Notes to Consolidated Financial Statements
Note 1. Business, Basis of Presentation and Significant Accounting Policies
Infrastructure and Energy Alternatives, Inc. (f/k/a M III Acquisition Corporation (“M III”)), a Delaware corporation, is a holding company organized on August 4, 2015 (together with its wholly-owned subsidiaries, “IEA” or the “Company”).
The Company specializes in providing complete engineering, procurement and construction (“EPC”) services throughout the United States (“U.S.”) for the renewable energy, traditional power and civil infrastructure industries. These services include the design, site development, construction, installation and restoration of infrastructure. Although the Company has historically focused on the wind industry, but has recently focused on further expansion into the solar market and with our 2018 acquisitions expanded its construction capabilities and geographic footprint in the areas of renewables, environmental remediation, industrial maintenance, specialty paving, heavy civil and rail infrastructure construction, creating a diverse national platform of specialty construction capabilities.
Reportable Segments
The Company has two reportable segments: the Renewables (“Renewables”) segment and the Heavy Civil and Industrial (“Specialty Civil”) segment. See Note 13. Segments for a description of the reportable segments and their operations.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Infrastructure and Energy Alternatives, Inc. and its wholly-owned direct and indirect domestic and foreign subsidiaries. The Company occasionally forms joint ventures with unrelated third parties for the execution of single contracts or projects. The Company assesses its joint ventures to determine if they meet the qualifications of a variable interest entity (“VIE”) in accordance with Accounting Standard Codification (“ASC”) Topic 810, Consolidation. For construction joint ventures that are not VIEs or fully consolidated but for which the Company has significant influence, the Company accounts for its interest in the joint ventures using the proportionate consolidation method, see Note 14. Joint Ventures. All intercompany accounts and transactions are eliminated in consolidation.
Basis of Accounting and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Key estimates include: the recognition of revenue and profit or loss from construction projects; fair value estimates related to warrant liabilities; valuations of goodwill and intangible assets; asset lives used in computing depreciation and amortization; accrued self-insured claims; other reserves and accruals; accounting for income taxes; and the estimated impact of contingencies and ongoing litigation. While management believes that such estimates are reasonable when considered in conjunction with the Company’s consolidated financial position and results of operations, actual results could differ materially from those estimates.
The prior period classification of the warrant liability fair value adjustment for the Series B Preferred Stock - Anti-dilution warrants has been revised to conform to the current period presentation within the Consolidated Statements of Operations. This reclassification has no effect on net income or stockholders' equity.
Cash and Cash Equivalents
The Company considers all unrestricted, highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents. The Company maintains cash balances in various United States (“US”)-backed banks, which, at times, may exceed the amounts insured by the Federal Deposit Insurance Corporation.
Accounts Receivable
The Company does not charge interest to its customers and carries its customer receivables at their face amounts, less an allowance for credit losses. Accounts receivable and contract assets include amounts billed to customers under the terms and provisions of the contracts. Most billings are determined based on contractual terms. As is common practice in the industry, the Company classifies all accounts receivable and contract assets, including retainage, as current assets. The
contracting cycle for certain long-term contracts may extend beyond one year, and accordingly, collection of retainage on those contracts may extend beyond one year. Contract assets include amounts billed to customers under retention provisions in construction contracts. Such provisions are standard in the Company’s industry and usually allow for a portion of progress billings on the contract price, typically 5-10%, to be withheld by the customer until after the Company has completed work on the project. Billings for such retention balances at each balance sheet date are finalized and collected after project completion. Generally, unbilled amounts will be billed and collected within one year. The Company determined that there are no material amounts due past one year and no material amounts billed but not expected to be collected within one year.
As noted in the Recently Adopted Accounting Standards section below, the Company adopted the new accounting standard for measuring credit losses effective January 1, 2021 utilizing the transition method that allows recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company's financial results for reporting periods beginning on or after January 1, 2021 are presented under the new standard, while financial results for prior periods continue to be reported in accordance with the prior standard and the Company's historical accounting policy. The net cumulative effect due to the adoption of the new standard did not have an impact to retained earnings as of January 1, 2021. Although the adoption of the new standard did not have a material impact on the Company's consolidated financial statements at the date of adoption, expected credit losses could change as a result of changes in credit loss experience, changes to specific risk characteristics of the Company's portfolio of financial assets or changes to management’s expectations of future economic conditions that affect the collectability of the Company's financial assets. At the end of each quarter, management reassesses these factors.
Activity in the Company's allowance for credit losses for the periods indicated was as follows:
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| Year Ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Allowance for credit losses at beginning of period | $ | — | | | $ | 75 | | | $ | 42 | |
| | | | | |
Plus: provision for (reduction in) allowance | — | | | (75) | | | 33 | |
Less: write-offs, net of recoveries | — | | | — | | | — | |
Allowance for credit losses at period-end | $ | — | | | $ | — | | | $ | 75 | |
Revenue Recognition
The Company adopted the requirements of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which is also referred to as Accounting Standards Codification (“ASC”) Topic 606, under the modified retrospective transition approach effective January 1, 2019, with application to all existing contracts that were not substantially completed as of January 1, 2019. The impacts of adoption on the Company’s retained earnings on January 1, 2019 was primarily related to variable consideration on unapproved change orders. The cumulative impact of adopting Topic 606 required net adjustments of $750,000 to the statement of operations among revenue, cost of revenue and income taxes, thereby reducing income for the year ended December 31, 2019 and reducing the December 31, 2019 accumulated deficit. The Company also adjusted the December 31, 2019, statement of cash flows to reflect the impact of adoption.
Under Topic 606, revenue is recognized when control of promised goods and services is transferred to customers, and the amount of revenue recognized reflects the consideration to which an entity expects to be entitled in exchange for the goods and services transferred. Revenue is recognized by the Company primarily over time utilizing the cost-to-cost measure of progress for fixed price contracts and is based on costs for time and materials and other service contracts, consistent with the Company’s previous revenue recognition practices.
The adoption of Topic 606 did not have a material effect on the Company's consolidated financial statements; related to revenues, contract assets/liabilities, deferred taxes and net loss as compared with the Company’s previous revenue recognition practices under ASC Topic 605.
Contracts
The Company derives revenue primarily from construction projects performed under contracts for specific projects requiring the construction and installation of an entire infrastructure system or specified units within an infrastructure system. Contracts contain multiple pricing options, such as fixed price, time and materials, or unit price. Generally, renewable energy projects are performed for private customers while Specialty Civil projects are performed for various governmental entities.
Revenue derived from projects billed on a fixed-price basis totaled 98.9%, 97.7% and 94.8% of consolidated revenue from continuing operations for the years ended December 31, 2021, 2020 and 2019, respectively. Revenue and related costs for
construction contracts billed on a time and materials basis are recognized as the services are rendered. Revenue derived from projects billed on a time and materials basis totaled 1.1%, 2.3% and 5.2% of consolidated revenue from continuing operations for the years ended December 31, 2021, 2020 and 2019, respectively.
Construction contract revenue is recognized over time using the cost-to-cost measure of progress for fixed price contracts. The cost-to-cost measure of progress best depicts the continuous transfer of control of goods or services to the customer. The contractual terms provide that the customer compensates the Company for services rendered.
Contract costs include all direct materials, labor and subcontracted costs, as well as indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and the costs of capital equipment. The cost estimation and review process for recognizing revenue over time under the cost-to-cost method is based on the professional knowledge and experience of the Company’s project managers, engineers and financial professionals. Management reviews estimates of total contract transaction price and total project costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected variable consideration are factors that influence estimates of the total contract transaction price, total costs to complete those contracts and profit recognition. Changes in these factors could result in revisions to revenue and costs of revenue in the period in which the revisions are determined on a prospective basis, which could materially affect the Company’s consolidated results of operations for that period. Provisions for losses on uncompleted contracts are recorded in the period in which such losses are determined.
Performance Obligations
A performance obligation is a contractual promise to transfer a distinct good or service to the customer and is the unit of account under Accounting Standards Codification (“ASC”) Topic 606. The transaction price of a contract is allocated to distinct performance obligations and recognized as revenue when or as the performance obligations are satisfied. The Company’s contracts often require significant integrated services and, even when delivering multiple distinct services, are generally accounted for as a single performance obligation. Contract amendments and change orders are generally not distinct from the existing contract due to the significant integrated service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation. With the exception of certain Specialty Civil service contracts, the majority of the Company’s performance obligations are completed within one year.
When more than one contract is entered into with a customer on or close to the same date, the Company evaluates whether those contracts should be combined and accounted for as a single contract as well as whether those contracts should be accounted for as more than one performance obligation. This evaluation requires significant judgment and is based on the facts and circumstances of the various contracts, which could change the amount of revenue and profit recognition in a given period depending upon the outcome of the evaluation.
Remaining performance obligations represent the amount of unearned transaction prices for fixed price contracts and open purchase orders for which work is wholly or partially unperformed. As of December 31, 2021, the amount of the Company’s remaining performance obligations was $2.0 billion. The Company expects to recognize approximately 81.8% of its remaining performance obligations as revenue in 2022, with the remainder recognized primarily in 2023. Revenue recognized from performance obligations satisfied in previous periods was $2.0 million and $(10.0) million for the years ended December 31, 2021 and 2020, respectively.
Variable Consideration
Transaction pricing for the Company’s contracts may include variable consideration, such as unapproved change orders, claims, incentives and liquidated damages. Management estimates variable consideration for a performance obligation utilizing estimation methods that best predict the amount of consideration to which the Company will be entitled. Variable consideration is included in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Management’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based on past practices with the customer, specific discussions, correspondence or preliminary negotiations with the customer, legal evaluations and all other relevant information that is reasonably available. The effect of a change in variable consideration on the transaction price of a performance obligation is typically recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders, claims and liquidated damages reflected in transaction price are not resolved in the Company’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.
As of December 31, 2021 and 2020, the Company included approximately $94.5 million and $52.6 million, respectively, on unapproved change orders and/or claims in the transaction price for certain contracts that were in the process of being resolved in the normal course of business, including through negotiation, arbitration and other proceedings. These
transaction price adjustments are included within Contract Assets or Contract Liabilities as appropriate. The Company actively engages with its customers to complete the final approval process, and generally expects these processes to be completed within one year. Amounts ultimately realized upon final acceptance by customers could be higher or lower than such estimated amounts.
