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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2024
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission file number 001-42022
_________________________
Centuri Holdings, Inc.
(Exact name of registrant as specified in its charter)
_________________________
| | | | | |
Delaware | 93-1817741 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
19820 North 7th Avenue, Suite 120, Phoenix, Arizona | 85027 |
(Address of Principal Executive Offices) | (Zip Code) |
(623) 582-1235
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common stock, $0.01 par value | | CTRI | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | o | | Accelerated filer | o |
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Non-accelerated filer | x | | Smaller reporting company | o |
| | | | |
| | | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
As of November 4, 2024, the number of outstanding shares of Common Stock of the Registrant was 88,517,521.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the U.S. federal securities laws. All statements other than historical factual information are forward-looking statements, including, without limitation, statements regarding our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Terminology such as “believe,” “anticipate,” “will,” “should,” “could,” “intend,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast,” “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.
Specific forward-looking statements in this Quarterly Report on Form 10-Q include:
•Our belief that our cash and cash equivalents are managed by high credit quality financial institutions;
•Our belief that our capital resources, including existing cash balances, together with our operating cash flows and borrowings under our credit facilities, are sufficient to meet our financial obligations for at least the next 12 months;
•Our belief that these trends listed in “Factors Affecting our Results of Operations” represent a significant challenge for utilities, but also an opportunity for outsourced utility infrastructure services companies to build and maintain more efficient, sustainable infrastructure that can meet the energy needs of future generations;
•Our belief that we have taken steps to secure delivery of a sufficient amount of equipment and do not anticipate any significant disruptions with respect to our fleet in the near-term;
•Our belief that we are well positioned to serve the increased demand resulting from system integrity management programs to enhance safety pursuant to federal and state mandates;
•Our belief that we are well positioned to support growing customer attention in achieving environmental objectives through infrastructure construction and maintenance;
•Our belief that we are particularly well positioned to capture incremental demand in the offshore wind space given the rapid and continuing expansion of projects in our core geographies, as North America looks to renewable energy sources that can sustain all-time high grid demands;
•Our belief that we will continue to renegotiate some of our major contracts to address the increased costs on future work;
•Our belief that presentation of non-GAAP measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for period-to-period comparisons of results;
•Our belief that any liabilities resulting from any known legal matters, including the City of Chicago matter described in “Note 15 — Commitments and Contingencies — Legal Proceedings”, will not have a material effect on the financial position, results of operations or cash flows;
•Our belief that providing non-GAAP measures helps investors evaluate our operating performance, profitability and business trends in a way that is consistent with how management evaluates such matters;
•Our expectation that the Separation (as defined below)-related costs will continue through at least fiscal year 2025;
•Our expectation that we will continue to incur capital expenditures to meet anticipated needs for our services;
•Our belief that the responsibility under a guarantee could exceed the amount recoverable from the subsidiary alone and could materially and adversely affect our consolidated financial condition, results of operations and cash flows;
•Our belief that the timing of the recognition of remaining performance obligations of fixed-price contracts is largely within the control of the customer, including when the necessary equipment and materials required to complete the work will be provided by the customer;
•Our belief that rising fuel, labor and material costs could continue to have, a negative effect on our results of operations;
•Our belief that fluctuations in the price or availability of materials and equipment that we or our customers utilize could impact (positively or negatively, as applicable) costs to complete projects or result in the postponement of projects;
•Our belief that changes in interest rates on our variable-rate debt could have a positive or negative effect on our business, financial condition and results of operation; and
•Our belief that projects included in backlog can be subject to delays or cancellation as a result of regulatory requirements, adverse weather conditions, customer requirements and other factors that could cause actual revenue to differ significantly from the estimates, or cause revenue to be realized in periods other than originally expected.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially as a result of a number of factors, including, among other things:
•Customer project scheduling and duration;
•Weather, and general economic conditions;
•Results of bid work, differences between actual and anticipated outcomes of bid or other fixed-price construction agreements;
•Outcomes from contract and change order negotiations;
•Our ability to successfully procure new work and impacts from work awarded or failing to be awarded work from significant customers, the mix of work awarded, and the amount of work awarded to us following work stoppages or reduction;
•The results of productivity inefficiencies from regulatory requirements, customer supply chain challenges, or otherwise, delays in commissioning individual projects, the ability of management to successfully finance, close on and assimilate any acquired businesses, and changes in our mix of customers, projects, contracts and business;
•Regional or national and/or general economic conditions and demand for our services;
•Price, volatility, and expectations of future prices of natural gas and electricity;
•Increases in the costs to perform services caused by changing conditions;
•The termination, or expiration of existing agreements or contracts;
•Decisions of our customers as to whether to pursue capital projects due to economic impacts resulting from a pandemic or otherwise;
•The budgetary spending patterns of customers;
•Inflation and other increases in construction costs that we may be unable to pass through to our customers;
•Cost or schedule overruns on fixed-price contracts;
•Availability of qualified labor for specific projects;
•The need and availability of letters of credit, payment and performance bonds, or other security;
•Costs we incur to support growth, whether organic or through acquisitions;
•The timing and volume of work under contract;
•Losses experienced in our operations;
•The results of the review of prior period accounting on certain projects and the impact of adjustments to accounting estimates;
•Developments in governmental investigations and/or inquiries;
•Intense competition in the industries in which we operate;
•Failure to obtain favorable results in existing or future litigation or regulatory proceedings, dispute resolution proceedings or claims, including claims for additional costs;
•Failure of our partners, suppliers or subcontractors to perform their obligations;
•Cyber-security breaches;
•Failure to maintain safe worksites;
•Risks or uncertainties associated with events outside of our control, including severe weather conditions, public health crises and pandemics (such as COVID-19), political crises or other catastrophic events, such as the ongoing war in Ukraine;
•The ongoing turmoil in the Middle East;
•Adverse developments affecting specific financial institutions or the broader financial services industry, including liquidity shortages or bank failures;
•Client delays or defaults in making payments;
•The cost and availability of credit and restrictions imposed by our debt agreements;
•The impact of credit rating actions and conditions in the capital markets on financing costs;
•Changes in construction expenditures and financing;
•Levels of or changes in operations and maintenance expenses;
•Our ability to continue to remain within the ratios and other limits in our debt covenants, failure to implement strategic and operational initiatives;
•Risks or uncertainties associated with acquisitions, dispositions and investments;
•Possible information technology interruptions or inability to protect intellectual property;
•Our failure, or the failure of our agents or partners, to comply with laws;
•Our ability to secure appropriate insurance, licenses or permits;
•New or changing legal requirements, including those relating to environmental, health, licensing and safety matters;
•The loss of one or more clients that account for a significant portion of our revenue; and
•Asset impairments.
Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including, but not limited to, the risks and uncertainties detailed from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our final IPO prospectus.
