and into a wholly-owned subsidiary of M III. See
Note 2. Merger and Acquisition
included in Item 1 of this Quarterly Report on Form 10-Q.
On September 25, 2018, we acquired CCS, a leading provider of environmental and industrial engineering services. The wholly-owned subsidiaries of CCS, Saiia and the ACC Companies, generally enter into long-term contracts with both government and non-government customers to provide EPC services for environmental, heavy-civil and mining projects. We believe our acquisition of Saiia and the ACC Companies will provide IEA with a strong and established presence in the environmental and industrial engineering markets, enhanced civil construction capabilities and an expanded domestic footprint in less-seasonal Southeast, West and Southwest markets.
On November 2, 2018, we acquired William Charles, a leader in engineering and construction solutions for the rail infrastructure and heavy civil construction industries. We believe our acquisition of William Charles will provide IEA with a market leading position in the attractive rail civil infrastructure market and continue to bolster our further growth in the heavy civil and construction footprint across the Midwest and Southwest.
We believe that through the Merger and the acquisitions above that the Company has transformed its business into a diverse national platform of specialty construction capabilities with market leadership in niche markets, including renewables, environmental remediation and industrial maintenance services, heavy civil and rail.
Economic, Industry and Market Factors
We closely monitor the effects that changes in economic and market conditions may have on our customers. General economic and market conditions can negatively affect demand for our customers’ products and services, which can lead to reductions in our customers’ capital and maintenance budgets in certain end-markets. In the face of increased pricing pressure, we strive to maintain our profit margins through productivity improvements and cost reduction programs. Other market, regulatory and industry factors could also affect demand for our services, such as:
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changes to our customers’ capital spending plans;
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mergers and acquisitions among the customers we serve;
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access to capital for customers in the industries we serve;
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new or changing regulatory requirements or other governmental policy uncertainty;
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economic, market or political developments; and
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changes in technology, tax and other incentives.
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While we actively monitor economic, industry and market factors that could affect our business, we cannot predict the effect that changes in such factors may have on our future results of operations, liquidity and cash flows, and we may be unable to fully mitigate, or benefit from, such changes.
Impact of Seasonality and Cyclical Nature of Business
Our revenue and results of operations are subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, fiscal year-ends, project schedules and timing, in particular, for large non-recurring projects and holidays. Typically, our revenue is lowest in the first quarter of the year because cold, snowy or wet conditions experienced in the northern climates are not conducive to efficient or safe construction practices. Revenue in the second quarter is typically higher than in the first quarter, as some projects begin, but continued cold and wet weather and effects from thawing ground conditions can often impact second quarter productivity. The third and fourth quarters are typically our most productive quarters of the year, as a greater number of projects are underway, and weather is normally more accommodating to construction projects. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive impact on our revenue. Nevertheless, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects. Any quarter may be positively or negatively affected by adverse or unusual weather patterns, including from excessive rainfall, warm winter weather or natural catastrophes such as hurricanes or other severe weather, making it difficult to predict quarterly revenue and margin variations.
Our industry is also highly cyclical. Fluctuations in end-user demand within the industries we serve, or in the supply of services within those industries, can impact demand for our services. As a result, our business may be adversely affected by industry declines or by delays in new projects. Variations in project schedules or unanticipated changes in project schedules, in particular, in connection with large construction and installation projects, can create fluctuations in revenue, which may adversely affect us in a given period. In addition, revenue from master service agreements, while generally predictable, can be subject to volatility. The financial condition of our customers and their access to capital, variations in project margins, regional, national and global economic, political and market conditions, regulatory or environmental influences, and acquisitions, dispositions or strategic investments can also materially affect quarterly results. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.
Understanding our Operating Results
Revenue
We provide engineering, building, installation, maintenance and upgrade services to our customers. We derive revenue from projects performed under fixed price contracts and other service agreements for specific projects or jobs requiring the construction and installation of an entire infrastructure system or specified units within an entire infrastructure system. We recognize a significant portion of our revenue based on the percentage-of-completion method. See
Revenue Recognition for Percentage-of-Completion Projects
within
Critical Accounting Policies and Estimates
below.
