INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The forward-looking statements can be identified by the use of forward-looking terminology including "may," "should," "likely," "will," "believe," "expect," "anticipate," "estimate," "forecast," "seek," "target," "continue," "plan," "intend," "project," or other similar words. All statements, other than statements of historical fact included in this Quarterly Report, regarding expectations for the impact of COVID-19, future financial performance, business strategies, expectations for our business, future operations, liquidity positions, availability of capital resources, financial position, estimated revenues and losses, projected costs, prospects, plans, objectives and beliefs of management are forward-looking statements. These forward-looking statements are based on information available as of the date of this Quarterly Report and our management's current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove correct. Forward-looking statements should not be relied upon as representing our views as of any subsequent date. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ include: •potential risks and uncertainties relating to COVID-19, including the geographic spread, the severity of the disease, the scope and duration of the COVID-19 pandemic, actions that may be taken by governmental authorities to contain the COVID-19 pandemic or to treat its impact, and the potential negative impacts of COVID-19 on economies and financial markets; •availability of commercially reasonable and accessible sources of liquidity and bonding; •our ability to generate cash flow and liquidity to fund operations; •the timing and extent of fluctuations in geographic, weather and operational factors affecting our customers, projects and the industries in which we operate; •our ability to identify acquisition candidates and integrate acquired businesses; •consumer demand; •our ability to grow and manage growth profitably; •the possibility that we may be adversely affected by economic, business, and/or competitive factors; •market conditions, technological developments, regulatory changes or other governmental policy uncertainty that affects us or our customers; •our ability to manage projects effectively and in accordance with management estimates, as well as the ability to accurately estimate the costs associated with our fixed price and other contracts, including any material changes in estimates for completion of projects; •the effect on demand for our services and changes in the amount of capital expenditures by customers due to, among other things, economic conditions, commodity price fluctuations, the availability and cost of financing, and customer consolidation; •the ability of customers to terminate or reduce the amount of work, or in some cases, the prices paid for services, on short or no notice; •customer disputes related to the performance of services; •disputes with, or failures of, subcontractors to deliver agreed-upon supplies or services in a timely fashion; •our ability to replace non-recurring projects with new projects; •the impact ofU.S. federal, local, state, foreign or tax legislation and other regulations affecting the renewable energy industry and related projects and expenditures; •the effect of state and federal regulatory initiatives, including costs of compliance with existing and future safety and environmental requirements; •fluctuations in equipment, fuel, materials, labor and other costs; •our beliefs regarding the state of the renewable wind energy market generally; and •the "Risk Factors" described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , and in our quarterly reports, other public filings and press releases. 23 --------------------------------------------------------------------------------
We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Throughout this section, unless otherwise noted "IEA," "Company," "we," "us," and "our" refer toInfrastructure and Energy Alternatives, Inc. and its consolidated subsidiaries. Certain amounts in this section may not foot due to rounding. Overview We are a leading diversified infrastructure construction company with specialized energy and heavy civil expertise throughoutthe United States . We segregate our business into two reportable segments: the Renewables segment and the Specialty Civil segment. The Renewables segment operates throughoutthe United States and specializes in a range of services for the power delivery, solar, wind and battery storage markets that includes design, procurement, construction, restoration, and maintenance. The Company is one of the largest providers in the renewable energy industry and has completed more than 200 utility scale wind and solar projects in 35 states.
The Specialty Civil segment operates throughout
•Heavy civil construction services such as road and bridge construction, specialty paving, sports field development, industrial maintenance, outsourced contract mining and heavy hauling.
•Environmental remediation services such as site development, environmental site closure, and coal ash management. •Rail infrastructure services such as planning, design, procurement, construction and maintenance of major railway and intermodal facilities.
The Company has created a diverse national platform of specialty construction capabilities with market leadership in the niche markets of power delivery, solar power, wind power, rail, heavy civil and environmental.
Coronavirus Pandemic Update
The COVID-19 pandemic continues to significantly impactthe United States and the world. Since the start of the COVID-19 pandemic, we have been focused on the safety of our employees and ensuring that our construction sites are managed by taking all reasonable precautions to protect on-site personnel.
We took the following actions in the first half of 2020 to address the risks attributable to the COVID-19 pandemic:
•We established a dedicated COVID-19 task force representing all parts of the Company to review and implement actions to prepare for the impacts on our operations, including a variety of protocols in the areas of social distancing, working from home, emergency office and project site closures, and travel restrictions.
•In addition to our existing site crisis management plans, our operations expanded and implemented their pandemic response plans to ensure a consistent, comprehensive response to various COVID-19 scenarios.