Part I - Financial Information
Item 1. Financial Statements
Centuri Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share information)
(Unaudited)
| | | | | | | | | | | |
| September 29, 2024 | | December 31, 2023 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 52,459 | | | $ | 33,407 | |
Accounts receivable, net | 245,593 | | | 335,196 | |
Accounts receivable, related party - parent, net | 7,426 | | | 12,258 | |
Contract assets | 283,929 | | | 266,600 | |
Contract assets, related party - parent | 4,639 | | | 3,208 | |
Prepaid expenses and other current assets | 40,555 | | | 32,258 | |
Total current assets | 634,601 | | | 682,927 | |
Property and equipment, net | 498,154 | | | 545,442 | |
Intangible assets, net | 348,647 | | | 369,048 | |
Goodwill, net | 373,993 | | | 375,892 | |
Right-of-use assets under finance leases | 36,246 | | | 43,525 | |
Right-of-use assets under operating leases | 109,719 | | | 118,448 | |
Other assets | 111,351 | | | 54,626 | |
Total assets | $ | 2,112,711 | | | $ | 2,189,908 | |
LIABILITIES, TEMPORARY EQUITY AND EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 30,264 | | | $ | 42,552 | |
Current portion of finance lease liabilities | 10,110 | | | 11,370 | |
Current portion of operating lease liabilities | 19,372 | | | 19,363 | |
Accounts payable | 121,298 | | | 116,583 | |
Accrued expenses and other current liabilities | 183,290 | | | 187,050 | |
Contract liabilities | 21,894 | | | 43,694 | |
Total current liabilities | 386,228 | | | 420,612 | |
Long-term debt, net of current portion | 762,139 | | | 1,031,174 | |
Line of credit | 116,378 | | | 77,121 | |
Finance lease liabilities, net of current portion | 17,075 | | | 24,334 | |
Operating lease liabilities, net of current portion | 96,676 | | | 105,215 | |
Deferred income taxes | 134,885 | | | 135,123 | |
Other long-term liabilities | 67,891 | | | 71,076 | |
Total liabilities | 1,581,272 | | | 1,864,655 | |
Commitments and contingencies (Note 15) | | | |
Temporary equity: | | | |
Redeemable noncontrolling interests | 4,132 | | | 99,262 | |
Equity: | | | |
Common stock, $0.01 par value, 850,000,000 shares authorized, 88,517,521 shares issued and outstanding at September 29, 2024 and 1,000 shares issued and outstanding at December 31, 2023 | 885 | | | — | |
Additional paid-in capital | 693,476 | | | 374,124 | |
Accumulated other comprehensive loss | (6,087) | | | (4,025) | |
Accumulated deficit | (160,967) | | | (144,108) | |
Total equity | 527,307 | | | 225,991 | |
Total liabilities, temporary equity and equity | $ | 2,112,711 | | | $ | 2,189,908 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Centuri Holdings, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per-share information)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 | | |
Revenue | $ | 692,821 | | | $ | 745,639 | | | $ | 1,840,960 | | | $ | 2,145,601 | | | |
Revenue, related party - parent | 27,232 | | | 29,250 | | | 79,191 | | | 88,360 | | | |
Total revenue, net | 720,053 | | | 774,889 | | | 1,920,151 | | | 2,233,961 | | | |
Cost of revenue (including depreciation) | 620,751 | | | 662,427 | | | 1,699,359 | | | 1,935,111 | | | |
Cost of revenue, related party - parent (including depreciation) | 23,509 | | | 24,849 | | | 71,216 | | | 79,316 | | | |
Total cost of revenue | 644,260 | | | 687,276 | | | 1,770,575 | | | 2,014,427 | | | |
Gross profit | 75,793 | | | 87,613 | | | 149,576 | | | 219,534 | | | |
Selling, general and administrative expenses | 27,213 | | | 27,993 | | | 76,461 | | | 81,632 | | | |
Amortization of intangible assets | 6,662 | | | 6,670 | | | 19,991 | | | 20,007 | | | |
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Operating income | 41,918 | | | 52,950 | | | 53,124 | | | 117,895 | | | |
Interest expense, net | 23,925 | | | 26,131 | | | 70,653 | | | 73,032 | | | |
Other income, net | (160) | | | (109) | | | (899) | | | (312) | | | |
Income (loss) before income taxes | 18,153 | | | 26,928 | | | (16,630) | | | 45,175 | | | |
Income tax expense | 21,770 | | | 10,010 | | | 523 | | | 16,835 | | | |
Net (loss) income | (3,617) | | | 16,918 | | | (17,153) | | | 28,340 | | | |
Net income (loss) attributable to noncontrolling interests | 35 | | | 736 | | | (130) | | | 3,856 | | | |
Net (loss) income attributable to common stock | $ | (3,652) | | | $ | 16,182 | | | $ | (17,023) | | | $ | 24,484 | | | |
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(Loss) income per share attributable to common stock: | | | | | | | | | |
Basic | $ | (0.04) | | | $ | 0.23 | | | $ | (0.21) | | | $ | 0.34 | | | |
Diluted | $ | (0.04) | | | $ | 0.23 | | | $ | (0.21) | | | $ | 0.34 | | | |
Shares used in computing earnings per share: | | | | | | | | | |
Weighted average basic shares outstanding | 88,518 | | 71,666 | | 81,679 | | 71,666 | | |
Weighted average diluted shares outstanding | 88,518 | | 71,666 | | 81,679 | | 71,666 | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Centuri Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 | | |
Net (loss) income | $ | (3,617) | | | $ | 16,918 | | | $ | (17,153) | | | $ | 28,340 | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Foreign currency translation adjustment | 1,519 | | | (2,021) | | | (2,062) | | | 109 | | | |
Other comprehensive income (loss), net of tax | 1,519 | | | (2,021) | | | (2,062) | | | 109 | | | |
Comprehensive (loss) income | (2,098) | | | 14,897 | | | (19,215) | | | 28,449 | | | |
Comprehensive income (loss) attributable to noncontrolling interests | 35 | | | 736 | | | (130) | | | 3,856 | | | |
Total comprehensive (loss) income attributable to common stock | $ | (2,133) | | | $ | 14,161 | | | $ | (19,085) | | | $ | 24,593 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Centuri Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | | | | | | | | | | | |
| Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | |
Cash flows from operating activities: | | | | | |
Net (loss) income | $ | (17,153) | | | $ | 28,340 | | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities | | | | | |
Depreciation | 81,921 | | | 90,975 | | | |
Amortization of intangible assets | 19,991 | | | 20,007 | | | |
Amortization of debt issuance costs | 4,052 | | | 3,779 | | | |
Loss on debt extinguishment | 1,726 | | | — | | | |
Non-cash stock-based compensation expense | 810 | | | 2,149 | | | |
Gain on sale of equipment | (2,651) | | | (2,954) | | | |
Amortization of right-of-use assets | 15,491 | | | 12,537 | | | |
Deferred income taxes | (10,406) | | | 8,703 | | | |
Other non-cash items | 836 | | | — | | | |
Changes in assets and liabilities, net of non-cash transactions | 2,615 | | | (101,727) | | | |
Net cash provided by operating activities | 97,232 | | | 61,809 | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (66,093) | | | (79,610) | | | |
Proceeds from sale of property and equipment | 6,802 | | | 7,673 | | | |
Net cash used in investing activities | (59,291) | | | (71,937) | | | |
Cash flows from financing activities: | | | | | |
Proceeds from initial public offering and private placement, net of offering costs paid | 327,967 | | | — | | | |
Proceeds from line of credit borrowings | 280,408 | | | 195,842 | | | |
Payment of line of credit borrowings | (239,704) | | | (134,073) | | | |
| | | | | |
Principal payments on long-term debt | (285,807) | | | (34,054) | | | |
Principal payments on finance lease liabilities | (8,574) | | | (9,095) | | | |
| | | | | |
Redemption of redeemable noncontrolling interest | (92,839) | | | (39,894) | | | |
| | | | | |
Other | (198) | | | (213) | | | |
Net cash used in financing activities | (18,747) | | | (21,487) | | | |
Effects of foreign exchange translation | (142) | | | 102 | | | |
Net increase (decrease) in cash and cash equivalents | 19,052 | | | (31,513) | | | |
Cash and cash equivalents, beginning of period | 33,407 | | | 63,966 | | | |
Cash and cash equivalents, end of period | $ | 52,459 | | | $ | 32,453 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Centuri Holdings, Inc.