Cost of Revenue
Cost of revenue consists principally of: salaries, wages and employee benefits; subcontracted services; equipment rentals and repairs; fuel and other equipment expenses, including allocated depreciation and amortization expense; material costs, parts and supplies; insurance; and facilities expenses. Project profit is calculated by subtracting a project’s cost of revenue, including project-related depreciation, from project revenue. Project profitability and corresponding project margins will be reduced if actual costs to complete a project exceed our estimates on fixed price and installation/construction service agreements. Estimated losses on contracts are recognized immediately when estimated costs to complete a project exceed the remaining revenue to be received over the remainder of the contract. Various factors can impact our margins on a quarterly or annual basis, including:
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Seasonality and Geographical Factors
. Seasonal patterns can have a significant impact on project margins. Generally, business is slower at the beginning of the year. Adverse or favorable weather conditions can impact project margins in a given period. For example, extended periods of rain or snowfall can negatively impact revenue and project margins as a result of reduced productivity from projects being delayed or temporarily halted. Conversely, in periods when weather remains dry and temperatures are accommodating, more work can be done, sometimes with less cost, which can favorably impact project margins. In addition, the mix of business conducted in different geographic areas can affect project margins due to the particular characteristics associated with the physical locations where the work is being performed, such as mountainous or rocky terrain versus open terrain. Site conditions, including unforeseen underground conditions, can also impact project margins.
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Revenue Mix
. The mix of revenues derived from the industries we serve and the types of services we provide within an industry will impact margins, as certain industries and services provide higher margin opportunities. Additionally, changes in our customers’ spending patterns in any of the industries we serve can cause an imbalance in supply and demand and, therefore, affect margins and mix of revenues by industry served.
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Performance Risk
. Overall project margins may fluctuate due to work volume, project pricing and job productivity. Job productivity can be impacted by quality of the work crew and equipment, availability of skilled labor, environmental or regulatory factors, customer decisions and crew productivity. Crew productivity can be influenced by weather conditions and job terrain, such as whether project work is in a right of way that is open or one that is obstructed (either by physical obstructions or legal encumbrances).
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Subcontracted Resources
. Our use of subcontracted resources in a given period is dependent upon activity levels and the amount and location of existing in-house resources and capacity. Project margins on subcontracted work can vary from project margins on self-perform work. As a result, changes in the mix of subcontracted resources versus self-perform work can impact our overall project margins.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of compensation and benefit expenses, travel expenses and related costs for our finance, benefits and risk management, legal, facilities, information services and executive personnel. Selling, general and administrative expenses also include outside professional and accounting fees, expenses associated with information technology used in administration of the business, various forms of insurance, acquisition and transaction expenses.
Interest Expense, Net
Interest expense, net consists of contractual interest expense on outstanding debt obligations, capital leases, amortization of deferred financing costs and other interest expense, including interest expense related to financing arrangements, with all such expenses net of interest income.
Critical Accounting Policies and Estimates
This management’s discussion and analysis of our financial condition and results of operations is based upon IEA’s consolidated financial statements included in Item 1 of this Quarterly Report, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires the use of estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Given that management estimates, by their nature, involve judgments regarding future uncertainties, actual results may differ from these estimates if conditions change or if certain key assumptions used in making these estimates ultimately prove to be inaccurate. For discussion of all of our significant accounting policies, see
Note 1. Business, Basis of Presentation and Significant Accounting Policies
to our condensed consolidated financial statements.
We believe that the accounting policies described below are the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management.
Revenue Recognition for Percentage-of-Completion Projects
Revenue from fixed-price contracts provides for a fixed amount of revenue for the entire project, subject to certain additions for changed scope or specifications. We recognize revenue from these contracts using the percentage-of-completion method. Under this method, the percentage of revenue to be recognized for a given project is measured by the percentage of costs incurred to date on the contract to the total estimated costs for the contract.
The estimation process for revenue recognized under the percentage-of-completion method is based on the professional knowledge and experience of our project managers, engineers and financial professionals. Our management reviews the estimates of contract revenue and costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected settlements of disputes related to contract price adjustments are factors that influence estimates of total contract value and total costs to complete those contracts and, therefore, our profit recognition. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined, which could materially affect our results of operations in the period in which such changes are recognized. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated. The substantial majority of fixed price contracts are completed within one year.
For an approved change order which can be reliably estimated as to price, the anticipated revenues and costs associated with the change order are added to the total contract value and total estimated costs of the project, respectively. When costs are incurred for a) an unapproved change order which is probable to be approved or b) an approved change order which cannot be reliably estimated as to price, the total anticipated costs of the change order are added to both the total contract value and total estimated costs for the project. Once a change order becomes approved and reliably estimable, any margin related to the change order is added to the total contract value of the project.
Business Combinations
We account for our business combinations by recognizing and measuring in the financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interests (if applicable) in the acquiree at the acquisition date. The purchase is accounted for using the acquisition method, and the fair value of purchase consideration is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess, if any, of the fair value of the purchase consideration over the fair value of the identifiable net assets is recorded as goodwill. Conversely, the excess, if any, of the net fair values of the identifiable net assets over the fair value of the purchase consideration is recorded as a gain. The fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques and these valuations require management to make significant estimates and assumptions. These estimates and
assumptions are inherently uncertain and, as a result, actual results may materially differ from estimates. Significant estimates include, but are not limited to, future expected cash flows, useful lives and discount rates.
Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition, or adjust the fair values, of acquisition-related assets and liabilities and/or consideration paid, and are referred to as “measurement period” adjustments. For the period ended March 31, 2019, measurement period adjustments related to a decrease to goodwill of $2.9 million and further adjustments discussed in
Note 2. Merger and Acquisition
included in Item 1 of this Quarterly Report on Form 10-Q.
Results of Operations
Three Months Ended March 31,
2019
and
2018
The following table reflects our consolidated results of operations in dollar and percentage of revenue terms for the periods indicated:
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Three Months Ended March 31,
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(in thousands)
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2019
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2018
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Revenue
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$
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190,810
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100.0
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%
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$
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50,135
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100.0
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%
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Cost of revenue
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184,037
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96.5
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%
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53,220
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106.2
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%
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Gross profit
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6,773
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3.5
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%
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(3,085
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)
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(6.2
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)%
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Selling, general and administrative expenses
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27,754
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14.5
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%
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16,960
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33.8
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%
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Income from operations
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(20,981
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)
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(11.0
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)%
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(20,045
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)
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(40.0
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)%
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Interest expense, net
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(10,367
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)
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(5.4
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)%
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(851
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)
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(1.7
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)%
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Other income (expense)
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(170
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)
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(0.1
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)%
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(11
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)
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—
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%
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Income from continuing operations before income taxes
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(31,518
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)
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(16.5
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)%
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(20,907
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)
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(41.7
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)%
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Provision for income taxes
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8,629
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4.5
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%
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3,515
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7.0
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%
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Net income
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$
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(22,889
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)
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(12.0
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)%
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$
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(17,392
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)
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(34.7
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)%
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The following discussion and analysis of our results of operations should be read in conjunction with our condensed consolidated financial statements and the notes relating thereto, included in this report.
Revenue .
Revenue
increased
280.6%
, or
$140.7 million
, in the
first quarter
of
2019
, compared to the same period in
2018
. The increase in revenue was primarily due to revenue of $109.9 million from our acquired businesses, coupled with approximately $17.0 million of growth in our wind operations for our top ten projects quarter over quarter.
Cost of revenue.
Cost of revenue
increased
245.8%
, or
$130.8 million
, in the
first quarter
of
2019
, compared to the same period in
2018
, primarily due to the cost of revenue of $104.0 million from our acquired businesses, and to a lesser extent, increased cost to finish remaining projects effected by multiple severe weather events in the fourth quarter of 2018.
Gross profit.
Gross profit
increased
319.5%
, or
$9.9 million
, in the
first quarter
of
2019
, compared to the same period in
2018
. As a percentage of revenue, gross profit increased and totaled 3.5% in the quarter, as compared to (6.2)% in the prior-year period. The increase in margin was primarily related to a reduction of costs on a disputed project of $4.7 million in 2018, coupled with increased gross profit from our acquired businesses of $5.9 million. While the Company's gross profit margin increased period over period, it was still lower than expected at March 31, 2019 due to the continuing effort to complete the six projects affected by force majeure weather in the fourth quarter of 2018. These six projects created a 0.9% reduction to gross margin in 2019 and will continue to have a further negative on gross margin impact through the third quarter.
Selling, general and administrative expenses.
Selling, general and administrative expenses
increased
63.6%
, or
$10.8 million
, in the
first quarter
of
2019
, compared to the same period in
2018
. Selling, general and administrative expenses were
14.5%
of revenue in the
first quarter
of
2019
, compared to
33.8%
in the same period in
2018
. The increase in selling, general and administrative expenses was primarily driven by $11.7 million related to our acquired businesses.
Interest expense, net.
Interest expense, net
increased
by
$9.5 million
, in the
first quarter
of
2019
, compared to the same period in
2018
. This increase was primarily driven by the increased borrowings under our lines of credit and term loan in the third and fourth quarter of 2018.
Other income (expense).
Other income
decreased
by
$0.2 million
, in the
first quarter
of
2019
, compared to the same period in
2018
. The decrease was primarily the result of losses on the sale of property, plant and equipment.
Provision for income taxes.
Income tax benefit increased
145.5%
, or
$5.1 million
, to a benefit of
$8.6 million
in the
first quarter
of
2019
, compared to
$3.5 million
for the same period in
2018
. The effective tax rates for the period ended
March 31, 2019 and 2018
were
27.38%
and
16.81%
, respectively. The higher effective tax rate is primarily attributable to changes from permanent adjustments and current state taxes. There were no changes in uncertain tax positions during the periods ended
March 31, 2019 and 2018
.
