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Acquisitions | 9 Months Ended
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Sep. 30, 2019
Acquisitions |
Acquisitions | 2. Acquisitions CSI Electrical Contractors, Inc. On July 15, 2019, the Company completed the acquisition of substantially all the assets of CSI Electrical Contractors, Inc. (“CSI”), an electrical contracting firm based in California. CSI provides services to a broad array of end markets under the Company’s C&I segment. The total consideration paid was approximately $79.7 million, subject to working capital and net asset adjustments, entirely funded through borrowings under the Company’s credit facility. Total consideration paid may include a portion subject to potential net asset adjustments which are expected to be finalized in early 2020. The Company’s preliminary estimate of these net asset adjustments was approximately $0.6 million as of the July 15, 2019 closing date and as of September 30, 2019, 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 contract performance subsequent to the acquisition. The contracts were valued at fair value at the acquisition date, causing no margin guarantee estimate. Changes in contract estimates, such as modified costs to complete or change order recognition, will result in changes to these margin guarantee estimates. Changes in contingent consideration, subsequent to the acquisition, related to the margin guarantee adjustments on contracts of approximately $1.1 million were recorded in other expense for the three and nine months ended September 30, 2019. Future margin guarantee adjustments, if any, are expected to be recognized through 2020. 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 CSI. These payments are recognized as compensation expense in the consolidated statements of operations as incurred. For the three and nine months ended September 30, 2019 the Company has not recognized any compensation expense associated with these contingent payments. The results of operations for CSI 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 three and nine months ended September 30, 2019. The following table summarizes the preliminary allocation of the opening balance sheet from the date of the CSI acquisition through September 30, 2019:
|  | (as of acquisition
|  | date) July 15,
(in thousands) |  | 2019
Consideration paid |  | $ | 79,720
Preliminary estimated net asset adjustments |  |  | 633
Total consideration, net of net asset adjustments |  | $ | 80,353
Accounts receivable, net |  | $ | 59,579
Contract assets |  |  | 38,970
Other current assets |  |  | 83
Property and equipment |  |  | 7,964
Operating lease right-of-use assets |  |  | 9,933
Intangible assets |  |  | 26,000
Other long term assets |  |  | 149
Accounts payable |  |  | (29,533)
Accrued salaries and benefits |  |  | (8,091)
Contract liabilities |  |  | (18,934)
Current portion of operating lease obligations |  |  | (2,526)
Other current liabilities |  |  | (4,776)
Operating lease obligations, net of current maturities |  |  | (7,407)
Long-term debt |  |  | (20)
Net identifiable assets and liabilities |  |  | 71,391
Goodwill |  | $ | 8,962
The Company has developed preliminary estimates of fair value of the assets acquired and liabilities assumed for the purposes of allocating the purchase price. 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 CSI will function as an individual district within the Company’s operating structure. Further adjustments are expected to the allocation as third party valuations of identifiable intangible assets, including backlog, customer relationships, trade name and off-market component, are determined, and as 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:
|  | Three months ended |  | Nine months ended
|  | September 30, |  | September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
(in thousands, except per share data) |  | (unaudited) |  | (unaudited) |  | (unaudited) |  | (unaudited)
Contract revenues |  | $ | 596,600 |  | $ | 474,783 |  | $ | 1,672,149 |  | $ | 1,277,341
Net income |  | $ | 10,743 |  | $ | 5,602 |  | $ | 26,515 |  | $ | 18,940
Net income attributable to MYR Group, Inc. |  | $ | 10,637 |  | $ | 5,600 |  | $ | 27,991 |  | $ | 18,938
Income per common share attributable to MYR Group Inc.: |  |  |  |  |  |  |  |  |  |  |  |
—Basic |  | $ | 0.64 |  | $ | 0.34 |  | $ | 1.69 |  | $ | 1.15
—Diluted |  | $ | 0.64 |  | $ | 0.34 |  | $ | 1.68 |  | $ | 1.14
Weighted average number of common shares and potential common shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |
—Basic |  |  | 16,614 |  |  | 16,492 |  |  | 16,576 |  |  | 16,423
—Diluted |  |  | 16,714 |  |  | 16,630 |  |  | 16,692 |  |  | 16,580
The pro forma combined results of operations for the three and nine months ended September 30, 2019 and 2018 were prepared by adjusting the historical results of the Company to include the historical results of CSI, as if the acquisition occurred on January 1, 2018. These pro forma results were adjusted for the following:
| · |  | additional depreciation associated with the estimated step-up in fair value of the property and equipment acquired;
| · |  | transaction costs associated with the acquisition;
| · |  | estimated compensation expense related to contingent payments associated with the achievement of certain performance targets and continued employment of certain key executives of CSI;
| · |  | the estimated amortization related to the acquired intangible assets discussed above;
| · |  | interest expense recorded by CSI and the additional interest expense related to the incremental borrowings of $79.7 million on the Company’s credit facility as if the borrowing occurred on January 1, 2018; and
| · |  | the income tax effect of pro forma adjustments at the statutory tax rate.
Revenues of approximately $65.0 million and net loss before income taxes of approximately $1.7 million, net of CSI margin guarantee adjustments on contracts of $1.1 million and intangible amortization of $1.1 million, were included in the Company’s consolidated results of operations for the three and nine months ended September 30, 2019 related to the acquisition of CSI. Huen Electric, Inc. On July 2, 2018, the Company completed the acquisition of substantially all 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 after net asset adjustments of $10.8 million was approximately $57.9 million, which was funded through borrowings under the Company’s credit facility. The Company has finalized the purchase price accounting relating to the acquisition of the Huen Companies. All goodwill and identifiable intangible assets are expected to be tax deductible per applicable Internal Revenue Service regulations. The purchase agreement also included contingent consideration provisions for margin guarantee adjustments based upon performance subsequent to the acquisition on certain contracts. The contracts were 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 were not significant for the three months ended September 30, 2019 and $1.4 million for the nine months ended September 30, 2019. Future margin guarantee adjustments, if any, are expected to be recognized in 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 three and nine months ended September 30, 2019, the Company recognized $0.9 million and $1.4 million, respectively, of compensation expense associated with these contingent payments. The following table summarizes the allocation of the opening balance sheet from the date of the Huen Companies acquisition through September 30, 2019:
|  | (as of |  | Measurement |  |  |
|  | acquisition date) |  | Period |  | Final Acquisition
(in thousands) |  | July 2, 2018 |  | Adjustments |  | Allocation
Consideration paid |  | $ | 47,082 |  | $ | — |  | $ | 47,082
Preliminary estimated net asset adjustments |  |  | 10,749 |  |  | 85 |  |  | 10,834
Total consideration, net of net asset adjustments |  | $ | 57,831 |  | $ | 85 |  | $ | 57,916
Accounts receivable, net |  | $ | 33,903 |  | $ | (207) |  | $ | 33,696
Contract assets |  |  | 10,570 |  |  | 1,010 |  |  | 11,580
Other current and long term assets |  |  | 88 |  |  | (11) |  |  | 77
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) |  |  | 49 |  |  | (6,521)
Net identifiable assets and liabilities |  |  | 25,193 |  |  | 24,392 |  |  | 49,585
Unallocated intangible assets |  |  | 9,800 |  |  | (9,800) |  |  | —
Total acquired assets and liabilities |  |  | 34,993 |  |  | 14,592 |  |  | 49,585
Fair value of acquired noncontrolling interest |  |  | (1,273) |  |  | (7) |  |  | (1,280)
Goodwill |  | $ | 24,111 |  | $ | (14,500) |  | $ | 9,611

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