•We implemented more stringent office and project site cleaning and hygiene protocols in all locations. We also developed more stringent tool, vehicle and equipment cleaning protocols. •For employees, we established a regularly updated COVID-19 information hub with FAQs, important communications, regularly updated protocols, business planning tools, best practices, signage/flyers and other important resources.
•We significantly increased communications, signage and oversight of personal hygiene requirements to drive better prevention practices.
•We postponed social gatherings, large in-person training sessions and other activities involving groups of 10 or more.
24
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•We prohibited virtually all Company air travel unless approved by executive
leadership. We also required all employees to report their personal travel
schedules in order to closely monitor and take any necessary steps to maintain
the safety of our workforce.
•We increased our efforts to reduce selling, general and administrative expenses
by implementing a hiring freeze, delaying the Company 401(k) match until later
in the year, prohibiting all non-essential travel, reducing new initiatives,
deferring promotions and salary changes, and canceling any non-essential capital
expenditures or consulting work.
•To mitigate the effects of working from home and travel bans, we significantly increased the use of remote communication technologies.
We are actively monitoring the COVID-19 pandemic, including disease progression, federal, state and local government actions,CDC and WHO responses, supplier and supply chain risks, and prevention and containment measures to maintain business operations. As the COVID-19 pandemic and the responses by federal, state and local governments continue to evolve, we continue to make adjustments to our practices and policies to protect the health of our employees and those we work with at our projects and office locations, while continuing to provide our essential construction services to our clients. We believe that the foregoing actions have significantly reduced the Company's exposure to the effects of COVID-19, including our workforce's exposure to infection from COVID-19. As of today, we have had a low incidence of infection in our workforce. The impact of COVID-19 on construction businesses such as ours is evolving rapidly and its future effects are uncertain. The Company has received several notices of force majeure from project owners as a result of delivery delays due to COVID-19. We have experienced project interruptions and restrictions that have delayed project timelines from those originally planned, and we have experienced some temporary work stoppages. This has led to general inefficiencies from having to start and stop work, re-sequencing work, requiring on-site health screenings before entering a job site, and following proper social distancing practices. To date, the inefficiencies we have experienced have had an unquantifiable negative impact on our results of operations during the third quarter and management does not anticipate a negative impact going forward from slower delivery of equipment. However, we cannot predict significant disruptions beyond our control, including quarantines and customer work stoppages, significant force majeure declarations by our suppliers or other equipment providers material to our projects.
We have also noticed an impact of COVID-19 in adding new projects to our
backlog. Our bidding activity continues at very high levels, but the final
approval process for some projects has been slowed due to COVID-19. Despite
that, we were able to add
We are continuing to take actions to preserve our liquidity such as limiting our hiring and delaying spending on non-critical initiatives. At this point, we do not believe that COVID-19 is having a negative impact on our liquidity. We could see a change in this status if we experience future work stoppages at our projects which would prevent us from billing customers for new work performed. If the federal, state and local governments proceed with more restrictive measures, and our customers determine to stop work or terminate projects, these actions would negatively impact our business, results of operations, liquidity and prospects. In addition, the Company is unable to predict any changes in the market for bonding by our sureties.
Economic and Market Factors
We closely monitor the effects that changes in economic and market conditions may have on our customers. General economic and market conditions can negatively affect demand for our customers' products and services, which can lead to reductions in our customers' capital and maintenance budgets in certain end-markets. In the face of increased pricing pressure, we strive to maintain our profit margins through productivity improvements and cost reduction programs. Other market, regulatory and industry factors could also affect demand for our services, such as:
•changes to our customers' capital spending plans;
•mergers and acquisitions among the customers we serve;
•access to capital for customers in the industries we serve;
25
--------------------------------------------------------------------------------•changes in tax and other incentives;
•new or changing regulatory requirements or other governmental policy uncertainty;
•economic, market or political developments; and
•changes in technology.