Disaggregation of Revenue
The following tables disaggregate revenue by customers and services performed, which the Company believes best depicts how the nature, amount, timing and uncertainty of its revenue for the years ended:
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(in thousands) | | December 31, 2021 | | December 31, 2020 |
| | | | |
Renewables | | | | |
Wind | | 1,146,920 | | | 1,033,204 | |
Solar | | 314,217 | | | 109,638 | |
| | $ | 1,461,137 | | | $ | 1,142,842 | |
| | | | |
Specialty Civil | | | | |
Heavy civil | | 340,447 | | | 356,616 | |
Rail | | 125,546 | | | 166,948 | |
Environmental | | 151,290 | | | 86,499 | |
| | $ | 617,283 | | | $ | 610,063 | |
Concentrations
The Company had the following approximate revenue and accounts receivable concentrations, net of allowances, for the periods ended:
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| Revenue % | | Accounts Receivable % |
| Year Ended December 31, | | December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
Company A (Renewables Segment) | * | | * | | * | | * | | * |
| | | | | | | | | |
Company B (Specialty Civil Segment) | * | | * | | 10.9 | | | * | | * |
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———
* Amount was not above 10% threshold.
Construction Joint Ventures
Certain contracts are executed through joint ventures. The arrangements are often formed for the execution of single contracts or projects and allow the Company to share risks and secure specialty skills required for project execution.
In accordance with ASC Topic 810, Consolidation, the Company assesses its joint ventures at inception to determine if any meet the qualifications of a VIE. The Company considers a joint venture a VIE if either (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, the Company reassesses its initial determination of whether the joint venture is a VIE.
The Company also evaluates whether it is the primary beneficiary of each VIE and consolidates the VIE if the Company has both (a) the power to direct the economically significant activities of the entity, and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining whether it qualifies as the primary beneficiary. The Company also considers all parties that have direct or implicit variable interests when
determining whether it is the primary beneficiary. When the Company is determined to be the primary beneficiary, the VIE is consolidated. In accordance with ASC 810, management’s assessment of whether the Company is the primary beneficiary of a VIE is performed continuously.
Construction joint ventures that do not involve a VIE, or for which the Company is not the primary beneficiary, are evaluated for consolidation under the voting interest model that considers whether the Company owns or controls more than 50% of the voting interest in the joint venture. For construction joint ventures that are not consolidated but for which the Company has significant influence, the Company accounts for its interest in the joint ventures using the proportionate consolidation method, whereby the Company’s proportionate share of the joint ventures’ assets, liabilities, revenue and cost of operations are included in the appropriate classifications in the Company’s consolidated financial statements. See Note 14. Joint Ventures for additional discussion regarding joint ventures.
Self-Insurance
The Company is self-insured up to the amount of its deductible for its medical and workers’ compensation insurance policies. For the years ended December 31, 2021, 2020 and 2019, the Company maintained insurance policies subject to per claim deductibles of $0.5 million, for its workers' compensation policy. Liabilities under these insurance programs are accrued based upon management’s estimates of the ultimate liability for claims reported and an estimate of claims incurred but not reported with assistance from third-party actuaries. The Company’s recorded liability for employee group medical claims is based on analysis of historical claims experience and specific knowledge of actual losses that have occurred. The Company is also required to post letters of credit and provide cash collateral to certain of its insurance carriers and to obtain surety bonds in certain states.
The Company’s self-insurance liability is reflected in the consolidated balance sheets within accrued liabilities. The determination of such claims and expenses and the appropriateness of the related liability is reviewed and updated quarterly, however, these insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the determination of the Company’s liability in proportion to other parties and the number of incidents not reported. Accruals are based upon known facts and historical trends. Although management believes its accruals are adequate, a change in experience or actuarial assumptions could materially affect the Company’s results of operations in a particular period.
Company-Owned Life Insurance
The Company has life insurance policies on certain key executives. Company-owned life insurance is recorded at its cash surrender value or the amount that can be realized.
As of December 31, 2021 and 2020, the Company had a long-term asset of $4.9 million and $4.3 million, respectively, related to these policies. For the years ended December 31, 2021, 2020 and 2019, the Company recognized an increase of $694, a decrease of $502 and an increase of $898, respectively, in the cash surrender value of these policies.
Leases
In the ordinary course of business, the Company enters into agreements that provide financing for machinery and equipment and for other of its facility, vehicle and equipment needs. The Company reviews all arrangements for potential leases, and at inception, determines whether a lease is an operating or finance lease. Lease assets and liabilities, which generally represent the present value of future minimum lease payments over the term of the lease, are recognized as of the commencement date. Leases with an initial lease term of twelve months or less are classified as short-term leases and are not recognized in the consolidated balance sheets unless the lease contains a purchase option that is reasonably certain to be exercised.
Lease term, discount rate, variable lease costs and future minimum lease payment determinations require the use of judgment and are based on the facts and circumstances related to the specific lease. Lease terms are generally based on their initial non-cancelable terms, unless there is a renewal option that is reasonably certain to be exercised. Various factors, including economic incentives, intent, past history and business need are considered to determine if a renewal option is reasonably certain to be exercised. The implicit rate in a lease agreement is used when it can be determined. Otherwise, the Company's incremental borrowing rate, which is based on information available as of the lease commencement date, including applicable lease terms and the current economic environment, is used to determine the value of the lease obligation.
Property, Plant and Equipment, Net
Property, plant and equipment is recorded at cost, or if acquired in a business combination, at the acquisition-date fair value, less accumulated depreciation. Depreciation of property, plant and equipment, including property and equipment under capital leases, is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are depreciated over the shorter of the term of the lease or the estimated useful lives of the improvements. Expenditures for repairs and maintenance are charged to expense as incurred, and expenditures for betterments and major improvements are capitalized and depreciated over the remaining useful lives of the assets. The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal, with resulting gains or losses included in cost of revenue.
The assets’ estimated lives used in computing depreciation for property, plant and equipment are as follows:
| | | | | |
Buildings and leasehold improvements | 2 to 39 years |
Construction equipment | 3 to 15 years |
Office equipment, furniture and fixtures | 3 to 7 years |
Vehicles | 3 to 5 years |
Intangible Assets, Net
The Company's intangible assets represent finite-lived assets that were acquired in a business combination, consisting of customer relationships, trade names and backlog, and are recorded at acquisition-date fair value, less accumulated amortization. These assets are amortized over their estimated lives, which are generally based on contractual or legal rights. Amortization of customer relationship and trade name intangibles is recorded within selling, general and administrative expenses in the consolidated statements of operations, and amortization of backlog intangibles is recorded within cost of revenue. The straight-line method of amortization is used because it best reflects the pattern in which the economic benefits of the intangibles are consumed or otherwise used up. The amounts and useful lives assigned to intangible assets acquired impact the amount and timing of future amortization.
Impairment of Property, Plant and Equipment and Intangibles
Management reviews long-lived assets that are held and used for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared with the asset’s carrying amount to determine if there has been an impairment, which is calculated as the difference between the fair value of an asset and its carrying value. Estimates of future undiscounted cash flows are based on expected growth rates for the business, anticipated future economic conditions and estimates of residual values. Fair values take into consideration management’s estimates of risk-adjusted discount rates, which are believed to be consistent with assumptions that marketplace participants would use in their estimates of fair value. There were no impairments of property, plant and equipment or intangible assets recognized during the years ended December 31, 2021, 2020 and 2019.
Goodwill
Goodwill represents the excess purchase price paid over the fair value of acquired intangible and tangible assets. Goodwill is assessed annually for impairment on October 1st and tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on its assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s carrying value is greater than its fair value, then a quantitative analysis will be performed to determine if there is any impairment.
The quantitative assessment for goodwill requires us to estimate the fair value of each reporting unit carrying goodwill using a weighted combination of the income and market approaches. The income approach uses a discounted cash flow model, which involves significant estimates and assumptions including preparation of revenue and profitability forecasts, selection of a discount rate and selection of a long-term growth rate. The market approach uses an analysis of stock prices and enterprise values of a set of guideline public companies to arrive at a market multiple that is used to estimate fair value. If the fair value of the respective reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a
reporting unit exceeds its fair value, the Company would record an impairment charge equal to the difference, not to exceed the carrying amount of goodwill.
Management performed a qualitative assessment for the goodwill recorded in its Renewables and Specialty Civil reporting units by examining relevant events and circumstances that could have an effect on its fair value, such as macroeconomic conditions, industry and market conditions, entity-specific events, financial performance and other relevant factors or events that could affect earnings and cash flows. Based on evaluation of these qualitative assessments, it was determined that there was no goodwill impairment.
Contingent Consideration
As part of the merger (the “Merger”) completed with M III on March 26, 2018 (the “Closing Date”), the Company agreed to issue additional common shares to the Seller upon satisfaction of financial targets for 2019. This contingent liability, which was presented as contingent consideration in the consolidated balance sheets, was measured at its estimated fair value as of the Closing Date using a Monte Carlo simulation and subsequent changes in fair value were recorded within other (expense) income, net in the consolidated statement of operations. See Note 6. Fair Value of Financial Instruments for further discussion.
Debt Issuance Costs
Financing costs incurred with securing the Senior Unsecured Notes are deferred and amortized to interest expense, net over the maturity of the agreement on a straight-line basis and are presented as a direct deduction from the carrying amount of the related debt. Financing costs incurred with securing a revolving line of credit are deferred and amortized to interest expense, net over the contractual term of the arrangement on a straight-line basis and are presented as a direct deduction from the carrying amount of the related debt. The loss on extinguishment of debt is recognized in income in the period of extinguishment and calculated as the difference between the reacquisition price (remaining principal balance, excluding accrued and unpaid interest) and the net carrying amount of the related debt. The net carrying amount of the related debt represents the amount due at maturity, adjusted for unamortized debt issuance costs.
