Acquisitions

12 Months Ended

Dec. 31, 2018

2. Acquisitions

Huen Electric, Inc.

On July 2, 2018,

the Company completed the acquisition of substantially all of the assets of Huen Electric, Inc., an electrical contracting firm based in Illinois, Huen Electric New Jersey Inc., an electrical contracting firm based in New Jersey, and Huen New York, Inc., an electrical contracting firm based in New York (collectively, the “Huen Companies”). The Huen Companies provide a wide range of commercial and industrial electrical construction capabilities under the Company’s C&I segment in Illinois, New Jersey and New York. The total consideration paid was approximately

47.1

million, subject to working capital and net asset adjustments, which was funded through borrowings on the line of credit. Total consideration paid may include a portion subject to potential net asset adjustments which are expected to be finalized in early 2019. The Company’s preliminary estimate of these net asset adjustments was approximately

10.7

million as of the July 2, 2018 closing date and approximately $11.2 million as of December 31, 2018,

which will increase the total consideration to be paid, and is recorded in other current liabilities on the consolidated balance sheets.

The purchase agreement also includes contingent consideration provisions for margin guarantee adjustments based upon performance subsequent to the acquisition on certain contracts. The contracts are valued at fair value at the acquisition date, causing no margin guarantee estimate or adjustments for fair value. Changes in contract estimates, such as modified costs to complete or change order recognition, have resulted and will continue to result in changes to these margin guarantee estimates. Changes in contingent consideration, subsequent to the acquisition, related to the margin guarantee adjustments on certain contracts of approximately

$3.9 million were recorded in other expense for the year ended

December 31, 2018

. Future margin guarantee adjustments, if any, are expected to be recognized through

2019

. The Company could also be required to make compensation payments contingent on the successful achievement of certain performance targets and continued employment of certain key executives of the Huen Companies. These payments are recognized as compensation expense in the consolidated statements of operations as incurred. For the year ended

December 31, 2018

the Company recognized $

0.6 million of compensation expense associated with these contingent payments.

The results of operations for Huen Companies are included in the Company’s consolidated statement of operations and the C&I segment from the date of acquisition. Costs of approximately $0.3 million related to the acquisition were included in selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2018.

The following table summarizes the preliminary allocation of the opening balance sheet from the date of acquisition through December 31, 2018:

(in thousands)	(as of acquisition date) July 2, 2018			Measurement Period Adjustments			Adjusted acquisition amounts as of December 31, 2018
Consideration paid	$	47,082		$	—		$	47,082
Preliminary estimated net asset adjustments		10,749			461			11,210
Total consideration, net of net asset adjustments	$	57,831		$	461		$	58,292
Accounts receivable	$	33,903		$	206		$	34,109
Contract assets		10,570			1,010			11,580
Other current and long term assets		88			1			89
Property and equipment		3,188			—			3,188
Intangible assets		—			24,300			24,300
Accounts payable		(9,592	)		(1,274	)		(10,866	)
Contract liabilities		(6,394	)		525			(5,869	)
Other current liabilities		(6,570	)		—			(6,570	)
Net identifiable assets and liabilites		25,193			24,768			49,961
Unallocated intangible assets		9,800			(9,800	)		—
Total aquired assets and liabilites		34,993			14,968			49,961
Fair value of aquired noncontrolling interests		(1,273	)		(7	)		(1,280	)
Goodwill	$	24,111		$	(14,500	)	$	9,611

The Company has developed preliminary estimates of fair value of the assets acquired and liabilities assumed for the purposes of allocating the purchase price. In conjunction with the acquisition of the Huen Companies, the Company acquired a majority-ownership of an ongoing joint venture. The assets acquired within the joint venture are recorded at their fair value at the time of the acquisition, relate to a specific contract, and no assets or liabilities outside of the operations of the contract existed at the acquisition date. The goodwill to be recognized, which represents the excess of the purchase price over the net amount of the fair values assigned to assets acquired and liabilities assumed, is primarily attributable to the value of an assembled workforce and other non-identifiable assets. No synergies were anticipated in the acquisition as the three companies will function as individual districts within the Company’s operating structure. There may be further adjustments to the total consideration as the net asset adjustments are finalized. Additionally, the Company will perform an analysis of the purchase price allocation and make appropriate adjustments based on the analysis. All of the goodwill and identifiable intangible assets are expected to be tax deductible per applicable Internal Revenue Service regulations.

The following unaudited supplemental pro forma results of operations have been provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following pro forma financial information because of future events and transactions, as well as other factors:

	Year ended December 31,
(In thousands, except per share data)	2018		2017
	(unaudited)		(unaudited)
Contract revenues	$	1,612,618	$	1,523,328
Net income	$	35,872	$	26,531
Net income attributable to MYR Group, Inc.	$	34,947	$	25,561
Income per common share:
– Basic	$	2.13	$	1.57
– Diluted	$	2.11	$	1.55
Weighted average number of common shares and potential common shares outstanding:
– Basic		16,441		16,273
– Diluted		16,585		16,496

The pro forma combined results of operations for years ended December 31, 2018 and 2017 were prepared by adjusting the historical results of the Company to include the historical results of the Huen Companies as if the acquisition occurred on January 1, 2017. These pro forma results were adjusted for the following:



To include additional depreciation associated with the estimated step-up in fair value of the property and equipment acquired.



To record the net reduction in lease expense associated with the revised real estate lease contracts that were completed at the time of the acquisition.



To record transaction costs associated with the acquisition.



To record the estimated amortization related to the acquired intangible assets discussed above.



To record the additional interest expense related to the incremental borrowings of $

47.1

million on the Company’s credit facility as if the borrowing occurred on January 1, 2017.



To reflect the income tax effect of pro forma adjustments at the statutory tax rate.



To record estimated compensation payments contingent on the successful achievement of certain performance targets.

Revenues of approximately $69.0 million and income before income taxes of approximately $0.5 million, were included in the Company’s consolidated results of operations for the year ended December 31, 2018 related to the acquisition of the Huen Companies.

Western Pacific Enterprises Ltd.

On October 28, 2016, the Company completed the acquisition of substantially all of the assets of Western Pacific Enterprises GP and Western Pacific Enterprises Ltd., except for certain real estate owned by Western Pacific Enterprises Ltd., with the company continuing operations under the name Western Pacific Enterprises Ltd. (“WPE”), an electrical contracting firm in western Canada. With its main headquarters in Coquitlam, British Columbia, WPE provides a wide range of commercial and industrial electrical construction capabilities under the Company’s C&I segment. WPE also provides substation construction capabilities under the Company’s T&D segment. The total consideration paid was approximately $12.1 million, which was funded through borrowings from our line of credit. Total consideration paid included $2.2 million subject to potential net asset adjustments. These net asset adjustments were approximately $0.8 million as of the October 28, 2016 closing date and as of December 31, 2017. The Company accounted for the net asset adjustments as a reduction to consideration paid which was funded through the return of funds held in a $1.9 million escrow account, established at the time of purchase. The purchase agreement also included provisions for margin guarantee adjustments based upon performance subsequent to the acquisition on certain contracts. In early 2018, the Company finalized an agreement to settle all amounts outstanding under the margin guarantee adjustment provision as well as previous contingent compensation agreements that were being recognized as compensation expense in the consolidated statement of operations as incurred. As a result, the Company recorded other expense of $2.3 million for the year ended December 31, 2017 and reversed the compensation expense that was previously recorded. The Company had previously recognized other income of $1.4 million relating to the margin guarantee adjustments provision for the year ended December 31, 2016.