Condensed Consolidated Statements of Changes in Equity
(In thousands, except share information)
(Unaudited)
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| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Accumulated Deficit) | | Total Equity |
| Shares | | Amount | | | | |
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Balances as of January 1, 2023 | 1,000 | | $ | — | | | $ | 370,134 | | | $ | (6,494) | | | $ | 23,113 | | | $ | 386,753 | |
Net loss | — | | | — | | | — | | | — | | | (8,844) | | | (8,844) | |
Stock-based compensation activity | — | | | — | | | (25) | | | — | | | (45) | | | (70) | |
Foreign currency translation adjustment | — | | | — | | | — | | | 87 | | | — | | | 87 | |
Capital contribution from related party - parent | — | | | — | | | 670 | | | — | | | — | | | 670 | |
Noncontrolling interest revaluation | — | | | — | | | — | | | — | | | (5,832) | | | (5,832) | |
Balances at April 2, 2023 | 1,000 | | $ | — | | | $ | 370,779 | | | $ | (6,407) | | | $ | 8,392 | | | $ | 372,764 | |
Net income | — | | | — | | | — | | | — | | | 17,146 | | | 17,146 | |
Stock-based compensation activity | — | | | — | | | 842 | | | — | | | (153) | | | 689 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 2,043 | | | — | | | 2,043 | |
Capital contribution from related party - parent | — | | | — | | | 669 | | | — | | | — | | | 669 | |
Noncontrolling interest revaluation | — | | | — | | | — | | | — | | | (29,773) | | | (29,773) | |
Balances at July 2, 2023 | 1,000 | | $ | — | | | $ | 372,290 | | | $ | (4,364) | | | $ | (4,388) | | | $ | 363,538 | |
Net income | — | | | — | | | — | | | — | | | 16,182 | | | 16,182 | |
Stock-based compensation activity | — | | | — | | | 1,425 | | | — | | | (108) | | | 1,317 | |
Foreign currency translation adjustment | — | | | — | | | — | | | (2,021) | | | — | | | (2,021) | |
Capital contribution from related party - parent | — | | | — | | | 670 | | | — | | | — | | | 670 | |
Noncontrolling interest revaluation | — | | | — | | | — | | | — | | | 13,758 | | | 13,758 | |
Balances at October 1, 2023 | 1,000 | | $ | — | | | $ | 374,385 | | | $ | (6,385) | | | $ | 25,444 | | | $ | 393,444 | |
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Balances as of December 31, 2023 | 1,000 | | $ | — | | | $ | 374,124 | | | $ | (4,025) | | | $ | (144,108) | | | $ | 225,991 | |
Net loss | — | | | — | | | — | | | — | | | (25,058) | | | (25,058) | |
Stock-based compensation activity | — | | | — | | | (912) | | | — | | | 151 | | | (761) | |
Foreign currency translation adjustment | — | | | — | | | — | | | (2,543) | | | — | | | (2,543) | |
Purchase of noncontrolling interest | — | | | — | | | 4,187 | | | — | | | — | | | 4,187 | |
Distribution to related party - parent | — | | | — | | | (1,599) | | | — | | | — | | | (1,599) | |
Noncontrolling interest revaluation | — | | | — | | | (2,449) | | | — | | | — | | | (2,449) | |
Balances at March 31, 2024 | 1,000 | | $ | — | | | $ | 373,351 | | | $ | (6,568) | | | $ | (169,015) | | | $ | 197,768 | |
Net income | — | | | — | | | — | | | — | | | 11,687 | | | 11,687 | |
Stock-based compensation activity | — | | | — | | | 24 | | | — | | | 56 | | | 80 | |
Foreign currency translation adjustment | — | | | — | | | — | | | (1,038) | | | — | | | (1,038) | |
Issuance of shares as part of reorganization | 71,664,592 | | 717 | | | (717) | | | — | | | — | | | — | |
Issuance of shares in initial public offering and private placement, net of offering costs | 16,851,929 | | 168 | | | 327,799 | | | — | | | — | | | 327,967 | |
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Distribution to related party - parent | — | | | — | | | (6,582) | | | — | | | — | | | (6,582) | |
Noncontrolling interest revaluation | — | | | — | | | 552 | | | — | | | — | | | 552 | |
Balances at June 30, 2024 | 88,517,521 | | $ | 885 | | | $ | 694,427 | | | $ | (7,606) | | | $ | (157,272) | | | $ | 530,434 | |
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| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings (Accumulated Deficit) | | Total Equity |
| Shares | | Amount | | | | |
Net loss | — | | | — | | | — | | | — | | | (3,652) | | | (3,652) | |
Stock-based compensation activity | — | | | — | | | 1,338 | | | — | | | (43) | | | 1,295 | |
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Foreign currency translation adjustment | — | | | — | | | — | | | 1,519 | | | — | | | 1,519 | |
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Distribution to related party - parent | — | | | — | | | (2,161) | | | — | | | — | | | (2,161) | |
Noncontrolling interest revaluation | — | | | — | | | (128) | | | — | | | — | | | (128) | |
Balances at September 29, 2024 | 88,517,521 | | $ | 885 | | | $ | 693,476 | | | $ | (6,087) | | | $ | (160,967) | | | $ | 527,307 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1.Description of Business
Organization Structure
Centuri Holdings, Inc. (“Holdings” and, collectively with the Operating Company (as defined below) and its consolidated subsidiaries, the “Company” or “Centuri”) was formed as a Delaware corporation in June 2023. Holdings was formed for the purpose of completing an initial public offering and facilitating the separation of Centuri Group, Inc. (the “Operating Company”) from Southwest Gas Holdings, Inc. (“Southwest Gas Holdings”) in order to carry on the business of the Operating Company. From formation until April 13, 2024, Southwest Gas Holdings owned 1,000 shares of Holdings common stock, representing 100% of the issued and outstanding shares of common stock of Holdings.
The Operating Company was formed as a wholly owned subsidiary of Southwest Gas Holdings under the laws of the state of Nevada in October 2014 to consolidate and oversee the operations of several utility infrastructure services companies operating throughout North America. On April 13, 2024, Holdings issued 71,664,592 shares of common stock to Southwest Gas Holdings as consideration for the transfer of assets and assumption of liabilities of the Operating Company (“the Separation”). Following the completion of the Separation, the Operating Company became a wholly owned subsidiary of Holdings, and all of Holdings’ operations are conducted through the Operating Company. Prior to its acquisition of the Operating Company as part of the Separation, Holdings had nominal assets, liabilities, and operations.
As Holdings and the Operating Company were both wholly owned by Southwest Gas Holdings as of April 13, 2024, Holdings’ acquisition of the Operating Company as part of the Separation is treated as a reorganization of entities under common control that results in a change in reporting entity. The Operating Company has been determined to be the predecessor for accounting purposes and, accordingly, the condensed consolidated financial statements for periods prior to the combination of Holdings and the Operating Company on April 13, 2024 have been adjusted to combine the previously separate entities for presentation purposes. Amounts for the period from January 2, 2023 through October 1, 2023 and from January 1, 2024 through April 12, 2024 presented in the condensed consolidated financial statements and condensed notes to the financial statements herein represent the historical operations of the Operating Company. The amounts as of September 29, 2024 and for the period from April 13, 2024 reflect the consolidated operations of the Company. For calculation of earnings per share, shares outstanding for all periods prior to April 13, 2024 have been retrospectively adjusted to 71,665,592 to reflect the shares of the Company owned by Southwest Gas Holdings immediately after the combination on April 13, 2024 which resulted in the change in reporting entity. Outstanding shares presented on the Company’s condensed consolidated balance sheet and statement of changes in equity for historical periods have been presented as 1,000 to reflect the shares of Holdings that existed at the formation of Holdings.
Description of Operations
The Company is a pure-play North American utility infrastructure services company that partners with regulated utilities to maintain, upgrade and expand the energy network that powers millions of homes and businesses. The Company’s service offerings primarily consist of the modernization of utility infrastructure through the maintenance, retrofitting and installation of electric and natural gas distribution networks, building capacity to meet current and future demands and preparing systems for the expected energy transition. The Company operates through a family of integrated companies working together across different geographies to establish solid customer relationships and a strong reputation for a wide range of capabilities.
Initial Public Offering
On April 17, 2024, the registration statement related to the initial public offering of Centuri’s common stock was declared effective, and Centuri’s common stock began trading on the New York Stock Exchange under the ticker “CTRI” (the “Centuri IPO”) on April 18, 2024. On April 22, 2024, the Centuri IPO was completed through the sale of 14,260,000 shares of Holdings common stock, par value $0.01 per share, including the underwriters’ full exercise of their option to purchase 1,860,000 shares to cover over-allotments, at an initial public offering price of $21.00 per share. On the same day, Icahn Partners and Icahn Partners Master Fund LP, investment entities affiliated with Carl C. Icahn, purchased 2,591,929 shares of Centuri’s common stock in a concurrent private placement at a price per share equal to the IPO price, for gross proceeds of approximately $54.4 million. The total final net proceeds to Centuri from the Centuri IPO and the concurrent private placement, after deducting underwriting discounts and commissions of $18.0 million and offering expenses payable by Centuri of $8.0 million, were $328.0 million. Offering expenses represent costs that were determined to be directly
attributable to the Centuri IPO, and are recorded as a reduction in additional paid-in capital on the Company’s condensed consolidated balance sheet.