Stock-Based Compensation
The 2018 Equity Plan grants stock options (“Options”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) to certain key employees and members of the Board of Directors of the Company (the “Board”) for their services. The Company recognizes compensation expense for these awards in accordance with the provisions of ASC 718, Stock Compensation, which requires the recognition of expense related to the fair value of the awards in the Company’s consolidated statement of operations.
The Company estimates the grant-date fair value of each award at issuance. For awards subject to service-based vesting conditions, the Company recognizes compensation expense equal to the grant-date fair value on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are accounted for when incurred. For awards subject to both performance and service-based vesting conditions, the Company recognizes stock-based compensation expense using the straight-line recognition method when it is probable that the performance condition will be achieved.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Where applicable, the Company records a valuation allowance to reduce any deferred tax assets that it determines will not be realizable in the future.
The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on income tax returns it files if such tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. These tax benefits are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Litigation and Contingencies
Accruals for litigation and contingencies are reflected in the consolidated financial statements based on management’s assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. Liabilities for estimated losses are accrued if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable. Accruals are based on information available at the time of the assessment due to the uncertain nature of such matters. As additional information becomes available, management reassesses potential liabilities related to pending claims and litigation and may revise its previous estimates, which could materially affect the Company’s results of operations in a given period.
Fair Value of Financial Instruments
The Company applies ASC 820, Fair Value Measurement, which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability and are to be developed based on the best information available in the circumstances.
The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:
Level 1 - Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 - Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions and valuation techniques when little or no market data exists for the assets or liabilities. The Company has Series B Preferred Stock, Warrants and the Rights Offering value in Level 3.
Fair values of financial instruments are estimated using public market prices, quotes from financial institutions and other available information.
Segments
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision makers are the chief executive officer and chief financial officer. The Company reports its operations as two reportable segments.
Recently Adopted Accounting Standards - Guidance Adopted in 2021
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis. The Company adopted the standard on January 1, 2021 on a prospective basis, which did not have an impact on our disclosures for income taxes.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial assets, including trade accounts receivables. The expected credit loss methodology under ASU 2016-13 is based on historical experience, current conditions and reasonable and supportable forecasts, and replaces the probable/incurred loss model for measuring and recognizing expected losses under current GAAP. The ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The ASU and its related clarifying updates are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted.
The Company adopted the standard on January 1, 2021 on a prospective basis, utilizing the transition method that allows recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company's financial results for reporting periods beginning on or after January 1, 2021 are presented under the new standard, while financial results for prior periods continue to be reported in accordance with the prior standard and the Company's historical accounting policy. The net cumulative effect due to the adoption of the new standard did not impact retained earnings as of January 1, 2021. Although the adoption of the new standard did not have a material impact on the Company's consolidated financial statements at the date of adoption, expected credit losses could change as a result of changes to credit loss experience, specific risk characteristics of the Company's portfolio of financial assets or management’s expectations of future economic conditions that affect the collectability of the Company's financial assets. Management continues to periodically assess these factors and incorporates any changes in its estimate of credit losses.
Recently Issued Accounting Standards Not Yet Adopted
Management has evaluated other recently issued accounting pronouncements and does not believe that they will have a significant impact on the Company's consolidated financial statements and related disclosures.
COVID-19 Pandemic
During March 2020, the World Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The COVID-19 pandemic has significantly affected economic conditions in the United States and internationally as national, state and local governments reacted to the public health crisis by requiring mitigation measures that have disrupted business activities for an uncertain period of time.
The Company incurred $1.3 million and $3.0 million of specific expenses related to the COVID-19 pandemic for the year ended December 31, 2021 and 2020, respectively. Currently, most of the Company’s construction services are deemed essential under governmental mitigation orders and all of our business segments continue to operate. The Company has issued several notices of force majeure for the purpose of recognizing delays in construction schedules due to COVID-19 outbreaks on certain of its work sites and has also received notices of force majeure from the owners of certain projects and certain subcontractors. Management does not believe that any delays on projects related to these events of force majeure will have a material impact on the
Company's results of operations.
Management’s top priority has been to take appropriate actions to protect the health and safety of the Company's employees, customers and business partners, including adjusting the Company's standard operating procedures to respond to evolving health guidelines. Management believes that it is taking appropriate steps to mitigate any potential impact to the Company; however, given the uncertainty regarding the potential effects of the COVID-19 pandemic, any future impacts cannot be quantified or predicted with specificity.
The effects of the COVID-19 pandemic could affect the Company’s future business activities and financial results, including new contract awards, reduced crew productivity, contract amendments or cancellations, higher operating costs or delayed project start dates or project shutdowns that may be requested or mandated by governmental authorities or others.
Note 2. Contract Assets and Liabilities
We bill our customers based on contractual terms, including, milestone billings based on the completion of certain phases of the work. Sometimes, billing occurs after revenue recognition, resulting in unbilled revenue, which is accounted for as a contract asset. Sometimes we receive advance mobilization payments from our customers before revenue is recognized, resulting in deferred revenue, which is accounted for as a contract liability.
Contract assets in the Consolidated Balance Sheets represents the following:
•costs and estimated earnings in excess of billings, which arise when revenue has been recorded but the amount has not been billed; and
•retainage amounts for the portion of the contract price earned by us for work performed but held for payment by the customer as a form of security until we reach certain construction milestones or complete the project.
Contract assets consist of the following:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 120,900 | | | $ | 51,367 | |
Retainage receivable | 93,398 | | | 93,816 | |
| $ | 214,298 | | | $ | 145,183 | |
Contract liabilities consist of the following:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Billings in excess of costs and estimated earnings on uncompleted contracts | $ | 125,658 | | | $ | 117,641 | |
Loss provision for contracts in progress | 470 | | | 594 | |
| $ | 126,128 | | | $ | 118,235 | |
Revenue recognized for the year ended December 31, 2021, that was included in the contract liability balance at December 31, 2020 was approximately $114.8 million.
Note 3. Property, Plant and Equipment, Net
Property, plant and equipment consisted of the following as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Buildings and leasehold improvements | $ | 6,884 | | | $ | 4,402 | |
Land | 17,600 | | | 17,600 | |
Construction equipment | 227,807 | | | 192,402 | |
Office equipment, furniture and fixtures | 3,687 | | | 3,620 | |
Vehicles | 8,289 | | | 7,326 | |
Total property, plant and equipment | 264,267 | | | 225,350 | |
Accumulated depreciation | (125,662) | | | (94,604) | |
Property, plant and equipment, net | $ | 138,605 | | | $ | 130,746 | |
Depreciation expense for property, plant and equipment was $40.6 million, $35.9 million and $34.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Note 4. Goodwill and Intangible Assets, Net
The following table provides the changes in the carrying amount of goodwill for 2021 and 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | Renewables | | Specialty Civil | | Total |
January 1, 2020 | $ | 3,020 | | | $ | 34,353 | | | $ | 37,373 | |
Adjustments | — | | | — | | | — | |
December 31, 2020 | 3,020 | | | 34,353 | | | 37,373 | |
Adjustments | — | | | — | | | — | |
December 31, 2021 | $ | 3,020 | | | 34,353 | | | $ | 37,373 | |
The goodwill recorded in the Company's Specialty Civil reporting unit is deductible for income tax purposes over a 15-year period, with the exception of $2.9 million that is not deductible.
Intangible assets consisted of the following as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
($ in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Weighted Average Remaining Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Weighted Average Remaining Life |
Customer relationships | $ | 26,500 | | | $ | (12,267) | | | $ | 14,233 | | | 4 years | | $ | 26,500 | | | $ | (8,481) | | | $ | 18,019 | | | 5 years |
Trade names | 13,400 | | | (8,664) | | | 4,736 | | | 2 years | | 13,400 | | | (5,985) | | | 7,415 | | | 3 years |
| | | | | | | | | | | | | | | |
| $ | 39,900 | | | $ | (20,931) | | | $ | 18,969 | | | | | $ | 39,900 | | | $ | (14,466) | | | $ | 25,434 | | | |
Amortization expense associated with intangible assets for the years ended December 31, 2021, 2020 and 2019 totaled $6.5 million, $11.8 million and $13.6 million, respectively.
The following table provides the expected annual intangible amortization expense:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2023 | | 2024 | | 2025 |
Amortization expense | $ | 6,466 | | | $ | 5,841 | | | $ | 3,785 | | | $ | 2,877 | |
Note 5. Accrued Liabilities
Accrued liabilities consisted of the following as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Accrued project costs | $ | 88,063 | | | $ | 63,486 | |
Accrued compensation and related expenses | 46,701 | | | 42,672 | |
Other accrued expenses | 28,600 | | | 23,436 | |
| $ | 163,364 | | | $ | 129,594 | |
Note 6. Fair Value of Financial Instruments
The following table presents the Company's financial instruments measured at fair value on a recurring basis, classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Liabilities | | | | | | | | | | | | | | | |
Private warrants | — | | | 410 | | | — | | | 410 | | | — | | | — | | | — | | | — | |
Series B Preferred Stock - Anti-dilution warrants | — | | | — | | | 5,557 | | | 5,557 | | | — | | | — | | | 8,800 | | | 8,800 | |
Series B-1 Preferred Stock - Performance warrants | — | | | — | | | — | | | — | | | — | | | — | | | 400 | | | 400 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total liabilities | $ | — | | | $ | 410 | | | $ | 5,557 | | | $ | 5,967 | | | $ | — | | | $ | — | | | $ | 9,200 | | | $ | 9,200 | |
The following table reconciles the beginning and ending balances of recurring fair value measurements using Level 3 inputs for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
(in thousands) | Contingent Consideration | Series B Preferred Stock - Anti-dilution warrants | Series B-1 Preferred Stock - Performance warrants | Series B-3 Preferred - Closing Warrants | Rights Offering |
Beginning Balance, January 1, 2019 | $ | 23,082 | | $ | — | | $ | — | | $ | — | | $ | — | |
Preferred Series B Stock - initial fair value | — | | 5,646 | | 400 | | 7,900 | | 1,383 | |
Fair value adjustment - (gain) loss recognized in other income | (23,082) | | (1,329) | | — | | 3,591 | | — | |
Beginning Balance, December 31, 2019 | $ | — | | $ | 4,317 | | $ | 400 | | $ | 11,491 | | $ | 1,383 | |
Fair value adjustment - (gain) loss recognized in other income | — | | (491) | | — | | 1,677 | | (1,383) | |
Transfer to non-recurring fair value instrument (liability) | — | | 7,400 | | — | | — | | — | |
Transfer to non-recurring fair value instrument (equity) | — | | (2,426) | | — | | (13,168) | | — | |
Beginning Balance, December 31, 2020 | $ | — | | $ | 8,800 | | $ | 400 | | $ | — | | $ | — | |
Fair value adjustment - loss (gain) recognized in other income | — | | 4,325 | | (400) | | — | | — | |
| | | | | |
Transfer to non-recurring fair value instrument (equity) | — | | (7,568) | | — | | — | | — | |
Ending Balance, December 31, 2021 | $ | — | | $ | 5,557 | | $ | — | | $ | — | | $ | — | |
In 2019, the Company entered into three equity agreements and issued Series B Preferred Stock as discussed in Note 7. Debt and Series B Preferred Stock. The agreements required that on the conversion of any of the Convertible Series A Preferred Stock to common shares, the Series B Preferred Stock will receive additional warrants (Anti-dilution Warrants) to purchase common shares at a price of $0.0001 per share. The agreements also required that if the Company fails to meet a certain Adjusted EBITDA (as that term is defined in the agreements) threshold on a trailing twelve-month basis from May 31, 2020 through April 30, 2021, the Series B Preferred Stock will receive additional warrants (Performance Warrants) to purchase common shares at $0.0001 per share.