Segment Results
The Company operated as one reportable segment for 2018 and evaluated the business as a renewable construction company. In late 2018, the Company completed two significant acquisitions that construct projects outside of the renewable market. As of March 31, 2019, we operate our business as two reportable segments: the Renewables segment and the Specialty Civil segment. The 2018 results for the Specialty Civil segment was not meaningful.
Each of our reportable segments is comprised of similar business units that specialize in services unique to the market that segment serves. Driving the end-user focused segments are differences in the economic characteristics of each segment; the nature of the services provided by each segment; the production processes of each segment; and the type or class of customer using the segment’s services.
The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses, were made based on segment revenue.
The following is a brief description of the Company's reportable segments:
The Renewables segment operates throughout the United States and specializes in a range of services that include full EPC project delivery, design, site development, construction, installation and restoration of infrastructure services for the wind and solar industries.
The Specialty Civil segment operates throughout the United States and specializes in a range of services that include:
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Heavy civil construction services such as high-altitude road and bridge construction, specialty paving, industrial maintenance and other local, state and government projects.
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Environmental remediation services such as site development, environmental site closure and outsourced contract mining and coal ash management services.
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Rail Infrastructure services such as planning, creation and maintenance of infrastructure projects for major railway and intermodal facilities construction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
For the three months ended March 31, 2019
|
For the three months ended March 31, 2018
|
Segment
|
Revenue
|
Gross Profit
|
Gross Profit Margin
|
Revenue
|
Gross Profit
|
Gross Profit Margin
|
Renewables
|
$
|
75,060
|
|
$
|
2,187
|
|
2.9
|
%
|
$
|
50,135
|
|
$
|
(3,085
|
)
|
(6.2
|
)%
|
Civil
|
115,750
|
|
4,586
|
|
4.0
|
%
|
—
|
|
—
|
|
—
|
|
Total
|
$
|
190,810
|
|
$
|
6,773
|
|
3.5
|
%
|
$
|
50,135
|
|
$
|
(3,085
|
)
|
(6.2
|
)%
|
Liquidity and Capital Resources
Overview
Historically, our primary sources of liquidity have been cash flows from operations, our cash balances and availability under our A&R Credit Agreement. Because we have experienced decreased liquidity due to increased costs and delayed collections relating to the multiple severe weather events in the third quarter and fourth quarter of 2018, we have sought additional sources of liquidity in the form of proceeds from the issuance of Series B Preferred Stock.
Our primary liquidity needs are for working capital, debt service, dividends on our Series A Preferred Stock, income taxes, capital expenditures, insurance collateral, and strategic acquisitions. During the quarter ended March 31, 2019, we decreased our liquidity needs through a previously obtained waiver from the holders of the Series A Preferred Stock allowing us to extend the due date for payment of dividends on the Series A Preferred Stock. However, following the issuance of the Series B Preferred Stock, we will have additional need for liquidity to pay dividends on our Series B Preferred Stock.
As of March 31, 2019, we had approximately $48.0 million in cash, and no availability under our A&R Credit Agreement. We expect to receive proceeds of approximately $50.0 million from the issuance of Series B Preferred Stock and to use such proceeds to repay outstanding accounts payable, partially repay the A&R Credit Agreement, to pay fees and expenses and for general corporate purposes.
We anticipate that our existing cash balances, funds generated from operations, proceeds from the issuance of the Series B Preferred Stock and borrowings will be sufficient to meet our cash requirements for the next twelve months. No assurance can be given, however, that these sources will be sufficient, because there are many factors which could affect our liquidity, including some which are beyond our control. Please see “Item 1A. Risk Factors” in Part II to this Quarterly Report on Form 10-Q.
Capital Expenditures
For the
three
months ended
March 31,
2019
, we incurred $1.9 million in cash purchases for equipment. We estimate that we will spend approximately two percent of revenue for capital expenditures for
2019
and
2020
. Actual capital expenditures may increase or decrease in the future depending upon business activity levels, as well as ongoing assessments of equipment lease versus buy decisions based on short and long-term equipment requirements.
Working Capital
We require working capital to support seasonal variations in our business, primarily due to the effect of weather conditions on external construction and maintenance work and the spending patterns of our customers, both of which influence the timing of associated spending to support related customer demand. Our business is typically slower in the first quarter of each calendar year. Working capital needs are generally lower during the spring when projects are awarded and we receive down payments from customers. Conversely, working capital needs generally increase during the summer or fall months due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. Again, working capital needs are typically lower and working capital is converted to cash during the winter months. These seasonal trends, however, can be offset by changes in the timing of projects, which can be affected by project delays or accelerations and/or other factors that may affect customer spending.