As of the closing of the Centuri IPO, Southwest Gas Holdings owned 71,665,592 shares of Centuri common stock, or approximately 81% of the total outstanding shares of Centuri.
2.Basis of Presentation and Summary of Significant Accounting Policies
Interim Condensed Consolidated Financial Information
The unaudited condensed consolidated financial statements and footnotes were prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to those rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2023, as included in the Company’s final IPO prospectus (the “IPO Prospectus”) filed on April 18, 2024 with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended relating to Centuri’s Registration Statement on Form S-1. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations, comprehensive income and cash flows with respect to the interim condensed consolidated financial statements have been included. The results of operations and comprehensive income for the interim periods are not necessarily indicative of the results for the entire fiscal year. The results of the Company have historically been subject to significant seasonal fluctuations.
As of and prior to December 31, 2023, the Company reported its results under two reportable segments. In January 2024, the Company appointed a new Chief Executive Officer, who was determined by Centuri to be the Company’s chief operating decision maker (“CODM”). Following this appointment, the Company underwent an internal personnel reorganization, causing the Company to re-evaluate its reportable segments based on the information reviewed by the new CODM. Effective July 31, 2024, the Company appointed a new interim Chief Executive Officer who currently acts as the Company’s CODM. However, there have been no changes in the information reviewed by the CODM. See “Note 4 — Segment Information” for additional details.
The Company uses a 52/53-week fiscal year that ends on the Sunday closest to the end of the calendar year. Unless otherwise stated, references to months in the Company’s condensed consolidated financial statements relate to fiscal months rather than calendar months. The fiscal nine month period ended September 29, 2024 and October 1, 2023 each had 39 weeks, and the third fiscal quarters of 2024 and 2023 each had 13 weeks.
Cloud Computing Arrangements
The Company capitalizes certain implementation costs incurred in the application development stage of projects related to its cloud computing arrangements (“CCA”) that are service contracts. Capitalized CCA implementation costs are recognized in other assets in the condensed consolidated balance sheets and expensed on a straight-line basis over the fixed, noncancellable term of the associated hosting arrangement plus any reasonably certain renewal periods.
As of September 29, 2024, the net carrying amounts of the Company’s CCA implementation costs were $27.6 million. Amortization of CCA-related assets is classified as a cash operating expense (i.e., not included in amortization or depreciation in the Company’s condensed consolidated financial statements). CCA implementation expenditures are included within cash flows from operating activities in the condensed consolidated statement of cash flows.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The update improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This update is effective beginning with the Company’s 2024 fiscal year annual reporting period, and will be effective for
interim reporting periods in the Company’s fiscal 2025, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this update will have on its disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The update enhances income tax disclosure requirements. This update is effective beginning with the Company’s 2025 fiscal year annual reporting period, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this update will have on its disclosures.
In March 2024, the SEC issued the final rules under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” In April 2024, the SEC voluntarily stayed the new rules as a result of pending legal challenges. Absent the stay and the result of pending legal challenges, these rules will require registrants to disclose certain climate-related information, including Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics, in registration statements and annual reports, when material. Disclosure requirements, absent the results of pending legal challenges, will begin phasing in with the annual reporting for the fiscal year ending 2027 based on Centuri’s current status as a non-accelerated filer. The Company is currently evaluating the impact the rules will have on its disclosures.
3.Revenue and Related Balance Sheet Accounts
The following table presents the Company’s revenue from contracts with customers disaggregated by contract type (in thousands):
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| Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 | | |
Contract Type: | | | | | | | | | |
Master services agreements | $ | 569,000 | | | $ | 631,913 | | | $ | 1,571,701 | | | $ | 1,830,242 | | | |
Bid contracts | 151,053 | | | 142,976 | | | 348,450 | | | 403,719 | | | |
Total revenue | $ | 720,053 | | | $ | 774,889 | | | $ | 1,920,151 | | | $ | 2,233,961 | | | |
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Unit-price contracts | $ | 412,871 | | | $ | 440,787 | | | $ | 1,119,161 | | | $ | 1,191,889 | | | |
Time and materials contracts | 168,940 | | | 168,465 | | | 417,900 | | | 520,350 | | | |
Fixed-price contracts | 138,242 | | | 165,637 | | | 383,090 | | | 521,722 | | | |
Total revenue | $ | 720,053 | | | $ | 774,889 | | | $ | 1,920,151 | | | $ | 2,233,961 | | | |
Contract assets and liabilities consisted of the following (in thousands):
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| September 29, 2024 | | December 31, 2023 |
Current contract assets | $ | 288,568 | | | $ | 269,808 | |
Non-current contract assets | 24,097 | | | 214 | |
Contract assets, total | 312,665 | | | 270,022 | |
Contract liabilities | (21,894) | | | (43,694) | |
Net contract assets | $ | 290,771 | | | $ | 226,328 | |
Contract assets primarily consist of revenue earned on contracts in progress in excess of billings, which relates to the Company’s rights to consideration for work completed but not billed and/or approved at the reporting date as well as contract retention balances. Contract assets that are not expected to be invoiced and collected within a year of the financial statement date (“Non-current contract assets”) are included in other assets on the condensed consolidated balance sheets. Revenue earned on contracts in progress in excess of billings are transferred to accounts receivable when the rights become unconditional. Non-current contract assets as of September 29, 2024 included approximately $13.2 million of net recovery claims. Claims occur when there is a dispute regarding a change in the scope of work and associated price for work already performed. The Company records estimated claims as variable consideration based on the most likely amount it expects to receive, and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty with the variable consideration is resolved.
Total contract assets increased $42.6 million during the fiscal nine months ended September 29, 2024 due primarily to timing of billings. Contract assets are recoverable from the Company’s customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In
addition, many of the Company’s time and materials (“T&M”) contract arrangements are billed in arrears pursuant to contract terms that are standard within the industry, resulting in revenue earned on contracts in progress in excess of billings and/or unbilled receivables being recorded as revenue is recognized in advance of billings. The lag in billing due to the aforementioned contractual provisions may create circumstances in which material changes to a customer’s business, cash flows or financial condition, which may be impacted by negative economic or market conditions, could affect the Company’s ability to bill and subsequently collect amounts due. These changes may result in the need to record an estimate of the amount of loss from uncollectible receivables.
Contract liabilities primarily consist of amounts billed in excess of revenue earned related to the advance consideration received from customers for which work has not yet been completed. The change in the contract liability balance of $21.8 million from December 31, 2023 to September 29, 2024 was primarily due to revenue recognized that was included in the balance as of December 31, 2023, after which time it became earned and the balance was ultimately realized.
The Company considers retention and unbilled amounts to customers to be conditional contract assets, as payment is contingent on the occurrence of a future event. Accounts receivable, net, includes only amounts that are unconditional in nature, which means only the passage of time remains and the Company has invoiced the customer. Similarly, contract liabilities include amounts billed in excess of revenue earned on contracts in progress related to fixed-price, unit-price and T&M contracts. In the event contract assets or contract liabilities are expected to be recognized more than one year from the financial statement date, the Company classifies those amounts as long-term contract assets or contract liabilities, included in other assets or other long-term liabilities, respectively, on the condensed consolidated balance sheets. Similarly, accounts receivable balances expected to be collected beyond one year are recorded as long-term within other assets.
For contracts with an original duration of one year or less, the Company uses the practical expedient applicable to such contracts and does not consider the time value of money. Further, because of the short duration of these contracts, the Company has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or the related timing of revenue recognition.
As of September 29, 2024, the Company had 42 fixed-price contracts with an original duration of more than one year. The aggregate amount of the transaction price allocated to the unsatisfied performance obligations of these contracts as of September 29, 2024 was $249.1 million. The Company expects to recognize the remaining performance obligations of these contracts over approximately the next two years; however, the timing of that recognition is largely within the control of the customer, including when the necessary equipment and materials required to complete the work will be provided by the customer.