We cannot predict the effect that changes in such factors may have on our future results of operations, liquidity and cash flows, and we may be unable to fully mitigate, or benefit from, such changes. Industry Trends Our industry is composed of national, regional and local companies in a range of industries, including renewable power generation, traditional power generation and the civil infrastructure industries. We believe the following industry trends will help to drive our growth and success over the coming years: Renewables - We have maintained a focus on construction of renewable power production capacity as renewable energy, particularly from wind and solar. OnDecember 16, 2019 , the federal government implemented an agreement that extended lapsed and expiring tax breaks for wind renewable projects. The extension provides a single year extension of the production tax credit ("PTC") at a 60% level and the investment tax credit ("ITC") at an 18% level to qualifying projects for which the construction commencement date is now prior toJanuary 1, 2021 . OnMay 27, 2020 , the federal government extended the safe harbor for completion of projects from four years to five years giving an extra year to complete construction due to delays from COVID-19. We believe that demand will continue to remain strong even after expiration due to the following factors:
•Technological advances in turbines sizes and battery storage continue to drive lower costs of electricity generated from wind and solar farms;
•Approximately 40 states, as well as the
•The Annual Energy Outlook 2020 published by theU.S. Department of Energy ("DOE") inJanuary 2020 projected the addition of approximately 117 gigawatts of new utility-scale wind and solar capacity from 2020 to 2023. We estimate that EPC services will account for approximately 30% of the estimated$28.4 billion of construction over that time period. We believe that a reduction of owner financing related to the current COVID-19 environment could cause delays or cancellations of future projects which could challenge our future revenue streams in the Renewables segment: Specialty Civil - Our Specialty Civil revenue has been generated through a combination of heavy civil construction, rail construction and environmental remediation. OnSeptember 22, 2020 , the federal highway, bridge and public transportation programs would be extended for one year under a House bill that also funds the federal government. With this extension expected to be approved, we believe that demand will continue to remain strong based on the following factors: •Heavy civil - the FMI 2020 Overview Report published in the fourth quarter of 2019 project that nonresidential construction put in place forthe United States will be over$850 million per year from 2020 to 2023. •Rail - Fostering Advancements in Shipping And Transportation For The Long-Term Achievement of National Efficiencies (FASTLANE) grants are expected to provide$4.5 billion through 2020 to freight and highway projects of national or regional significance. •Environmental remediation - According to theAmerican Coal Ash Association , more than 102.3 million tons of coal ash was generated in 2018 and 42% of coal ash generated was disposed of. We believe that a decrease in consumption taxes due to COVID-19 could cause decreases in state departments of transportation budgets from lack of revenues thus reducing civil construction projects which could challenge our future revenue streams in the Specialty Civil segment. 26 --------------------------------------------------------------------------------
Impact of Seasonality and Cyclical Nature of Business
Our revenue and results of operations are subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, project schedules and timing, in particular, for large non-recurring projects and holidays. Typically, our revenue in our Renewable segment is lowest in the first quarter of the year because cold, snowy or wet conditions experienced in the northern climates are not conducive to efficient or safe construction practices. Revenue in the second quarter is typically higher than in the first quarter, as some projects begin, but continued cold and wet weather and effects from thawing ground conditions can often impact second quarter productivity. The third and fourth quarters are typically the most productive quarters of the year as a greater number of projects are underway and weather is normally more accommodating to construction projects. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive impact on our revenue. Nevertheless, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects. Any quarter may be positively or negatively affected by adverse or unusual weather patterns, including excessive rainfall, warm winter weather or natural catastrophes such as hurricanes or other severe weather, making it difficult to predict quarterly revenue and margin variations. The Company started construction on 2020 renewable projects in late 2019 due to the desire of our customers to finish these projects beforeSeptember 30, 2020 . This shift in demand impacted 2020 quarterly revenues, which shifted revenue from the fourth quarter back into the second and third quarter of 2020. Our revenue and results of operations for our Specialty Civil segment are also affected by seasonality but to a lesser extent as these projects are more geographically diverse and located in less severe weather areas. While the first and second quarter revenues are typically lower than the third and fourth quarter, this diversity has allowed this segment to be less seasonal over the course of the year. Our industry is also highly cyclical. Fluctuations in end-user demand within the industries we serve, or in the supply of services within those industries, can impact demand for our services. As a result, our business may be adversely affected by industry declines or by delays in new projects. Variations in project schedules or unanticipated changes in project schedules, in particular, in connection with large construction and installation projects, can create fluctuations in revenue, which may adversely affect us in a given period. In addition, revenue from master service agreements, while generally predictable, can be subject to volatility. The financial condition of our customers and their access to capital, variations in project margins, regional, national and global economic, political and market conditions, regulatory or environmental influences, and acquisitions, dispositions or strategic investments can also materially affect quarterly results. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period. Critical Accounting Policies and Estimates This discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of our condensed consolidated financial statements requires the use of estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about our operating results, including the results of construction contracts accounted for under the cost-to-cost method, and the carrying values of assets and liabilities that are not readily apparent from other sources. Given that management estimates, by their nature, involve judgments regarding future uncertainties, actual results may differ from these estimates if conditions change or if certain key assumptions used in making these estimates ultimately prove to be inaccurate. Refer to Note 1. Business, Basis of Presentation and Significant Accounting Policies in the notes to our condensed consolidated financial statements and to our 2019 Form 10-K for discussion of our significant accounting policies. We believe that our key estimates include: the recognition of revenue and project profit or loss; fair value estimates, including those related to Series B Preferred Stock; valuations of goodwill and intangible assets; asset lives used in computing depreciation and amortization; accrued self-insured claims; other reserves and accruals; accounting for income taxes; and the estimated impact of contingencies and ongoing litigation. While management believes that such estimates are reasonable when considered in conjunction with the Company's condensed consolidated financial position and results of operations, actual results could differ materially from those estimates. 27 --------------------------------------------------------------------------------
"Emerging Growth Company" Status
As ofDecember 31, 2019 , the Company's total annual gross revenues exceed$1.07 billion and we are no longer an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"). See Note 1. Business, Basis of Presentation and Significant Accounting Policies to our condensed consolidated financial statements for more information.