Generally, we receive 5% to 10% cash payments from our customers upon the inception of the projects. Timing of billing milestones and project close-outs can contribute to changes in unbilled revenue. As of
March 31,
2019
, substantially all of our costs in excess of billings and earnings will be billed to customers in the normal course of business within the next twelve months. Net accounts receivable balances, which consist of contract billings as well as costs and earnings in excess of billings and retainage, decreased to $203.5 million as of
March 31,
2019
from $272.5 million as of December 31,
2018
, due primarily to higher levels of revenue, timing of project activity, and collection of billings to customers.
Our billing terms are generally net 30 days, and some of our contracts allow our customers to retain a portion of the contract amount (generally, from 5% to 10%) until the job is completed. As part of our ongoing working capital management practices, we evaluate opportunities to improve our working capital cycle time through contractual provisions and certain financing arrangements. Our agreements with subcontractors often contain a ‘‘pay-if-paid’’ provision, whereby our payments to subcontractors are made only after we are paid by our customers.
Sources and Uses of Cash
Sources and uses of cash are summarized below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
(37,547
|
)
|
|
14,845
|
|
Net cash used in investing activities
|
|
(2,063
|
)
|
|
(133
|
)
|
Net cash provided by financing activities
|
|
16,216
|
|
|
59
|
|
Operating Activities.
Net cash used in operating activities for the
three
months ended
March 31, 2019
was $
(37.5) million
, as compared to net cash provided by operating activities of
$14.8 million
over the same period in
2018
. The decrease in net cash provided by operating activities reflects the timing of receipts from customers and payments to vendors in the ordinary course of business. The change is primarily attributable to
$93.1 million
more cash paid for accounts payable, partially offset by $60.4 million more cash collected for accounts receivables.
Investing Activities.
Net cash used in investing activities for the
three
months ended
March 31, 2019
was
$2.1 million
, as compared to
$0.1 million
over the same period in
2018
. The increase in net cash used by investing activities reflects the cash paid for the purchase of equipment of $1.9 million.
Financing Activities.
Net cash provided by financing activities for the
three
months ended
March 31, 2019
was
$16.2 million
, as compared to
$0.1 million
over the same period in
2018
. The change of $16.1 million is primarily attributable to cash used in 2018 to effectuate the Company's Merger transaction to become a public company of $25.0 million. This increase was offset by less net proceeds from debt and the sale leaseback transaction in 2019 of $6.8 million.
Acquisition Credit Facility
At closing of the CCS acquisition, IEA Services entered into a credit agreement for a new credit facility, which was amended and restated in connection with the closing of the William Charles acquisition, and was further amended and restated on November 16, 2018 (as amended and restated, the “A&R Credit Agreement”). The A&R Credit Agreement provides for a term loan facility of $300.0 million and a revolving line of credit of $50.0 million, which is available for revolving loans and letters of credit. Availability on the line of credit is subject to customary borrowing base calculations.
On September 25, 2018, $200.0 million was drawn on the term loan facility and $20.5 million was drawn on the line of credit to pay the CCS acquisition consideration, repay borrowings under our previous credit facility and repay certain assumed indebtedness of Saiia and the ACC Companies. The remaining $100.0 million was drawn on the term loan facility on November 2, 2018 to pay the cash portion of the William Charles acquisition consideration and to repay certain assumed indebtedness of William Charles, and an additional $26.0 million of revolving loans were drawn in the third and fourth quarter of 2018, to be used for working capital and other general coporate purposes, for total outstanding revolving loans of $47.9 million as of March 31, 2019. The Company capitalized $24.5 million of financing fees that were incurred to obtain this new credit facility.
Term loan borrowings mature on September 25, 2024 and are subject to quarterly amortization of principal, commencing on the last day of the first quarter of 2019, in an amount equal to 2.50% of the aggregate principal amount of such loans. Beginning with 2020, an additional annual payment is required equal to 75% of Excess Cash Flow 3.25% (as defined in the A&R Credit Agreement) for the preceding fiscal year if such Excess Cash Flow is greater than $2.5 million, with the percentage of Excess Cash Flow subject to reduction based upon the Company's consolidated leverage ratio. Borrowings under the revolving line of credit mature on September 25, 2023.
Interest on term loan borrowings accrues at an interest rate of, at the Company's option, (x) LIBOR plus a margin of
6.25%
or (y) an alternate base rate plus a margin of
5.25%
. Interest on revolving loans accrues at an interest rate of, at the Company's option, (x) LIBOR plus a margin of
4.25%
or (y) the applicable base rate plus a margin of
3.25%
. The weighted average interest rate on our debt as of
March 31, 2019
and
December 31, 2018
, was
8.57%
and
8.82%
, respectively.