Accounts receivable, net consisted of the following (in thousands):
| | | | | | | | | | | |
| September 29, 2024 | | December 31, 2023 |
Billed on completed contracts and contracts in progress | $ | 253,809 | | | $ | 348,021 | |
Other receivables | 2,115 | | | 1,945 | |
Accounts receivable, gross | 255,924 | | | 349,966 | |
Allowance for doubtful accounts | (2,905) | | | (2,512) | |
Accounts receivable, net | $ | 253,019 | | | $ | 347,454 | |
4.Segment Information
As of and prior to December 31, 2023, the Company reported its results under the following two reportable segments: Gas Utility Services and Electric Utility Services. In January 2024, the Company appointed a new Chief Executive Officer, who was determined by Centuri to be the Company’s CODM. Following this appointment, the Company underwent an internal personnel reorganization, causing the Company to re-evaluate its reportable segments based on the information reviewed by the new CODM. The Company determined that it was appropriate to re-align its reporting structure from the following two reportable segments: (i) Gas Utility Services; and (ii) Electric Utility Services, to the following four reportable segments: (i) U.S. Gas Utility Services (“U.S. Gas”); (ii) Canadian Gas Utility Services (“Canadian Gas”); (iii) Union Electric Utility Services (“Union Electric”); and (iv) Non-Union Electric Utility Services (“Non-Union Electric”). The U.S. Gas and Canadian Gas businesses have historically been part of the Gas Utility Services segment, and the Union Electric and Non-Union Electric businesses have historically been part of the Electric Utility Services segment. All prior year segment financial information has been recast to reflect the new segment structure. Effective July 31, 2024, the Company appointed a new interim Chief Executive Officer who currently acts as the Company’s CODM. However, there has been no
change in the information reviewed by the CODM. The CODM allocates resources to and assesses the performance of each reportable segment using information about the reportable segment’s gross profit.
U.S. Gas
U.S. Gas provides comprehensive services, including maintenance, repair and installation for local natural gas distribution utilities (“LDCs”) throughout the United States focused on the modernization of customers’ infrastructure. The work performed within this segment includes solutions for all stages of utility work and is performed primarily within the distribution, urban transmission and end-user infrastructure, rather than large-scale, project-based, cross-country transmission. The Company is able to cater to the needs of its gas utility services customers by serving union and non-union markets.
Canadian Gas
Canadian Gas provides comprehensive services, including maintenance, repair and installation for LDCs focused on the modernization of customers’ infrastructure. The work performed within this segment includes solutions for all stages of utility work and is performed primarily within the distribution, urban transmission and end-user infrastructure, rather than large-scale, project-based, cross-country transmission. Canadian Gas serves union markets.
Union Electric
Union Electric provides a comprehensive set of electric utility services encompassing maintenance, repair, upgrade and expansion services for urban transmission and local distribution infrastructure within union markets. The work is focused primarily on recurring local distribution and urban transmission services under master service agreements (“MSAs”) as opposed to large-scale, project-based, cross-country transmission, and services are primarily focused on infrastructure between the substation and end-user meter.
Non-Union Electric
Non-Union Electric provides a comprehensive set of electric utility services encompassing maintenance, repair, upgrade and expansion services for urban transmission and local distribution infrastructure within non-union markets. The work is focused almost exclusively on recurring local distribution and urban transmission services under MSAs as opposed to large-scale, project-based, cross-country transmission, and services are primarily focused on infrastructure between the substation and end-user meter.
Other
Other primarily consists of corporate and non-allocated costs, including corporate facility costs, non-allocated corporate salaries, benefits and incentive compensation. Other also includes certain industrial service activities that do not meet the criteria of a reportable segment.
Revenue and gross profit by segment were as follows (in thousands):
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| Fiscal Three Months Ended | | Fiscal Nine Months Ended | | |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 | | |
Revenue: | | | | | | | | | |
U.S. Gas | $ | 366,070 | | | $ | 395,745 | | | $ | 933,334 | | | $ | 1,046,964 | | | |
Canadian Gas | 50,354 | | | 54,590 | | | 125,992 | | | 141,977 | | | |
Union Electric | 171,666 | | | 204,135 | | | 499,728 | | | 628,029 | | | |
Non-Union Electric | 128,844 | | | 110,715 | | | 345,971 | | | 380,882 | | | |
Other | 3,119 | | | 9,704 | | | 15,126 | | | 36,109 | | | |
Consolidated revenue | $ | 720,053 | | | $ | 774,889 | | | $ | 1,920,151 | | | $ | 2,233,961 | | | |
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Gross profit (loss): | | | | |
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U.S. Gas | $ | 27,960 | | | $ | 52,103 | | | $ | 49,140 | | | $ | 99,509 | | | |
Canadian Gas | 11,789 | | | 10,020 | | | 26,692 | | | 22,070 | | | |
Union Electric | 15,427 | | | 11,724 | | | 38,875 | | | 44,030 | | | |
Non-Union Electric | 21,437 | | | 12,802 | | | 40,474 | | | 51,864 | | | |
Other | (820) | | | 964 | | | (5,605) | | | 2,061 | | | |
Consolidated gross profit | $ | 75,793 | | | $ | 87,613 | | | $ | 149,576 | | | $ | 219,534 | | | |
Depreciation expense, included in cost of revenue, by segment was as follows (in thousands):
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| Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 | | |
U.S. Gas | $ | 11,194 | | | $ | 11,366 | | | $ | 34,146 | | | $ | 34,428 | | | |
Canadian Gas | 1,459 | | | 1,408 | | | 4,458 | | | 4,211 | | | |
Union Electric | 7,308 | | | 9,096 | | | 20,958 | | | 27,927 | | | |
Non-Union Electric | 6,676 | | | 6,464 | | | 19,902 | | | 20,668 | | | |
Other | 90 | | | 82 | | | 266 | | | 232 | | | |
Consolidated depreciation expense (1) | $ | 26,727 | | | $ | 28,416 | | | $ | 79,730 | | | $ | 87,466 | | | |
(1)Depreciation expense within selling, general and administrative expense, which was immaterial for all periods presented, was excluded from the table above as it is not produced or utilized by management to evaluate segment performance.
Separate measures of the Company’s assets and cash flows, with the exception of capital expenditures, are not produced or utilized by management to evaluate segment performance.
Capital expenditures by segment were as follows (in thousands):
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| Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 |
U.S. Gas | $ | 7,276 | | | $ | 14,170 | | | $ | 31,485 | | | $ | 43,900 | |
Canadian Gas (1) | 433 | | | 1,353 | | | 5,285 | | | 5,512 | |
Union Electric | 7,509 | | | 6,743 | | | 19,246 | | | 21,561 | |
Non-Union Electric | 4,293 | | | 1,782 | | | 9,915 | | | 4,315 | |
Other (1) | 20 | | | 1,810 | | | 162 | | | 4,322 | |
Consolidated capital expenditures | $ | 19,531 | | | $ | 25,858 | | | $ | 66,093 | | | $ | 79,610 | |
(1)Management determined that certain cash outflows incurred during the six months ended June 30, 2024 related to the implementation of a cloud computing arrangement were incorrectly reported as capital expenditures instead of as operating cash outflows (as required by ASC 350-40). The Company corrected the classification of these expenditures in the condensed consolidated statement of cash flows for the nine months ended September 29, 2024. The Company quantitatively and qualitatively assessed the impact of this error on previously issued financial statements and concluded the impact was not material and will revise the first and second quarter 2024 amounts in future filings.
Foreign Operations
The Company recorded revenue in Canada of approximately $53.5 million (7% of consolidated revenue) and $64.3 million (8%) during the fiscal three months ended September 29, 2024 and October 1, 2023, respectively, and $141.1 million (7%) and $178.1 million (8%) for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively.
5.Per Share Information
The Company computes earnings per share using the treasury stock method. Under the treasury stock method, basic earnings per share are computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding during the period, and diluted earnings per share are computed by dividing net income attributable to common stock by the weighted average number of common shares outstanding during the period plus all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalent would be anti-dilutive.
As discussed in “Note 1 — Description of Business”, shares outstanding for all periods before April 13, 2024 have been retrospectively restated to be 71,665,592, reflecting the shares issued as part of the combination of Holdings and the Operating Company plus the 1,000 Holdings shares that were issued to Southwest Gas Holdings upon formation.