On August 2, 2021, the Company closed an underwritten public offering. At the closing of the offering, the following equity transactions were completed with ASOF Holdings I, L.P. (“ASOF”) and Ares Special Situations Fund IV, L.P. (“ASSF” and, together with ASOF, “Ares Parties”):
•the Ares Parties converted all of their Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) (consisting of all of the Company's issued and outstanding shares of Series A Preferred Stock), into 2,132,273 shares of common stock;
•the Company issued to the Ares Parties 507,417 shares of common stock representing shares of common stock underlying warrants that the Ares Parties were entitled to pursuant to anti-dilution rights that are triggered upon conversion of the Series A Preferred Stock described below as a part of the “Series B Preferred Stock - Anti-Dilution Warrants” section;
For further discussion of the equity transaction see Note 9. Earnings Per Share.
The information below describes the balance sheet classification and the recurring fair value measurement for these requirements:
Private Warrants (recurring)
The Company has 295,000 private warrants that are not actively traded on the public markets and the Company adjusts the fair value at the end of each fiscal period using the price on that date multiplied by the remaining private warrants. The Private warrants were recorded as warrant obligations and the fair value adjustment was recorded as Warrant liability fair value adjustment. For further discussion see Note 9. Earnings Per Share.
Series B Preferred Stock - Anti-dilution Warrants (recurring)
The number of common shares attributable to the warrants issued to Series B Preferred Stockholders for anti-dilution warrants were determined as follows;
•upon conversion by Series A Preferred Stockholders and determined on a 30-day volume weighted average. As noted above, these anti-dilution warrants were issued upon the conversion of the Series A Preferred Stock as part of the equity transaction on August 2, 2021 and therefore no liability was recorded at December 31, 2021.
•upon the exercise of any warrant with an exercise price of $11.50 or higher. As of December 31, 2021, the Company had 3,827,325 Merger Warrants to purchase shares of common stock at $11.50 per share. If the Merger Warrants were converted it would result in an additional 1.2 million anti-dilution warrants being issued. As of December 31, 2021, the Company recorded the anti-dilution warrants at fair value, which was estimated using a Monte Carlo simulation based on certain significant unobservable inputs, such as a risk rate premium, volatility of stock, conversion stock price, current stock price and amount of time remaining before expiration of the Merger Warrants. The calculation derived a fair value of $5.6 million for the liability based on an anti-dilution warrant fair value of $4.77.
Significant unobservable inputs used in the fair value calculation as of the periods indicated were as follows:
| | | | | |
| December 31, 2021 |
Stock price | $ | 9.20 | |
Conversion stock price | $ | 11.50 | |
Time before Merger Warrant expiration | 1.23 | |
Stock volatility | 63.77 | % |
Risk-free interest rate | 0.47 | % |
Series B-1 Preferred Stock - Performance Warrants (recurring)
The warrant liability was recorded at fair value as a liability, using a Monte Carlo Simulation based on certain significant unobservable inputs, such as a risk rate premium, Adjusted EBITDA volatility, stock price volatility and projected
Adjusted EBITDA for the Company. The Company remained above the Adjusted EBITDA threshold for the trailing twelve-month basis from May 31, 2020 through April 30, 2021 and therefore was not required to issue additional warrants.
Series B-3 Preferred - Closing Warrants
See further discussion on Series B-3 Preferred - Closing Warrants in Note 7. Debt and Series B Preferred Stock.
Rights Offering
The Company conducted a rights offering in connection with the offering of the Series B Preferred Stock. The rights offering fair value was recorded as a liability and was a deemed dividend to common stockholders. On March 4, 2020 we completed the rights offering and removed the liability associated with the fair value.
Contingent Consideration
Pursuant to the merger agreement with M III, the Company was required to issue up to an additional 9,000,000 shares of common stock, if the 2018 and 2019 adjusted EBITDA targets were achieved. The Company did not achieve the Adjusted EBITDA targets which resulted in fair value adjustments to the contingent liability.
Other financial instruments of the Company not listed in the table above primarily consist of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities that approximate their fair values, based on the nature and short maturity of these instruments, and they are presented in the Company's consolidated balance sheets at carrying cost. Additionally, management believes that the carrying value of the Company's outstanding debt balances, further discussed in Note 7. Debt and Series B Preferred Stock, approximate fair value.
Note 7. Debt and Series B Preferred Stock
Debt consists of the following obligations as of:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
| | | |
| | | |
Term loan | $ | — | | | $ | 173,345 | |
Senior unsecured notes | 300,000 | | | — | |
Commercial equipment notes | 3,557 | | | 5,582 | |
Total principal due for long-term debt | 303,557 | | | 178,927 | |
Unamortized debt discount and issuance costs | (10,867) | | | (17,196) | |
Less: Current portion of long-term debt | (1,960) | | | (2,506) | |
Long-term debt, less current portion | $ | 290,730 | | | $ | 159,225 | |
| | | |
Debt - Series B Preferred Stock | $ | — | | | $ | 185,396 | |
Unamortized debt discount and issuance costs | — | | | (11,528) | |
Long-term Series B Preferred Stock | $ | — | | | $ | 173,868 | |
Senior Unsecured Notes
On August 17, 2021, IEA Energy Services LLC, a wholly owned subsidiary of the Company (“Services”), issued $300.0 million aggregate principal amount of its 6.625% senior unsecured notes due 2029 (the “Senior Unsecured Notes”), in a private placement. Interest is payable on the Senior Unsecured Notes on each February 15 and August 15, commencing on February 15, 2022. The Senior Unsecured Notes will mature on August 15, 2029. The Senior Unsecured Notes are guaranteed on a senior unsecured basis by the Company and certain of its domestic wholly-owned subsidiaries (the “Guarantors”).
On or after August 15, 2024, the Senior Unsecured Notes are subject to redemption at any time and from time to time at the option of Services, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on August 15 of the years indicated below:
| | | | | |
Year | Percentage |
2024 | 103.3 | % |
2025 | 101.7 | % |
2026 and thereafter | 100.0 | % |
Prior to August 15, 2024, Services may also redeem some or all of the Senior Unsecured Notes at the principal amount of the Senior Unsecured Notes, plus a “make-whole premium,” together with accrued and unpaid interest. In addition, at any time prior to August 15, 2024, Services may redeem up to 40.0% of the original principal amount of the Senior Unsecured Notes with the proceeds of certain equity offerings at a redemption price of 106.63% of the principal amount of the Senior Unsecured Notes, together with accrued and unpaid interest.
In connection with the issuance of the Senior Unsecured Notes, Services entered into an indenture (the “Indenture”) with the Guarantors and Wilmington Trust, National Association, as trustee, providing for the issuance of the Senior Unsecured Notes. The terms of the Indenture provides for, among other things, negative covenants that under certain circumstances would limit Services’ ability to incur additional indebtedness; pay dividends or make other restricted payments; make loans and investments; incur liens; sell assets; enter into affiliate transactions; enter into certain sale and leaseback transactions; enter into agreements restricting Services' subsidiaries' ability to pay dividends; and merge, consolidate or amalgamate or sell all or substantially all of its property, subject to certain thresholds and exceptions. The Indenture provides for customary events of default that include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest; breach of other covenants or agreements in the Indenture; failure to pay certain other indebtedness; failure to pay certain final judgments; failure of certain guarantees to be enforceable; and certain events of bankruptcy or insolvency.
Credit Agreement
On August 17, 2021, Services, as the borrower, and certain guarantors (including the Company), entered into a Credit Agreement (the “Credit Agreement”) with a syndicate of lenders and CIBC Bank USA in its capacities as the Administrative and Collateral Agent for the lenders. The Credit Agreement provides for a $150.0 million senior secured revolving credit facility. The Credit Agreement is guaranteed by the Company and certain subsidiaries of the Company (the “Credit Agreement Guarantors” and together with Services, the “Loan Parties”) and is secured by a security interest in substantially all of the Loan Parties’ personal property and assets. Services has the ability to increase available borrowing under the credit facility by an additional amount up to $50.0 million subject to certain conditions.
Services may voluntarily repay and reborrow outstanding loans under the credit facility at any time subject to usual and customary breakage costs for borrowings bearing interest based on LIBOR and minimum amount requirements set forth in the Credit Agreement. The credit facility includes $100.0 million in borrowing capacity for the issuance of letters of credit. The credit facility is not subject to amortization and matures with all commitments terminating on August 17, 2026.