Obligations under this credit facility are guaranteed by Infrastructure and Energy Alternatives, Inc., Intermediate Holdings (as defined therein) and each existing and future, direct and indirect, wholly-owned, material domestic subsidiary of
Infrastructure and Energy Alternatives, Inc. other than IEA Services (together with IEA Services, the “Credit Parties”), and are secured by all of the present and future assets of the Credit Parties, subject to customary carve-outs.
Under the A&R Credit Agreement, the Credit Parties are subject to various affirmative covenants, including those requiring (i) delivery of financial statements, budgets and forecasts; (ii) delivery of certificates and other information; (iii) delivery of notices (of any default, material adverse condition, ERISA event, material litigation or material environmental event); (iv) payment of tax obligations; (v) preservation of existence; (vi) maintenance of properties; (vii) maintenance of insurance; (viii) compliance with laws; (ix) maintenance of books and records; (x) inspection rights; (xi) use of proceeds; (xii) maintenance of guarantee obligations and collateral security; and (xiii) compliance with environmental laws.
Under the A&R Credit Agreement, the Credit Parties are also subject to negative covenants, including restrictions (subject to certain exceptions) on (i) liens; (ii) indebtedness (including guarantees and other contingent obligations); (iii) investments (including loans, advances and acquisitions); (iv) mergers and other fundamental changes; (v) sales and other dispositions of property or assets; (vi) payments of dividends and other distributions and share repurchases (provided, that the Credit Agreement permits (x) distributions to the Company or any of its subsidiaries, (y) tax distributions and (z) certain other distributions by the Company (including distributions for customary public company expenses and for payments on preferred equity of the post-combination company subject to terms and conditions set forth in the loan documentation), (vii) changes in the nature of the business; (viii) transactions with affiliates; (ix) burdensome agreements; (x) payments and modifications of certain debt instruments; (xi) changes in fiscal periods; (xii) amendments of organizational documents; (xiii) division/series transactions; and (xiv) sale and lease-back transactions.
Events of default under the A&R Credit Agreement include, but are not limited to, (i) failure to pay any principal or interest when due; (ii) any material breach of the representations and warranties made in the A&R Credit Agreement; (iii) failure to obverse or perform covenants; and (iv) certain events of bankruptcy and judgements. Upon any event of default, the Lenders are permitted to cease making loans, declare the unpaid principal amount of all outstanding loans and all other obligations immediately due and payable, enforce liens and security interests, and exercise all other rights and remedies available under the loan documents or applicable law.
Under the A&R Credit Agreement, the Credit Parties are also subject to a First Lien Net Leverage Ratio. The First Lien Net Leverage Ratio is defined as the ratio of (a) the excess of (i) consolidated total debt that, as of such date, is secured by a lien on any asset of property of the Company or any of its Restricted Subsidiaries that is not expressly subordinated to the lien securing the obligations owing under the A&R Credit Agreement over (ii) net cash as of such date, to (b) consolidated EBITDA, calculated on a pro forma basis, for the most recently completed measurement period. The Company and Borrower must not permit the First Lien Net Leverage Ratio, as of the last day of any consecutive four fiscal quarter period to be greater than:
|
|
|
Measurement Period
|
Ratio
|
Prior to the fiscal quarter ending December 31, 2020
|
3:50 : 1.00
|
From and after the fiscal quarter ending December 31, 2020
|
2.25 : 1.00
|
As previously discussed, we potentially would not have been in compliance with the First Lien Net Leverage Ratio in the A&R Credit Agreement for the compliance period ended March 31, 2019. The Company sought relief by entering into the Second Amendment, which, among other things waives non-compliance with the First Lien Net Leverage Ratio under the A&R Credit Documents for the compliance period ended March 31, 2019 and replaces the existing A&R Credit Agreement with the Third A&R Credit Agreement. The effectiveness of the Third A&R Credit Documents is conditioned upon, among other things, the Company obtaining equity financing with proceeds of not less than $50.0 million. For a more detailed description of the terms, conditions and provisions of the Third A&R Credit Documents, including a revised First Lien Net Leverage Ratio covenant, please see “Item 5. Other Information” in Part II of this Form 10-Q.
After giving effect to the Second Amendment, our First Lien Net Leverage Ratio as of March 31, 2019, was in compliance with the Second Amendment.