The amounts used to compute basic and diluted earnings per share attributable to common stock consisted of the following (in thousands):
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| Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 | | |
Amounts attributable to common stock: | | | | | | | | | |
Net (loss) income attributable to common stock | $ | (3,652) | | | $ | 16,182 | | | $ | (17,023) | | | $ | 24,484 | | | |
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Weighted average shares: | | | | | | | | | |
Weighted average shares outstanding for basic and diluted earnings per share attributable to common stock | 88,518 | | | 71,666 | | | 81,679 | | | 71,666 | | | |
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There were no dilutive securities for any periods presented, and therefore the denominator for basic and diluted earnings per share was the same for all periods. There were a de minimis amount of potentially dilutive securities that were antidilutive in the current year periods presented due to the Company recording a net loss for the fiscal three and nine months ended September 29, 2024.
6.Accounts Receivable Securitization Facility
In September 2024, the Company entered into a three-year accounts receivable securitization facility for an aggregate amount of up to $125.0 million (the “Securitization Facility”), with PNC Bank, National Association (“PNC"), to enhance the company's financial flexibility by providing additional liquidity.
Under the Securitization Facility, certain designated subsidiaries of the Company have sold and/or contributed, and will continue to sell and/or contribute, their accounts receivable and contract assets generated in the ordinary course of their businesses and certain related assets to an indirect wholly owned bankruptcy-remote Special Purpose Entity (“SPE”) of the Company created specifically for this purpose. The SPE is a variable interest entity, and the Company is the primary beneficiary and therefore consolidates the SPE. The SPE transfers ownership and control of accounts receivable to PNC for payments as set forth in the agreement. The Company and its related subsidiaries have no continuing involvement in the transferred accounts receivable, other than collection and administrative responsibilities, and, once sold, the accounts receivable are no longer available to satisfy the creditors or the related subsidiaries. The Company has not recorded any servicing asset or liability related to this continuing involvement as the Company has determined it is compensated adequately for its servicing role. The Company accounts for accounts receivable sold to the banking counterparty as a sale of financial assets and has derecognized the accounts receivable from the condensed consolidated balance sheet for the current period.
In addition, Centuri Group, Inc. has agreed to guarantee the performance of the indirect wholly-owned subsidiaries of the Company and itself as the servicer of their respective obligations under the documentation for the Securitization Facility. Centuri Group, Inc. is not guaranteeing the collectibility of any assets transferred in the Securitization Facility or the
creditworthiness of the related obligors. The Securitization Facility is subject to yield charges based upon a rate as specified in the documentation for the Securitization Facility. These yield charges are recorded in interest expense, net on the Company’s condensed consolidated statement of operations, and were not material for the fiscal three or nine months ended September 29, 2024. The Company may incur a recourse obligation in limited circumstances, but the Company has determined this liability is not material.
The total outstanding balance of accounts receivable that had been sold and derecognized was $125.0 million as of September 29, 2024. Additionally, the SPE owned accounts receivable and contract assets of $60.6 million and $115.5 million, respectively, as of September 29, 2024, which were not sold to PNC but were pledged as collateral. These balances are primarily included in accounts receivable, net and contract assets (and the accompanying related party captions) in the Company’s condensed consolidated balance sheet, with certain non-current balances being included in other assets. For the nine months ended September 29, 2024, the Company received $125.0 million in cash proceeds from the Securitization Facility, which is recorded in operating cash flows on the condensed consolidated statement of cash flows, and had no repayments on the Securitization Facility. As of September 29, 2024, the Company had no available capacity under the Securitization Facility.
7.Noncontrolling Interests
In connection with the acquisition of Linetec Services, LLC (“Linetec”) in November 2018, the previous owner initially retained a 20% noncontrolling equity interest in the entity, which was reduced to 10% as of December 31, 2023. Additionally, in connection with the acquisition of Riggs Distler & Company, Inc. (“Riggs Distler”), certain members of Riggs Distler management acquired a 1.42% noncontrolling interest in the parent company of Riggs Distler, Drum Parent LLC (formerly Drum Parent, Inc.) (“Drum”), which was reduced to 1.41% as of December 31, 2023. In exchange for the noncontrolling interest in Drum, the Company received a combination of cash and promissory notes (which accrued interest at the prime rate plus 2%) from the noncontrolling interest holders. The Company maintained the right, subject to the passage of time or occurrence of certain triggering events, to repurchase the noncontrolling interests in both Linetec and Riggs Distler at fair value.
In March 2024, the parties agreed to redeem the remaining 10% equity interest for $92.0 million, which resulted in the Company owning all of the equity interest in Linetec. The Company paid the $92.0 million in April, in accordance with the agreement.
During the first quarter of 2024, the Company redeemed various Drum units in satisfaction of all outstanding promissory notes and forgave unpaid interest owed from the Riggs Distler noncontrolling interest holders and in exchange obtained the 0.47% portion of equity interest in Drum that had been funded through these notes. Additionally, during the first quarter of 2024, the Company reached an agreement to purchase a 0.13% noncontrolling interest in Drum for $0.8 million. The remaining noncontrolling interest in Drum outstanding as of September 29, 2024 was 0.81%.
Significant changes in the value of the redeemable noncontrolling interests, above a floor determined at the establishment date, are recognized as they occur, and the carrying value is adjusted as necessary at each reporting date. The fair value is estimated using a market approach that utilizes certain financial metrics from guideline public companies of similar industry and operating characteristics. Based on the fair value model employed, the estimated redemption value of the Linetec redeemable noncontrolling interest increased by $0.2 million during the first fiscal quarter of 2024 to the value at which it was redeemed. The estimated redemption value of the Riggs Distler redeemable noncontrolling interest increased by $1.8 million during the fiscal nine month period ended September 29, 2024.
Adjustments to the redemption values have historically impacted retained earnings, as reflected on the condensed consolidated statements of changes in equity. As the Company was in an accumulated deficit position prior to any redemption value adjustment during the fiscal nine months of 2024, the redemption value adjustments during this period were recorded as reductions in additional paid-in capital.
The following table depicts changes to the balance of the redeemable noncontrolling interests (in thousands):
| | | | | | | | | | | | | | | | | |
| Linetec Services, LLC | | Drum Parent LLC | | Redeemable Noncontrolling Interests |
Balance as of December 31, 2023 | $ | 91,979 | | | $ | 7,283 | | | $ | 99,262 | |
Net (loss) income attributable to redeemable noncontrolling interests | (193) | | | 63 | | | (130) | |
Redemption value adjustment | 193 | | | 1,832 | | | 2,025 | |
Redeemable noncontrolling interests redeemed | (91,979) | | | (5,046) | | | (97,025) | |
Balance as of September 29, 2024 | $ | - | | | $ | 4,132 | | | $ | 4,132 | |
8.Goodwill and Intangible Assets
During fiscal 2024, the Company changed its reporting units to align with changes in its organization structure, and as a result, the Company’s reporting units are the same as its reportable segments. Prior to and after the reporting unit restructure, the Company qualitatively assessed its reporting units for potential goodwill impairment, and with the exception of Riggs Distler (which was impaired in the fourth fiscal quarter of 2023), the results of the qualitative assessments did not indicate that it was more likely than not that the fair value of each reporting unit analyzed was less than the carrying value including goodwill, and no goodwill impairment was recognized.
Changes in the carrying amount of goodwill of each of the Company’s reportable segments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Gas | | Canadian Gas | | Union Electric (1) | | Non-Union Electric | | Total |
Balances as of December 31, 2023 | $ | 58,160 | | | $ | 93,911 | | | $ | 56,499 | | | $ | 167,322 | | | $ | 375,892 | |
Effect of exchange rate changes | - | | | (1,899) | | | - | | | - | | | (1,899) | |
Balances as of September 29, 2024 | $ | 58,160 | | | $ | 92,012 | | | $ | 56,499 | | | $ | 167,322 | | | $ | 373,993 | |
(1) Net of accumulated impairment of $391.1 million as of September 29, 2024 and December 31, 2023.
Goodwill and related accumulated impairment associated with reporting units that do not meet the quantitative thresholds for separate reporting were $10.8 million, resulting in a net carrying value of $0 as of September 29, 2024 and December 31, 2023.