Interest rates on the credit facility are based upon (1) an index rate that is established at the highest of the prime rate or the sum of the federal funds rate plus 0.50%, or (2) at Services’ election, a LIBOR rate, plus in either case, an applicable interest rate margin. The applicable interest rate margins are adjusted on a quarterly basis based upon Services’ first lien net leverage within the range of 1.00% to 2.50% for index rate loans and 2.00% and 3.50% for LIBOR loans. Borrowings under the credit facility shall initially bear interest at a rate per annum equal to LIBOR plus 2.50%. In anticipation of LIBOR's phase out, our Credit Agreement includes a well-documented transition mechanism for selecting a benchmark replacement rate for LIBOR. In addition to paying interest on outstanding principal under the credit facility, Services is required to pay a commitment fee to the lenders under the credit facility for unused commitments. The commitment fee rate ranges from 0.30% to 0.45% per annum depending on Services’ First Lien Net Leverage Ratio (as defined in the Credit Agreement).
The credit facility requires Services to comply with a quarterly maximum consolidated First Lien Net Leverage Ratio test and minimum Fixed Charge Coverage ratio as follows:
•Fixed Charge Coverage Ratio - The Loan Parties shall not permit the Fixed Charge Coverage Ratio (as defined in the Credit Agreement) as of the last day of any four consecutive fiscal quarter period ending on the last day of a fiscal quarter to be less than 1.20:1.00, commencing with the period ending September 30, 2021.
•First Lien Net Leverage Ratio – The Loan Parties will not permit the First Lien Net Leverage Ratio (as defined in the Credit Agreement) as of the last day of any four consecutive fiscal quarter period ending on the last day of a fiscal quarter to exceed 1.75:1.00, commencing with the period ending September 30, 2021 (subject to certain increases for permitted acquisitions).
In addition, the Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, limit Services’ ability and the ability of its restricted subsidiaries including the Company to incur indebtedness or guarantee debt; incur liens; make investments, loans and acquisitions; merge, liquidate or dissolve; sell assets, including capital stock of subsidiaries; pay dividends on its capital stock or redeem, repurchase or retire its capital stock; amend, prepay, redeem or purchase subordinated debt; and engage in transactions with affiliates.
The Credit Agreement contains certain customary representations and warranties, affirmative covenants and events of default (including, among others, an event of default upon a change of control). If an event of default occurs, the lenders under the credit facility are entitled to take various actions, including the acceleration of amounts due under the credit facility and all actions permitted to be taken by a secured creditor.
Third A&R Credit Agreement and Term Loan
Prior to entering into the Credit Agreement, we were party to that certain Third A&R Credit Agreement, dated May 15, 2019, as amended (the “Third A&R Credit Agreement”), which governed the terms of our term loan (the “Term Loan”) and provided for revolving credit commitments of up to $75.0 million, upon the terms and subject to the satisfaction of the conditions set forth in the Third A&R Credit Agreement. The Term Loan was repaid in full and the Third A&R Credit Agreement has been terminated.
The weighted average interest rate for the Third A&R Credit Agreement term loan as of December 31, 2020 was 7.00%.
Debt - Series B Preferred Stock
In 2019, the Company entered into three equity purchase agreements and issued Series B Preferred Stock. The Series B Preferred Stock was a mandatorily redeemable financial instrument under ASC Topic 480 and had been recorded as a liability using the effective interest rate method for each tranche. The mandatory redemption date for all tranches of the Series B Preferred Stock was February 15, 2025.
On August 17, 2021, the Company redeemed all of the shares of Series B Preferred Stock at the Optional Redemption Price per share. The Optional Redemption Price was a price per share of Series B Preferred Stock in cash equal to $1,500, plus all accrued and unpaid dividends thereon since the immediately preceding dividend date calculated through the day prior to such redemption, minus the amount of any Series B preferred cash dividends actually paid. See the table below for further discussion of proceeds and the loss on extinguishment.
Debt and Series B Preferred Stock Extinguishment
The Company used the proceeds from the Senior debt and equity transaction discussed in Note 9. Earnings Per Share and the New Credit Facility discussed above to redeem all of the Series B Preferred Stock and paid off the Term Loan. Below is a summary of the the use of proceeds:
| | | | | |
Use of Proceeds ($ in millions) |
Proceeds from Equity transaction | $ | 193.5 | |
Proceeds from Debt transaction | 300.0 | |
Transaction proceeds | 493.5 | |
Less: Deferred Fees | (11.4) | |
Net transaction proceeds | $ | 482.1 | |
| |
Series B Preferred Stock redemption | $ | (265.8) | |
Term Loan payoff | (173.3) | |
Revolver and letter of credit payoff | (22.4) | |
Total use of proceeds | $ | (461.5) | |
| |
Loss on Extinguishment of Debt |
Series B Preferred Stock - Make Whole Premium | $ | 47.3 | |
Write-off of deferred fees related to term loan | 13.2 | |
Series B Preferred Stock - write-off of deferred fees and discount | 40.5 | |
Loss on Extinguishment of Debt | $ | 101.0 | |
Contractual Maturities
Contractual maturities of the Company's outstanding principal on debt obligations as of December 31, 2021 are as follows:
| | | | | |
(in thousands) | Maturities |
2022 | $ | 1,792 | |
2023 | 1,003 | |
2024 | 441 | |
2025 | 255 | |
2026 | 66 | |
Thereafter | 300,000 | |
Total | $ | 303,557 | |
Note 8. Commitments and Contingencies
In the ordinary course of business, the Company enters into agreements that provide financing for machinery and equipment and for other of its facility, vehicle and equipment needs. The Company reviews all arrangements for potential leases, and at inception, determines whether a lease is an operating or finance lease. Lease assets and liabilities, which generally represent the present value of future minimum lease payments over the term of the lease, are recognized as of the commencement date. Under ASC Topic 842, leases with an initial lease term of twelve months or less are classified as short-term leases and are not recognized in the consolidated balance sheets unless the lease contains a purchase option that is reasonably certain to be exercised.
Lease term, discount rate, variable lease costs and future minimum lease payment determinations require the use of judgment, and are based on the facts and circumstances related to the specific lease. Lease terms are generally based on their initial non-cancelable terms, unless there is a renewal option that is reasonably certain to be exercised. Various factors, including economic incentives, intent, past history and business need are considered to determine if a renewal option is reasonably certain to be exercised. The implicit rate in a lease agreement is used when it can be determined. Otherwise, the incremental borrowing rate, which is based on information available as of the lease commencement date, including applicable lease terms and the current economic environment, is used to determine the value of the lease obligation.
Finance Leases
The Company has obligations, exclusive of associated interest, recognized under various finance leases for equipment totaling $54.4 million and $57.6 million at December 31, 2021 and 2020, respectively. Gross amounts recognized within property, plant and equipment in the consolidated balance sheets under these finance lease agreements at December 31, 2021 and 2020 totaled $143.6 million and $128.0 million, less accumulated depreciation of $71.4 million and $55.1 million, respectively, for net balances of $72.2 million and $72.9 million, respectively. Depreciation of assets held under the finance leases is included within cost of revenue in the consolidated statements of operations.
The future minimum payments of finance lease obligations are as follows:
| | | | | |
(in thousands) | |
2022 | $ | 26,334 | |
2023 | 12,989 | |
2024 | 8,869 | |
2025 | 6,780 | |
2026 | 3,428 | |
Thereafter | — | |
Future minimum lease payments | 58,400 | |
Less: Amount representing interest | (3,959) | |
Present value of minimum lease payments | 54,441 | |
Less: Current portion of finance lease obligations | 24,345 | |
Finance lease obligations, less current portion | $ | 30,096 | |
Operating Leases
In the ordinary course of business, the Company enters into non-cancelable operating leases for certain of its facility, vehicle and equipment needs. Rent and related expense for operating leases that have non-cancelable terms totaled approximately $13.0 million, $13.4 million and $9.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. When operating lease expense is related to projects it is charged to that specific project and included in cost of revenue. In addition, the Company has short-term equipment rentals, which are less than a year in duration and expense as incurred.
Included in non-cancelable operating lease expense above, the Company has long-term power-by-the-hour equipment rental agreements with a construction equipment manufacturer that have a guaranteed minimum monthly hour requirement. The minimum guaranteed amount based on the Company's current operations is $3.2 million per year. Total expense under these agreements are listed in the following table as variable lease costs.
The future minimum payments under non-cancelable operating leases are as follows:
| | | | | |
(in thousands) | |
2022 | $ | 12,587 | |
2023 | 10,015 | |
2024 | 5,608 | |
2025 | 2,839 | |
2026 | 2,185 | |
Thereafter | 18,588 | |
Future minimum lease payments | 51,822 | |
Less: Amount representing interest | (13,028) | |
Present value of minimum lease payments | 38,794 | |
Less: Current portion of operating lease obligations | 10,254 | |
Operating lease obligations, less current portion | $ | 28,540 | |
Lease Information
| | | | | | | | | | | |
| For the year ended |
(in thousands) | December 31, 2021 | | December 31, 2020 |
| | | |
Finance Lease cost: | | | |
Amortization of right-of-use assets | $ | 23,654 | | | $ | 23,289 | |
Interest on lease liabilities | 3,064 | | | 4,007 | |
Operating lease cost | 13,041 | | | 13,449 | |
Short-term lease cost | 181,739 | | | 158,403 | |
Variable lease cost | 6,211 | | | 3,836 | |
Sublease Income | (132) | | | (132) | |
Total lease cost | $ | 227,577 | | | $ | 202,852 | |
| | | |
Other information: | | | |
| | | |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from finance leases | $ | 3,064 | | | $ | 4,007 | |
Operating cash flows from operating leases | $ | 12,917 | | | $ | 13,167 | |
| | | |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 26,581 | | | $ | 19,172 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 11,091 | | | $ | 6,491 | |
Weighted-average remaining lease term - finance leases | 3.06 years | | 2.51 years |
Weighted-average remaining lease term - operating leases | 7.61 years | | 8.19 years |
Weighted-average discount rate - finance leases | 5.28 | % | | 6.19 | % |
Weighted-average discount rate - operating leases | 6.65 | % | | 7.04 | % |
Letters of Credit and Surety Bonds
In the ordinary course of business, the Company may be 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 December 31, 2021 and 2020, the Company was contingently liable under letters of credit issued under its respective revolving lines of credit in the amount of $31.1 million and $7.8 million, respectively, related to construction projects and insurance. In addition, as of December 31, 2021 and 2020, we had outstanding surety bonds on projects with nominal amounts of $3.3 billion and $2.8 billion, respectively. The remaining approximate exposure related to these surety bonds amounted to approximately $353.5 million and $293.1 million, respectively. We anticipate that our current bonding capacity will be sufficient for the next twelve months based on current backlog and available capacity.