Series A Preferred Stock
We have 34,965 shares of Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) outstanding. Dividends on each share of Series A Preferred Stock are payable in cash on a quarterly basis and accrue on the stated value of such share on a daily basis at a rate of (i) 6% per annum during the period from the closing of the initial sale of the Series A Preferred Stock until the 18 month anniversary of the initial sale of the Series A Preferred Stock and (ii) 10% per
annum thereafter; provided that the dividend rate will be increased by 2% per annum in case of any non-payment of dividends when due, failure to redeem shares of Series A Preferred Stock when required or any other material default (in each case, as further specified in the Certificate of Designations) until such non-payment, failure or default has been cured, resolved or waived.
Any holder of Series A Preferred Stock may elect, by written notice to the Company (x) at any time and from time to time on or after the third anniversary from the closing of the initial sale of the Series A Preferred Stock or (y) at any time and from time to time on or after the non-payment of dividends when due, failure to redeem shares of Series A Preferred Stock when required or any other material default (in each case, as further specified in the Certificate of Designation) until such non-payment, failure or default is cured by the Company, to cause the Company to convert, without the payment of additional consideration by such holder, all or any portion of the issued and outstanding shares of Series A Preferred Stock held by such holder, as specified by such holder in such notice, into a number of shares of common stock determined by dividing (i) the stated value per share of $1,000 (subject to certain adjustments provided in the Certificate of Designations for stock splits and similar events) plus accrued and unpaid dividends by (ii) the VWAP per share of common stock for the 30 consecutive trading days ending on the trading day immediately preceding the conversion date. In the event the Series A Preferred Stock is converted following an uncured non-payment, failure or default event, for the purposes of the foregoing calculation, VWAP per share shall be multiplied by 90%. The “VWAP per share” is defined as the per share volume-weighted average price for the relevant period as reported by Bloomberg (as further described in the Certificate of Designations).
During the quarter ended March 31, 2019, we extended the due date for payment of dividends on the Series A Preferred Stock through a previously obtained waiver. The effect of the waiver is that, during the waiver period, the dividends will not become payable, and the holders of the Series A Preferred will not have a right to convert based upon the non-payment of dividends on the scheduled payment date. Dividends will continue to accrue interest rate at the penalty rate if not paid on the scheduled payment date.
The issuance of the Series B Preferred Stock is subject to approval by Oaktree as representative of the holders of the Series A Preferred Stock. Under the terms of the amendment to the Third A&R Credit Documents, the Company cannot pay cash dividends to the holders of the Series A Preferred Stock nor can the Series A Preferred Stock be redeemed before repayment in full of all amounts due under the Senior Credit Facility. Under the terms of the Series B Preferred Stock, the Series A Preferred Stock is subordinated in right of dividend payment, redemption and liquidation to the Series B Preferred Stock. The Company expects to enter into an amendment to the Certificate of Designations for the Series A Preferred Stock in connection with the closing of the issuance of the Series B Preferred Stock to address the foregoing subordination issues. Upon effectiveness of the Third Amended and Restated Credit Agreement and the Series B Preferred Stock, dividends on the Series A Preferred Stock will accumulate to the liquidation preference when the Company is not permitted to pay cash dividends under those agreements. Dividends payable to Series A Preferred Stock on December 31, 2018 and March 31, 2019 will be accumulated to the liquidation preference.
Letters of Credit and Surety Bonds
In the ordinary course of business, the Company is required to post letters of credit and surety bonds to customers in support of performance under certain contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit or surety bond commits the issuer to pay specified amounts to the holder of the letter of credit or surety bond under certain conditions. If the letter of credit or surety bond issuer were required to pay any amount to a holder, the Company would be required to reimburse the issuer, which, depending upon the circumstances, could result in a charge to earnings. As of
March 31, 2019
, and
December 31, 2018
, the Company was contingently liable under letters of credit issued under its revolving credit facility or its old credit facility, respectively, in the amount of
$2,080
and
$3,006
, respectively, related to projects. In addition, as of
March 31, 2019
and
December 31, 2018
, the Company had outstanding surety bonds on projects of
$1,778,246
and
$1,681,983
, respectively, including the bonding line of the acquired ACC Companies and Saiia.