9.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| September 29, 2024 | | December 31, 2023 |
Accrued compensation | $ | 85,103 | | | $ | 92,205 | |
Other accrued expenses | 58,141 | | | 59,751 | |
Accrued insurance | 30,538 | | | 21,794 | |
Book overdrafts | 9,508 | | | 13,300 | |
| | | |
Accrued expenses and other current liabilities | $ | 183,290 | | | $ | 187,050 | |
10.Long-Term Debt
Long-term debt, including outstanding amounts on the Company’s line of credit, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 29, 2024 | | December 31, 2023 |
| Carrying Amount | | Fair Value (1) | | Carrying Amount | | Fair Value (1) |
Borrowings under revolving line of credit | $ | 116,378 | | | $ | 116,456 | | | $ | 77,121 | | | $ | 77,205 | |
Term loans under loan facility | 731,375 | | | 727,718 | | | 994,238 | | | 996,723 | |
Total loan facility | 847,753 | | | 844,174 | | | 1,071,359 | | | 1,073,928 | |
Equipment loans: | | | | | | | |
2.30%, due May 2025 | 3,077 | | | 3,041 | | | 5,768 | | | 5,618 | |
1.75%, due March 2027 | 5,569 | | | 5,339 | | | 7,193 | | | 6,740 | |
1.75%, due March 2027 | 12,995 | | | 12,457 | | | 16,783 | | | 15,727 | |
2.96%, due March 2027 | 12,962 | | | 12,595 | | | 16,667 | | | 15,903 | |
3.27%, due March 2027 | 15,326 | | | 14,960 | | | 20,055 | | | 19,237 | |
3.40%, due March 2027 | 8,067 | | | 7,867 | | | 10,037 | | | 9,641 | |
3.51%, due March 2027 | 15,659 | | | 15,325 | | | 20,096 | | | 19,342 | |
Total long-term debt | 921,408 | | | $ | 915,758 | | | 1,167,958 | | | $ | 1,166,136 | |
Current portion of long-term debt | (30,264) | | | | | (42,552) | | | |
Unamortized discount and debt issuance costs | (12,627) | | | | | (17,111) | | | |
Long-term debt, net of current portion | $ | 878,517 | | | | | $ | 1,108,295 | | | |
(1)Fair values as of September 29, 2024 and December 31, 2023 were determined using the Company’s credit rating.
On August 27, 2021, the Company entered into an amended and restated credit agreement. The agreement provided for a $1.145 billion secured term loan facility, at a discount of 1.00%, and a $400 million secured revolving credit facility, which in addition to funding the Riggs Distler acquisition, refinanced the Company’s previous $590 million loan facility. This multi-currency facility allows the Company to request loan advances in either Canadian dollars or U.S. dollars. Amounts borrowed and repaid under the revolving line of credit portion of the facility are available to be re-borrowed. The obligations under the credit agreement are secured by present and future ownership interests in substantially all direct and indirect subsidiaries of the Company, substantially all of the tangible and intangible personal property of each borrower, and all products, profits, and proceeds of the foregoing. The Company’s assets securing the facility as of September 29, 2024 totaled $2.0 billion. The credit agreement also contains a restriction on dividend payments with a calculated available amount generally defined as 50% of the Company’s rolling twelve-month consolidated net income adjusted for certain items, such as parent capital contributions, redeemable noncontrolling interest payments, and dividend payments, among other adjustments, as applicable. The term loan facility matures on August 27, 2028, and the revolving credit facility matures on August 27, 2026.
On May 31, 2023, the Company entered into an amendment to the amended and restated credit agreement to transition the interest rate benchmark for the term loan facility from London Interbank Offered Rate (“LIBOR”) to Secured Overnight Financing Rate (“SOFR”) benchmarks. The applicable margins for the term loan facility remained 1.50% for base rate loans and are 2.50% for SOFR loans. Furthermore, the Company’s Canadian entities may borrow under the revolving credit facility with interest rates based on either a “base rate” or the Canadian Overnight Repo Rate Average (“CORRA”) plus the applicable margin, at the borrower’s option. The weighted average interest rate on the term loan facility was 7.87% and 7.97% as of September 29, 2024 and December 31, 2023, respectively.
On November 4, 2022, November 13, 2023, and March 22, 2024, the Company amended the financial covenants of the revolving credit facility. Under the amended terms of the revolving credit facility, the Company was required to maintain certain net leverage ratios, however it also provided that, in the event that a “Qualified IPO” (as defined therein) is consummated prior to March 31, 2025, the maximum net leverage ratio financial covenant would be reduced based on the amount of net proceeds received from such Qualified IPO. Pursuant to these terms, the completion of the Qualified IPO resulted in a change to the maximum net leverage ratio. Based on the amount of proceeds received, the Company is now required to maintain a net leverage ratio of less than a maximum of 5.25 to 1.00 from April 18, 2024 through June 30, 2024, 5.00 to 1.00 from July 1, 2024 through September 29, 2024, 4.25 to 1.00 from September 30, 2024 through December 29, 2024, and 4.00 to 1.00 thereafter. Under the amended terms of the revolving credit facility, the Company is also required to maintain an interest coverage ratio of greater than a minimum of 2.00 to 1.00 from January 1, 2024 through December 29, 2024, and 2.50 to 1.00 thereafter. As of September 29, 2024, the Company was in compliance with all of the
financial covenants under the revolving credit facility. The November 4, 2022 amendment to the amended and restated credit agreement increased a letter of credit sub-facility from $100 million to $125 million, and also transitioned the interest rate benchmark for the revolving credit facility from LIBOR to SOFR benchmarks. On May 13, 2024, the Company also amended its revolving credit facility to transition from Canadian Dollar Offered Rate benchmarks to CORRA benchmarks for Canadian dollar borrowing under its revolving credit facility. The applicable margin for the revolving credit facility now ranges from 1.0% to 2.5% for SOFR and CORRA loans and from 0.0% to 1.5% for “base rate” loans, depending on the Company’s net leverage ratio. The Company is also required to pay a commitment fee on the unused portion of the commitments which ranges from 0.15% to 0.35% per annum, depending on the Company’s net leverage ratio. The weighted average interest rate on the revolving credit facility was 7.23% and 7.66% as of September 29, 2024 and December 31, 2023, respectively.
As of September 29, 2024 and December 31, 2023, the Company had borrowings outstanding of $0.8 billion and $1.1 billion, respectively, under its amended and restated credit agreement. The amount available under the revolving line of credit is further reduced by the amount of any outstanding letters of credit issued by the Company under the agreement. Accordingly, there was $218.4 million, net of outstanding letters of credit, of unused capacity on the revolving line of credit as of September 29, 2024. The Company had $59.8 million and $48.6 million of unused letters of credit available as of September 29, 2024 and December 31, 2023, respectively. Debt issuance costs associated with the Company’s line of credit are amortized over the term of the related line of credit. As of September 29, 2024 and December 31, 2023, there was $3.4 million and $4.2 million, respectively, in debt issuance costs recorded in other assets on the condensed consolidated balance sheets.
As of September 29, 2024, the Company had $72.7 million of surety-backed letters of credit issued outside of its amended and restated credit agreement.
Debt issuance costs associated with the Company’s term loan are amortized over the term of the related debt, which approximates the effective interest method. As of September 29, 2024 and December 31, 2023, debt issuance costs of $12.6 million and $17.1 million, respectively, were recorded as a reduction to long-term debt on the condensed consolidated balance sheets.
Amortization expense related to debt issuance costs is recorded as a component of interest expense in the condensed consolidated statements of operations. During each of fiscal three month periods ended September 29, 2024 and October 1, 2023, amortization of debt issuance costs was $1.5 million and $1.3 million, respectively. During the fiscal nine month periods ended September 29, 2024 and October 1, 2023, amortization of debt issuance costs was $4.1 million and $3.8 million, respectively. The Company incurred a debt extinguishment loss of $1.7 million in the third quarter of 2024 related to the write-off of debt issuance costs associated with its term loan. This loss was recorded within interest expense, net on the Company’s condensed consolidated statement of operations.