Deferred Compensation
The Company has two deferred compensation plans. The first plan is a supplemental executive retirement plan established in 1993 that covers four specific employees or former employees, whose deferred compensation is determined by the number of service years. Payment of the benefits is to be made for 20 years after employment ends. Three former employees are currently receiving benefits, and one participant is still an employee of the Company. The one current employee has reached the full benefit level, and as a result, the present value of the liability is estimated using the normal retirement method. Payments under this plan for 2021 were $0.2 million. Maximum aggregate payments per year if all participants were retired would be $0.3 million. As of December 31, 2021 and 2020, the Company had a long-term liability of $3.3 million and $3.5 million, respectively, for the supplemental executive retirement plan.
The Company offers a non-qualified deferred compensation plan which is made up of an executive excess plan and an incentive bonus plan. This plan was designed and implemented to enhance employee savings and retirement accumulation on a tax-advantaged basis, beyond the limits of traditional qualified retirement plans. This plan allows employees to: (i) defer annual
compensation from multiple sources; (ii) create wealth through tax-deferred investments; (iii) save and invest on a pretax basis to meet accumulation and retirement planning needs; and (iv) utilize a diverse choice of investment options to maximize returns. Executive awards are expensed when vested. Project Management Incentive Payments are expensed when awarded as they are earned through the course of the performance of the project to which they are related. Other incentive payments are expensed when vested as they are considered to be earned by retention. Unrecognized compensation expense for the non-qualified deferred compensation plan at December 31, 2021, 2020 and 2019 was $3.0 million, $1.7 million and $1.5 million, respectively. As of December 31, 2021 and 2020, the Company had a long-term liability of $3.3 million and $4.2 million, respectively, for deferred compensation to certain current and former employees.
Legal Proceedings
The Company is a nominal defendant to a lawsuit, instituted in December 2019 in the Delaware Chancery Court by a purported stockholder of the Company, against the Company’s Board of Directors, Oaktree Capital Management ("Oaktree"), and Ares Management, LLC ("Ares"), from which Ares was subsequently dismissed. The complaint asserts a variety of claims arising out of the sale of Series B Preferred Stock and warrants to Ares and Oaktree in May 2019. The complaint alleges claims for breach of fiduciary duty directly on behalf of putative class of stockholders and derivatively on behalf of the Company, aiding and abetting breach of fiduciary duty both derivatively and directly, and unjust enrichment derivatively on behalf of the Company. The plaintiff is seeking rescission of the transaction, unspecified monetary damages, and fees. On July 28, 2021, the Company and the plaintiff stockholder entered into a memorandum of understanding to settle the lawsuit against all defendants, subject to approval by the Delaware Chancery Court, the terms of which do not require payment of any settlement funds to the plaintiff except that, as they are entitled to do under Delaware law, the plaintiffs are entitled to ask the Court to award them attorneys’ fees in connection with the settlement. The timing of the approval of the settlement, if any, by the Court is unknown at this time but is not expected to occur until 2022. The Company has placed its director and officer liability insurance carriers on notice of the lawsuit and the proposed settlement; pursuant to the coverage terms, the Company is subject to a $1.5 million deductible, which the Company has exhausted. Pursuant to agreements entered into in connection with the sale of Series B Preferred Stock, the Company is obligated to indemnify Oaktree and Ares for any legal fees and damages incurred by either of them in connection with this matter.
The Company is involved in a variety of other legal cases, claims and other disputes that arise from time to time in the ordinary course of its business. While the Company believes it has good defense against these cases and intends to defend them vigorously, it cannot provide assurance that it will be successful in recovering all or any of the potential damages it has claimed or in defending claims against the Company. While the lawsuits and claims are asserted for amounts that may be material, should an unfavorable outcome occur, management does not currently expect that any currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, an unfavorable
resolution of one or more of such matters could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
Note 9. Earnings (Loss) Per Share
The Company calculates basic earnings (loss) per share (“EPS”) by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.
Income (loss) available to common stockholders is computed by deducting the dividends accumulated for the period on cumulative preferred stock from net income. If there is a net loss, the amount of the loss is increased by those preferred dividends. The contingent consideration fair value adjustment is a mark-to-market adjustment based on the Company not reaching the required financial targets; see Note. 6 Fair Value of Financial Instruments for further discussion. The Company is required to reverse the mark-to-market adjustment from the numerator as shown below.
Diluted EPS, where applicable, assumes the dilutive effect of (i) Series A cumulative convertible preferred stock, using the if-converted method, (ii) publicly traded warrants, (iii) Series B Preferred Stock - Warrants and (iv) the assumed exercise of in-the-money stock options and the assumed vesting of outstanding restricted stock units (“RSUs”), using the treasury stock method.
Whether the Company has net income or a net loss determines whether potential issuances of common stock are included in the diluted EPS computation or whether they would be anti-dilutive. As a result, if there is a net loss, diluted EPS is computed in the same manner as basic EPS is computed. Similarly, if the Company has net income but its preferred dividend adjustment made in computing income available to common stockholders results in a net loss available to common stockholders, diluted EPS would be computed in the same manner as basic EPS.
Public Offering
On August 2, 2021, the Company closed an underwritten public offering of 10,547,866 shares of common stock, par value $0.0001 per share (the “Common Stock”), at a public offering price of $11.00 per share and pre-funded warrants (the “Pre-Funded Warrants”) to purchase an additional 7,747,589 shares of Common Stock at a price of $10.9999 per Pre-Funded Warrant (the “Offering”).
The Pre-Funded Warrants to purchase 7,747,589 shares of our Common Stock were issued to ASOF in connection with the closing of the Offering. The Pre-Funded Warrants have an exercise price of $0.0001 per share and do not expire and are exercisable at any time after their original issuance. The Pre-Funded Warrants may not be exercised by the holder to the extent that the holder, together with its affiliates that report together as a group under the beneficial ownership rules, would beneficially own, after such exercise more than 32.0% of our issued and outstanding Common Stock.
At the closing of the Offering the Ares Parties completed the following equity transactions:
•converted all of their Series A Preferred Stock into 2,132,273 shares of Common Stock;
•the Company issued to the Ares Parties 507,417 shares of Common Stock representing shares of Common Stock underlying warrants that the Ares Parties were entitled to pursuant to anti-dilution rights that are triggered upon conversion of the Series A Preferred Stock described in Note 6. Fair Value of Financial Instruments; and
•the Company issued to the Ares Parties 5,996,310 shares of Common Stock for the exercise of warrants that were issued to the Ares Parties in connection with their original purchases of Series B Preferred Stock (the “Series B Preferred Stock - Warrants”).
The calculations of basic and diluted EPS, are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
($ in thousands, except per share data) | 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net income from continuing operations | $ | (83,729) | | | $ | 728 | | | $ | 6,231 | |
Less: Convertible preferred stock dividends | (1,587) | | | (2,628) | | | (2,875) | |
Less: Contingent consideration fair value adjustment | — | | | — | | | (23,082) | |
Net loss available to common stockholders | (85,316) | | | (1,900) | | | (19,726) | |
| | | | | |
| | | | | |
| | | | | |
Denominator: | | | | | |
Weighted average common shares outstanding - basic and diluted | 33,470,942 | | | 20,809,493 | | | 20,431,096 | |
| | | | | |
Anti-dilutive:(1)(3) | | | | | |
| | | | | |
Convertible Series A Preferred Stock(2) | — | | | 5,819,882 | | | 8,816,119 | |
| | | | | |
Series B Preferred Stock - Warrants(4) | 94,077 | | | 7,681,738 | | | — | |
Pre-Funded Warrants(5) | 4,327,353 | | | — | | | — | |
| | | | | |
RSUs(6) | 1,700,986 | | | 1,846,683 | | | 904,608 | |
| | | | | |
Net loss per common share - basic and diluted | $ | (2.55) | | | $ | (0.09) | | | $ | (0.97) | |
| | | | | |
| | | | | |
(1) The contingent earn-out shares were not included at December 31, 2019. See Note 6. Fair Value of Financial of Financial Instruments for discussion regarding the Company's contingently issuable earn-out shares that were not potentially dilutive.
(2) On August 2, 2021 the Series A Preferred Stock was converted into common shares and therefore has been excluded from the anti-dilutive section above for the year ended December 31, 2021.
(3) As of December 31, 2021, 2020 and 2019, there were public warrants to purchase 3,827,325, 8,477,600 and 8,480,000 shares of common stock at $11.50 per share were not potentially dilutive as the warrants’ exercise price was greater than the average market price of the common stock during the period.
(4) Series B Preferred Stock - Warrants are considered participating securities because the holders are entitled to participate in any distributions similar to the common shareholders. On August 2, 2021, the Company issued to the Ares Parties 5,996,310 shares of Common Stock for the exercise of warrants that were issued to the Ares Parties in connection with their original purchases of the Series B Preferred Stock. As of December 31, 2021, there were 94,077 Series B Preferred Stock - Warrants that were considered anti-dilutive.
(5) On August 2, 2021 the Company issued 7,747,589 Pre-Funded Warrants to ASOF that are considered participating because the holders are entitled to participate in any distributions similar to that of common shareholders. As of December 31, 2021 there were 4,327,353 Pre-Funded Warrants.
(6) As of December 31, 2021, 2020 and 2019, there were 480,124, 480,800 and 646,405, of unvested or anti-dilutive options and 135,330, 604,850 and 817,817 of unvested performance RSUs were also not potentially dilutive as the respective exercise price or average stock price required for vesting of such award was greater than the average market price of the common stock during the period.