Contractual Obligations
The following table sets forth our contractual obligations and commitments for the periods indicated as of
March 31,
2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
(in thousands)
|
|
Total
|
|
Remainder of 2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt (principal)
(1)
|
|
345,533
|
|
|
24,523
|
|
|
31,569
|
|
|
30,854
|
|
|
30,450
|
|
|
78,060
|
|
|
150,077
|
|
Debt (interest)
(2)
|
|
120,948
|
|
|
22,020
|
|
|
26,829
|
|
|
23,881
|
|
|
21,151
|
|
|
17,635
|
|
|
9,432
|
|
Capital leases
(3)
|
|
83,580
|
|
|
17,480
|
|
|
24,704
|
|
|
20,829
|
|
|
17,063
|
|
|
3,504
|
|
|
—
|
|
Operating leases
(4)
|
|
15,427
|
|
|
4,058
|
|
|
3,586
|
|
|
1,658
|
|
|
1,004
|
|
|
765
|
|
|
4,356
|
|
Total
|
|
$
|
565,488
|
|
|
$
|
68,081
|
|
|
$
|
86,688
|
|
|
$
|
77,222
|
|
|
$
|
69,668
|
|
|
$
|
99,964
|
|
|
$
|
163,865
|
|
|
|
(1)
|
Represents the contractual principal payment due dates on our outstanding debt.
|
|
|
(2)
|
Includes variable rate interest using March 31, 2019 rates.
|
|
|
(3)
|
We have obligations, exclusive of associated interest, recognized under various capital leases for equipment totaling $118.5 million at March 31, 2019. Net amounts recognized within property, plant and equipment, net in the consolidated balance sheet under these capitalized lease agreements at March 31, 2019 totaled $100.8 million.
|
|
|
(4)
|
We lease real estate, vehicles, office equipment and certain construction equipment from unrelated parties under non-cancelable leases. Lease terms range from month-to-month to terms expiring through 2038.
|
For detailed discussion and additional information pertaining to our debt instruments, see
Note 9. Debt
in the Notes to Condensed Consolidated Financial Statement, included in Item 1.
Off-Balance Sheet Arrangements
As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business. Our significant off-balance sheet transactions include liabilities associated with non-cancelable operating leases, letter of credit obligations, surety and performance and payment bonds entered into in the normal course of business, liabilities associated with deferred compensation plans, liabilities associated with certain indemnification and guarantee arrangements. See
Note 10. Commitments and Contingencies
in the Notes to Condensed Consolidated Financial Statements, included in Item 1 of this Quarterly Report on Form 10-Q, for discussion pertaining to our off-balance sheet arrangements. See
Note 1. Business, Basis of Presentation and Summary of Significant Accounting Policies
and
Note 14. Related Party Transactions
in the Notes to Condensed Consolidated Financial Statements, included in Item 1, for discussion pertaining to certain of our investment arrangements.
Backlog
For companies in the construction industry, backlog can be an indicator of future revenue streams. Estimated backlog represents the amount of revenue we expect to realize from the uncompleted portions of existing construction contracts, including new contracts under which work has not begun and awarded contracts for which the definitive project documentation is being prepared, as well as revenue from change orders and renewal options. Estimated backlog for work under fixed price contracts and cost-reimbursable contracts is determined based on historical trends, anticipated seasonal impacts, experience from similar projects and estimates of customer demand based on communications with our customers. Cost-reimbursable contracts are included in backlog based on the estimated total contract price upon completion.
As of March 31, 2019 and December 31, 2018, our total backlog was approximately $2.2 billion and $2.1 billion, respectively, compared to $1.1 billion as of March 31, 2018. The $1.1 billion increase is primarily related to $858.0 million of backlog related to our acquisitions coupled with $254.0 million of an increase in backlog related to our legacy IEA business.
The following table summarizes our backlog by segment for March 31, 2019:
|
|
|
|
|
(in millions)
|
|
Segments
|
Backlog at March 31, 2019
|
Renewables
|
1,264.4
|
|
Civil
|
892.7
|
|
Other
|
—
|
|
Total
|
$
|
2,157.1
|
|
Based on historical trends in the Company’s backlog, we believe awarded contracts to be firm and that the revenue for such contracts will be recognized over the life of the project. Timing of revenue for construction and installation projects included in our backlog can be subject to change as a result of customer delays, regulatory factors and/or other project-related factors. These changes could cause estimated revenue to be realized in periods later than originally expected, or not at all. In the past, we have occasionally experienced postponements, cancellations and reductions on construction projects, due to market volatility and regulatory factors. There can be no assurance as to our customers’ requirements or the accuracy of our estimates. As a result, our backlog as of any particular date is an uncertain indicator of future revenue and earnings.
Backlog is not a term recognized under GAAP, although it is a common measurement used in our industry. Our methodology for determining backlog may not be comparable to the methodologies used by others. See ‘‘
Item 1A. Risk Factors
’’ in our Annual Report on Form 10-K filed with the SEC on March 14, 2019 for a discussion of the risks associated with our backlog.
Recently Issued Accounting Pronouncements
See
Note 1. Business, Basis of Presentation and Summary of Significant Accounting Policies
in the Notes to Condensed Consolidated Financial Statements, included in Item 1.