The Company currently has seven equipment term loans with initial amounts totaling approximately $170 million, with certain owned equipment used as collateral. The loans are serviced in U.S. dollars. These term loans have prepayment penalties for the first three years of the agreements. The Company did not incur any material prepayment penalties during the first fiscal nine months of 2024 or 2023.
The fair value of the Company’s debt as of September 29, 2024 and December 31, 2023 was $0.9 billion and $1.2 billion, respectively. The carrying value of the Company’s revolving credit facility approximates fair value given interest rates on the revolving credit facility approximate market rates, and typically draws on the revolving credit facility are paid back in a short period of time. The fair values of the Company’s term loan facility and equipment loans were determined utilizing a market-based valuation approach, where fair values are determined based on evaluated pricing data, and as such are categorized as Level 2 in the hierarchy.
With the proceeds obtained from the Centuri IPO, the Company paid down $156.0 million of debt under its revolving credit facility and $160.0 million of debt under its term loan facility on April 22, 2024. The Company made an additional prepayment on its term loan debt in September 2024 using $100.0 million of the proceeds from the sale of accounts receivable discussed in “Note 6 — Accounts Receivable Securitization Facility”.
As of September 29, 2024, future principal payments required to be made on existing debt obligations (excluding finance lease obligations, which are discussed in “Note 11 — Leases”) are set forth in the table below (in thousands):
| | | | | |
Remainder of 2024 | $ | 8,418 | |
2025 | 29,441 | |
2026 | 144,911 | |
2027 | 7,263 | |
2028 | 731,375 | |
| |
Total | $ | 921,408 | |
No principal payments are due after 2028.
11.Leases
The Company has operating and finance leases for corporate and field offices, construction equipment and transportation vehicles. The Company is currently not a lessor in any significant lease arrangements. The Company’s leases have remaining lease terms of up to 14 years. Some of these leases include options to extend the leases, generally for optional terms of up to five years, and some include options to terminate the leases within one year. The equipment leases may include variable payment terms in addition to the fixed lease payments if machinery is used in excess of the standard work periods. The occurrence of these variable payments is not probable under the Company’s current operating environment and has not been included in consideration of lease payments. Leases with an initial term of 12 months or less are classified as short-term leases and are not recognized on the condensed consolidated balance sheets unless the lease contains a purchase option that is reasonably certain to be exercised, or unless it is reasonably certain that the equipment will be leased for greater than 12 months. Due to the seasonality of the Company’s operations, expense for short-term leases will fluctuate throughout the year with higher expense typically incurred during the periods when revenue is the greatest. As of September 29, 2024, the Company did not have any significant executed lease agreements that had not yet commenced.
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
Lease cost | Classification | September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | October 1, 2023 |
Operating lease cost | Cost of revenue and selling, general and administrative expenses | $ | 6,700 | | | $ | 5,998 | | | $ | 19,949 | | | $ | 16,055 | |
Finance lease cost: | | | | | | | | |
Amortization of ROU assets | Depreciation (1) | 1,765 | | | 2,164 | | | 6,049 | | | 5,837 | |
Interest on lease liabilities | Interest expense, net | 316 | | | 412 | | | 1,021 | | | 1,290 | |
Total finance lease cost | | 2,081 | | | 2,576 | | | 7,070 | | | 7,127 | |
Short-term lease cost (2) | Cost of revenue and selling, general and administrative expenses | 27,510 | | | 30,903 | | | 73,800 | | | 90,491 | |
Total lease cost | | $ | 36,291 | | | $ | 39,477 | | | $ | 100,819 | | | $ | 113,673 | |
(1)Depreciation is included within cost of revenue in the accompanying condensed consolidated statements of operations.
(2)Short-term lease cost includes both leases and rentals with initial terms of 12 months or less.
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Fiscal Nine Months Ended |
| | September 29, 2024 | | October 1, 2023 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 19,784 | | | $ | 15,585 | |
Operating cash flows from finance leases | | 1,021 | | | 1,290 | |
Financing cash flows from finance leases | | 8,574 | | | 9,095 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 8,710 | | | $ | 37,747 | |
Finance leases | | 124 | | | 1,471 | |
Supplemental information related to leases was as follows:
| | | | | | | | | | | |
| September 29, 2024 | | December 31, 2023 |
Weighted average remaining lease term (in years): | | | |
Operating leases | 6.84 | | 7.45 |
Finance leases | 3.15 | | 3.64 |
| | | |
Weighted average discount rate: | | | |
Operating leases | 5.06 | % | | 4.88 | % |
Finance leases | 4.19 | % | | 4.02 | % |
The following is a schedule of maturities of lease liabilities as of September 29, 2024 (in thousands):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
Fiscal year ended: | | | |
Remainder of 2024 | $ | 6,710 | | | $ | 3,044 | |
2025 | 23,682 | | | 10,264 | |
2026 | 21,172 | | | 7,676 | |
2027 | 19,475 | | | 5,786 | |
2028 | 17,042 | | | 1,779 | |
Thereafter | 49,071 | | | 746 | |
Total lease payments | 137,152 | | | 29,295 | |
Less: Amount of lease payments representing interest | (21,104) | | | (2,110) | |
Total | $ | 116,048 | | | $ | 27,185 | |
Certain leases require the Company to pay variable property taxes, insurance and maintenance costs that have been excluded from the minimum lease payments in the above tables as they are variable in nature.
12.Income Taxes
Historically, including in the first and second quarters of 2024, the Company has calculated the provision for income taxes for interim periods by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss. However, because fluctuations in estimated ordinary income can result in significant changes in the estimated annual effective tax rate, the Company determined that this method does not provide a reliable estimate for the fiscal nine months ended September 29, 2024. As such, the Company calculates its interim income tax expense for the fiscal nine months ended September 29, 2024 on a discrete basis, consistent with the guidance in ASC 740-270, Income Taxes - Interim Reporting.
The Company’s effective tax rate for the fiscal three months ended September 29, 2024 and October 1, 2023 was 119.9% and 37.2%, respectively, and for the fiscal nine months ended September 29, 2024 and October 1, 2023 was (3.1)% and 37.3%, respectively. The effective tax rate in the current year periods was impacted by the Company’s use of the actual effective tax rate instead of the estimated annual effective tax rate method used in prior interim periods, as well as the disproportionate amount of non-deductible expenses in relation to income before income taxes.
The Company regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain, including in connection with changes in tax laws. The Company maintains a valuation allowance on certain state net operating loss carryforwards. Such valuation allowances are released as the related tax benefits are realized or when sufficient evidence exists to conclude that it is more likely than not the deferred tax assets will be realized.
As of September 29, 2024 and December 31, 2023, the total amount of unrecognized tax benefits relating to uncertain tax positions was $0.5 million.
As of September 29, 2024, with certain exceptions, the Company is no longer subject to U.S. federal, state, local, or Canadian examinations for years before fiscal 2018. As discussed in “Note 14 — Related Parties”, the Company is a party to a tax matters agreement with Southwest Gas Holdings. The agreement outlines the method in which the Company calculates its income tax liability and the manner in which it either reimburses Southwest Gas Holdings for taxes owed or is reimbursed for credits and net operating losses used.
13.Supplemental Cash Flow Disclosures
The following table represents the Company’s supplemental cash flow disclosures and non-cash investing activity, excluding lease activity (which is disclosed in “Note 11 — Leases”) (in thousands):
| | | | | | | | | | | |
| September 29, 2024 | | October 1, 2023 |
Non-cash investing activities: | | | |
Accrued capital expenditures | $ | 4,008 | | | $ | 6,811 | |
Proceeds from sale of property and equipment in accounts receivable | 377 | | | 1,074 | |
14.Related Parties
The Company performs various construction services for Southwest Gas Corporation, a wholly owned subsidiary of Southwest Gas Holdings. The following table represents the Company’s revenue in dollars and as a percentage of total revenue as well as gross profit in dollars and as a percentage of total gross profit relating to contracts with Southwest Gas Corporation (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| September 29, 2024 | | October 1, 2023 | | September 29, 2024 | | | October 1, 2023 | | |
Revenue | $ | 27,232 | | | 4 | % | | $ | 29,250 | | | 4 | % | | $ | 79,191 | | | 4 | % | | | $ | |