Merger Warrants
On August 4, 2015, M III formed a Special Purpose Acquisition Corporation and issued public and private warrants before the merger with the Company. As of the merger, the Company had 16,960,000 Merger Warrants outstanding, of which 295,000 are considered private warrants. Two Merger Warrants will be exercisable for one share of our common stock at $11.50 per share until the expiration on March 26, 2023. For further discussion about the valuation of the private warrants see Note 6. Fair Value of Financial Instruments.
On November 4, 2021, the Company’s Board of Directors authorized a repurchase program for the Company’s publicly traded warrants to purchase common stock, which trade on the Nasdaq under the symbol IEAWW. This repurchase program allows the Company to purchase up to $25.0 million of warrants, at prevailing prices, in open market or negotiated transactions, subject to market conditions and other considerations, beginning November 11, 2021, and it will end no later than the expiration of the warrants on March 26, 2023. This repurchase program does not obligate the Company to make any repurchases and it may be suspended at any time.
The following information is related to purchases made as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities |
Period | Total Number of Warrants Purchased | | Average Price Paid per Warrant | | Approximate Dollar Value of Warrants that May Yet Be Purchased Under the Plans or Programs (in thousands) |
November 11 - November 30 | 3,630,531 | | | $ | 1.36 | | | $ | 19,957 | |
December 1 - December 31 | 5,640,000 | | | 1.21 | | | 12,987 | |
Total | 9,270,531 | | | $ | 1.27 | | | |
| | | | | |
Series B Preferred Stock Anti-dilution Warrants
The Company also had potential outstanding warrants related to the Series B Preferred Stock issuance. Additional warrants would be issued if the exercise of any warrant with an exercise price of $11.50 or higher. See Note 6. Fair Value of Financial Instruments for further discussion.
Note 10. Stock-Based Compensation
In March 2018, the Company adopted the 2018 IEA Equity Incentive Plan (the “2018 Equity Plan”), which provided for 2,157,765 shares to be available for granting to certain officers, directors and employees under the plan. The plan allows for the granting of both RSUs and Options. In June 2019 and May 2021, the Company's shareholders approved an increase of 2,000,000 shares under the 2018 Equity Plan.
Stock-based compensation cost is measured at the date of grant based on the calculated fair value of the stock-based award and is recognized as an expense using the straight-line method over the employee’s requisite service period (generally the vesting period of the award) within selling, general and administrative expenses. The following table provides the components of stock-based compensation expense under the 2018 Equity Plan and the associated tax benefit recognized for the year ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Options | $ | 302 | | | $ | 944 | | | $ | 825 | |
RSUs | 4,437 | | | 2,881 | | | 2,193 | |
Directors' compensation | 622 | | | 584 | | | 998 | |
Stock-based compensation expense | 5,361 | | | 4,409 | | | 4,016 | |
Tax benefit for stock-based compensation expense | 3,667 | | | 332 | | | 64 | |
Stock-based compensation expense, net of tax | $ | 1,694 | | | $ | 4,077 | | | $ | 3,952 | |
Employee Options
In 2018, the Board's Compensation Committee granted both time based vesting and stock price based performance vesting options. The options are granted with exercise prices equal to market prices on the date of grant and expire 10 years from the date of grant.
The following table summarizes all option activity:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in thousands) | | Weighted Average Remaining Contractual Term (in years) |
Outstanding at January 1, 2019 | 713,260 | | | — | | | | | |
Granted | — | | | — | | | | | |
Exercised | — | | | — | | | | | |
Forfeited | (66,855) | | | 10.37 | | | | |
Outstanding at December 31, 2019 | 646,405 | | | $ | 10.37 | | | — | | | — | |
Granted | — | | | — | | | | | |
Exercised | (8,022) | | | 10.37 | | | | | |
Forfeited | (157,583) | | | 10.37 | | | | | |
Outstanding at December 31, 2020 | 480,800 | | | $ | 10.37 | | | — | | | 7.70 |
Granted | — | | | — | | | | | |
Exercised | — | | | — | | | | | |
Forfeited | (676) | | | 10.37 | | | | | |
Outstanding at December 31, 2021 | 480,124 | | | $ | 10.37 | | | — | | | 6.70 |
| | | | | | | |
Vested or expected to vest at December 31, 2021 | 480,124 | | | $ | 10.37 | | | — | | | 6.70 |
| | | | | | | |
Exercisable at December 31, 2021 | — | | | $ | — | | | — | | | 0.00 |
The Company plans to issue new common shares to satisfy the exercise of Options. As of December 31, 2021, there was $0.1 million of unrecognized stock-based compensation expense for unvested Options, and the expected remaining expense period was 0.25 years.
Employee RSUs
RSUs are awarded to select employees and, when vested, RSUs entitle the holder to receive a specified number of shares of the Company's common stock. The value of RSU grants was measured as of the grant date using the closing price of IEA's common stock.
The following table summarizes all activity for RSUs awarded during 2021:
| | | | | | | | | | | |
| Number of RSUs | | Weighted Average Grant-Date Fair Value Per Share |
Unvested at January 1, 2019 | 449,050 | | | $ | 10.37 | |
Granted | 1,720,396 | | | 2.96 | |
Vested (1) | (42,378) | | | 10.37 | |
Forfeited | (47,060) | | | 8.44 | |
Unvested at December 31, 2019 | 2,080,008 | | | $ | 4.27 | |
Granted | 1,138,209 | | | $ | 2.25 | |
Vested (1) | (627,650) | | | 4.39 | |
Forfeited | (372,813) | | | 4.06 | |
Unvested at December 31, 2020 | 2,217,754 | | | $ | 3.12 | |
Granted | 866,970 | | | 11.50 | |
Vested (1) | (1,002,188) | | | 4.17 | |
Forfeited | (382,192) | | | 2.71 | |
Unvested at December 31, 2021 | 1,700,344 | | | $ | 7.01 | |
(1) The tax benefit related to vestings that occurred during 2021, 2020, and 2019 was $2.5 million, $0.3 million, and $0.1 million, respectively.
As of December 31, 2021, there was $9.0 million of unrecognized stock-based compensation expense for unvested RSUs awarded to employees, and the expected remaining expense period was 3.5 years.
Non-employee Director RSUs
For service in 2021, the non-employee directors of the Board were granted 49,378 RSUs on March 26, 2021. Members of the Special Transaction Committee were granted an additional 4,152 RSUs on November 4, 2021. These grants were valued at $0.7 million using the closing price of the Company's common stock at the grant date. All RSUs granted to non-employee directors in 2021 will vest on March 26, 2022. As of December 31, 2021, there was $0.2 million of unrecognized stock-based compensation expense for unvested non-employee director RSUs, and the expected remaining expense period was 0.25 months.
Note 11. Income Taxes
The Company is a corporation that is subject to U.S. federal income tax, various state income taxes, Canadian federal taxes and provincial taxes.
(Loss) income before income taxes and the related tax provision (benefit) are as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
(Loss) income before income taxes: | | | | | |
U.S operations | $ | (71,093) | | | $ | 14,763 | | | $ | 6,374 | |
Non-U.S. operations | (1,438) | | | (1,455) | | | (1,764) | |
Total (loss) income before taxes | $ | (72,531) | | | $ | 13,308 | | | $ | 4,610 | |
| | | | | |
Current (benefit) provision: | | | | | |
Federal | $ | 28 | | | $ | — | | | $ | (148) | |
State | 902 | | | 1,444 | | | 90 | |
Total current (benefit) provision | 930 | | | 1,444 | | | (58) | |
| | | | | |
Deferred (benefit) provision: | | | | | |
Federal | 8,435 | | | 10,119 | | | (1,146) | |
State | 1,833 | | | 1,017 | | | (417) | |
Total deferred (benefit) provision | 10,268 | | | 11,136 | | | (1,563) | |
| | | | | |
Total (benefit) provision for income taxes | $ | 11,198 | | | $ | 12,580 | | | $ | (1,621) | |
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate from continuing operations is as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State and local income taxes, net of federal benefits | (3.2) | | | 18.5 | | | (7.2) | |
Permanent items | (33.4) | | | 55.8 | | | (51.2) | |
| | | | | |
| | | | | |
Other | 0.2 | | | (0.8) | | | 2.2 | |
Effective tax rate | (15.4) | % | | 94.5 | % | | (35.2) | % |
The permanent differences for the year ended December 31, 2021 primarily relate to non-deductible interest expenses on the Series B Preferred Stock and the loss on the extinguishment of debt. The most significant difference between the years ended December 31, 2021 and 2020 relate to these permanent items. The differences in the effective tax rate between the years ended December 31, 2020 and 2019 related to non-deductible interest expenses on the Series B Preferred Stock, permanent items pertaining to contingent consideration, the Merger, the acquisitions made in 2018, and state taxes. As of December 31, 2021 and 2020, the Company had not identified any uncertain tax positions for which recognition was required.
Deferred taxes reflect the tax effects of the differences between the amounts recorded as assets and liabilities for financial statement purposes and the comparable amounts recorded for income tax purposes. Significant components of the deferred tax assets (liabilities) as of December 31, 2021 and 2020, are as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Deferred tax assets: | | | |
| | | |
Accrued liabilities and deferred compensation | $ | 6,588 | | | $ | 6,932 | |
| | | |
Net operating loss carryforwards | 29,332 | | | 30,131 | |
Transaction costs | 1,536 | | | 1,695 | |
R&D Credit Usage | 213 | | | 215 | |
| | | |
Other reserves and accruals | 1,588 | | | 2,236 | |
Intangible amortization | 2,842 | | | 2,374 | |
Operating lease right of use asset | 10,861 | | | 10,554 | |
Less: valuation allowance | (24,887) | | | (24,360) | |
Total deferred tax assets | 28,073 | | | 29,777 | |
Deferred tax liabilities: | | | |
Property, plant and equipment | (23,505) | | | (15,702) | |
Equipment under finance lease | (177) | | | (353) | |
Operating lease liability | (10,447) | | | (10,124) | |
| | | |
Goodwill | (2,143) | | | (1,529) | |
| | | |
Total deferred tax liabilities | (36,272) | | | (27,708) | |
Net deferred tax asset (liability) | $ | (8,199) | | | $ | 2,069 | |
The Company assesses the realizability of the deferred tax assets at each balance sheet date based on actual and forecasted operating results in order to determine the proper amount, if any, required for a valuation allowance. As of December 31, 2021, the Company has a Canadian net operating loss carryover of $93.9 million and net operating loss carryovers which will begin to expire in 2035. Since the Canadian operations are in a cumulative loss position and the operations have ceased, the Company has recorded a full valuation allowance related to the Canadian net operating losses.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. The Company believes ownership changes have occurred in the past. This may impact the Company's ability to utilize portions of its net operating losses and interest carry forward in future periods. However, it is management’s belief that it is more likely than not that the net deferred tax assets related to the Company will be utilized prior to expiration.
As of December 31, 2021, the Company has a federal net operating loss carryover of $11.0 million and net operating loss carryovers in certain state tax jurisdictions of approximately $44.0 million. The federal net operating loss was incurred in 2018 and 2019 and can be carried forward indefinitely. The state net operating loss carryovers will begin to expire in 2025.
The Company files income tax returns in U.S. federal, state and certain international jurisdictions. For federal and certain state income tax purposes, the Company's 2017 through 2021 tax years remain open for examination by the tax authorities under the normal statute of limitations. For certain international income tax purposes, the Company’s tax years 2015 through 2021 remain open for examination by the tax authorities under the normal statute of limitations.
The Company classifies interest expense and penalties related to unrecognized tax benefits as components of the income tax provision. There were no such interest or penalties recognized in the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019, and there were no corresponding accruals as of December 31, 2021 and 2020.
Deferred Taxes - COVID-19
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted by the U.S. Government in response to the COVID-19 pandemic to provide employment retention incentives. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws. We do not believe that these relief measures materially affect the consolidated financial statements for the year ended December 31, 2021 but some of the key income tax-related provisions of the CARES Act include:
•Eliminating the 80% of taxable income limitation by allowing corporate entities to fully utilize net operating losses (“NOLs”) to offset taxable income in 2018, 2019 or 2020.
•Allowing NOLs originating in 2018, 2019 or 2020 to be carried back five years.
•Increasing the net interest expense deduction limit to 50% of adjusted taxable income beginning 1 January 2019 and 2020.
•Allowing taxpayers with alternative minimum tax (“AMT”) credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act (“TCJA”).
•Payroll tax deferral.
The new NOL carryforward and interest expense deduction rules could defer future cash tax liabilities. IEA filed an election to refund $0.5 million AMT credit which was received in the third quarter of 2020.
The Company has also made use of the payroll deferral provision to defer the 6.2% social security tax, which is approximately $13.6 million through December 31, 2020. This amount was paid at 50% on December 31, 2021. The remaining 50% is required to be paid on December 31, 2022.
Note 12. Employee Benefit Plans
The Company participates in numerous multi-employer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As of December 31, 2021, 2020 and 2019, 25%, 24% and 27%, respectively, of the Company’s employees were members of a CBA. As one of many participating employers in these MEPPs, the Company is responsible, with the other participating employers, for any plan underfunding. Contributions to a particular MEPP are established by the applicable CBA; however, required contributions may increase based on the funded status of a MEPP and legal requirements of the Pension Protection Act of 2006, which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact the funded status of a MEPP include investment performance, changes in the participant demographics, change in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. If a contributing employer stops contributing to a MEPP, the unfunded obligations of the MEPP may be borne by the remaining contributing employers. Assets contributed to an individual MEPP are pooled with contributions made by other contributing employers; the pooled assets will be used to provide benefits to the Company’s employees and the employees of the other contributing employers.
An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to: (a) an increase in the contribution rate as a signatory to the applicable collective bargaining agreement, (b) a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP and/or (c) a reduction in the benefits to be paid to future and/or current retirees. In addition, the Pension Protection Act of 2006 requires that a 5% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. The zone status included in the table below is based on information that the Company received from the plan and is certified by the plan’s actuary. Among other
factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are greater than 65% and less than 80% funded, and plans in the green zone are at least 80% funded.
The Company could also be obligated to make payments to MEPPs if the Company either ceases to have an obligation to contribute to the MEPP or significantly reduces its contributions to the MEPP because of a reduction in the number of employees who are covered by the relevant MEPP for various reasons. Due to uncertainty regarding future factors that could trigger a withdrawal liability, as well as the absence of specific information regarding the MEPP’s current financial situation, the Company is unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether participation in these MEPPs could have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
The Company contributed $53.5 million to various MEPPs in 2021. The nature and diversity of the Company’s business may result in volatility of the amount of contributions to a particular MEPP for any given period. In any given market, the Company could be working on a significant project and/or projects, which could result in an increase in its direct labor force and a corresponding increase in its contributions to the MEPP(s) dictated by the applicable CBA. When the particular project(s) finishes and is not replaced, the level of direct labor of contributions to a particular MEPP could also be affected by the terms of the applicable CBA, which could require at a particular time, an increase in the contribution rate and/or surcharges. All of the Company's contributions were less than 5% of the total plan contributions from all participating employers.
The Company also has a 401(k) plan for non-union employees. Employees are eligible to participate in the plan beginning on their employment date. The Company matches employee contributions up to 4% of employee compensation.
Note 13. Segments
We operate our business as two reportable segments: the Renewables segment and the Specialty Civil segment. Each of our reportable segments is comprised of similar business units that specialize in services unique to the respective markets that each segment serves. 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.
Separate measures of the Company’s assets, including capital expenditures and cash flows by reportable segment are not produced or utilized by management to evaluate segment performance. A substantial portion of the Company’s fixed assets are owned by and accounted for in our equipment department, including operating machinery, equipment and vehicles, as well as office equipment, buildings and leasehold improvements, and are used on an interchangeable basis across our reportable segments. As such, for reporting purposes, total under/over absorption of equipment expenses consisting primarily of depreciation is allocated to the Company's two reportable segments based on segment revenue.
The following is a brief description of the Company's reportable segments:
Renewables Segment
The Renewables segment operates throughout the U.S. and specializes in a range of services that includes full EPC project delivery, design, site development, construction, installation and maintenance of infrastructure services for the wind and solar industries.
We have maintained a heavy focus on construction of renewable power production capacity as renewable energy, particularly from wind and solar, which has become widely accepted within the electric utility industry and has become a cost-effective solution for the creation of new generating capacity.
Specialty Civil Segment
The Specialty Civil segment operates throughout the U.S. and specializes in a range of services that include:
•Environmental remediation services such as site development, environmental site closure, outsourced contract mining and coal ash management services.
•Rail infrastructure services such as planning, design, procurement, construction and maintenance of infrastructure projects for major railway and intermodal facilities.
•Heavy civil construction services such as road and bridge construction, specialty paving, industrial maintenance and other local, state and government projects.
Segment Revenue
Revenue by segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Segment | Revenue | % of Total Revenue | | Revenue | % of Total Revenue | | Revenue | % of Total Revenue |
Renewables | $ | 1,461,137 | | 70.3 | % | | $ | 1,142,842 | | 65.2 | % | | $ | 834,029 | | 57.1 | % |
Specialty Civil | 617,283 | | 29.7 | % | | 610,063 | | 34.8 | % | | 625,734 | | 42.9 | % |
| | | | | | | | |
Total revenue | $ | 2,078,420 | | 100.0 | % | | $ | 1,752,905 | | 100.0 | % | | $ | 1,459,763 | | 100.0 | % |
Segment Gross Profit
Gross profit by segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Segment | Gross Profit | Gross Profit Margin | | Gross Profit | Gross Profit Margin | | Gross Profit | Gross Profit Margin |
Renewables | $ | 141,711 | | 9.7 | % | | $ | 126,919 | | 11.1 | % | | $ | 88,309 | | 10.6 | % |
Specialty Civil | 64,397 | | 10.4 | % | | 61,773 | | 10.1 | % | | 68,708 | | 11.0 | % |
Total gross profit | $ | 206,108 | | 9.9 | % | | $ | 188,692 | | 10.8 | % | | $ | 157,017 | | 10.8 | % |
Note 14. Joint Ventures
On May 22, 2019, the Company formed a joint venture with another construction company for purposes of designing and constructing an expansion of a major railway. Given that the joint venture does not meet the qualifications of a VIE, the Company records its share of the joint venture's results and balances within the Specialty Civil segment using the proportionate consolidation method at 25% ownership. The following balances were included in the consolidated financial statements:
| | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2021 | | | | | | | | |
Assets | | | | | | | | | | |
Cash | | $ | 8,850 | | | | | | | | | |
Accounts receivable | | 874 | | | | | | | | | |
Contract assets | | 2,796 | | | | | | | | | |
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
Accounts payable | | $ | 2,591 | | | | | | | | | |
Contract liabilities | | 7,353 | | | | | | | | | |
| | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, 2021 | | | | | | |
Revenue | | $ | 18,303 | | | | | | | | | |
Cost of revenue | | 15,727 | | | | | | | | | |
Note 15. Related Parties
On August 2, 2021, as part of the equity transactions the Company entered into the Stockholders’ Agreement with the Ares Parties. Pursuant to the Stockholders’ Agreement:
•The Ares Parties are entitled to designate two members of our Board under certain circumstances, as defined in the Stockholders' Agreement.
•The Ares Parties agreed to certain restrictions regarding transfers of common stock and other activities regarding our board composition.
•to cause all voting securities to be present at any annual or special meeting in which directors are to be elected, to vote such securities either as recommended by the Board, or in the same proportions as votes cast by other voting securities with respect to director nominees or other nominees and in favor of any director nominee of the Ares Parties, not to vote in favor of a change of control transaction pursuant to which the Ares Parties would receive consideration that is different in amount or form from other stockholders unless approved by the Board; and
•the Ares Parties are afforded reasonable access to our books and records for so long as the Ares Parties have a right to designate a director to the Board.
Note 16. Subsequent Event
As discussed in Note 9. Earnings Per Share, on November 4, 2021, the Company’s Board of Directors authorized a repurchase program for the Company’s publicly traded warrants to purchase common stock, which trade on the Nasdaq under the symbol IEAWW. The Company has purchased 1,591,599 warrants since December 31, 2021.