Results of Operations
Three Months Ended
The following table reflects our condensed consolidated results of operations in dollar and percentage of revenue terms for the periods indicated:
Three Months Ended September 30,
(in thousands) 2020 2019
Revenue $ 522,232 100.0 % $ 422,022 100.0 %
Cost of revenue 463,343 88.7 % 369,152 87.5 %
Gross profit 58,889 11.3 % 52,870 12.5 %
Selling, general and administrative expenses 29,656 5.7 % 31,313 7.4 %
Income from operations 29,233 5.6 % 21,557 5.1 %
Interest expense, net (14,975) (2.9) % (13,959) (3.3) %
Other income 3,161 0.6 % 4,455 1.1 %
Income from continuing operations before income
taxes 17,419 3.3 % 12,053 2.9 %
(Provision) benefit for income taxes (6,153) (1.2) % 556 0.1 %
Net income $ 11,266 2.2 % $ 12,609 3.0 %
We review our operating results by reportable segment. See Note 10. Segments in
the notes to the condensed consolidated financial statements in Part 1.
Financial Statements. Management's review of reportable segment results includes
analyses of trends in revenue and gross profit. The following table presents
revenue and gross profit by reportable segment for the periods indicated:
Three Months Ended September 30,
(in thousands) 2020 2019
% of Total % of Total
Segment Revenue Revenue Revenue Revenue
Renewables $ 327,051 62.6 % $ 242,654 57.5 %
Specialty Civil 195,181 37.4 % 179,368 42.5 %
Total revenue $ 522,232 100.0 % $ 422,022 100.0 %
Gross Profit Gross Profit
Segment Gross Profit Margin Gross Profit Margin
Renewables $ 37,371 11.4 % $ 27,469 11.3 %
Specialty Civil 21,518 11.0 % 25,401 14.2 %
Total gross profit $ 58,889 11.3 % $ 52,870 12.5 %
28-------------------------------------------------------------------------------- The following discussion and analysis of our results of operations should be read in conjunction with our condensed consolidated financial statements and the notes relating thereto, included in Item 1 of this Quarterly Report on Form 10-Q.
Revenue. Revenue increased 23.7%, or
Renewables Segment. Renewables revenue was$327.1 million for the third quarter of 2020, as compared to$242.7 million for the same period in 2019, an increase of$84.4 million , or 34.8%. The increase was primarily due to the expansion of our solar division of$65.2 million coupled with more favorable weather conditions at job sites. Specialty Civil Segment. Specialty Civil revenue was$195.2 million for the third quarter of 2020, as compared to$179.4 million for the same period in 2019, an increase of$15.8 million , or 8.8% . The increase was primarily due to an increase in the number of projects under construction in our heavy civil and rail divisions.
Gross profit. Gross profit increased 11.4%, or
Renewables Segment. Gross profit was$37.4 million for the second quarter of 2020, as compared to$27.5 million for the same period in 2019. As a percentage of revenue, gross profit was 11.4% in the quarter, as compared to 11.3% in the prior-year period. The increase in gross profit dollars is related to a larger number and greater average value of construction projects. Specialty Civil Segment. Gross profit was$21.5 million for the second quarter of 2020, as compared to$25.4 million for the same period in 2019. As a percentage of revenue, gross profit was 11.0% in the quarter, as compared to 14.2% in the prior-year period. The decrease in dollars and percentage was related to lower margins generated on a greater number of heavy civil projects compared to rail and environmental in the prior year. Selling, general and administrative expenses. Selling, general and administrative expenses decreased 5.3%, or$1.7 million , in the third quarter of 2020, compared to the same period in 2019. Selling, general and administrative expenses were 5.7% of revenue in the third quarter of 2020, compared to 7.4% in the same period in 2019. The decrease in selling, general and administrative expenses was primarily driven by lower professional fees in 2020 compared to 2019 due to transaction fees on Series B Preferred Stock. This decrease was offset by increased compensation expense related to significantly larger operations in both of the Company's operating segments. Interest expense, net. Interest expense, net increased by$1.0 million , in the third quarter of 2020, compared to the same period in 2019. This increase was primarily driven by dividends on Series B Preferred Stock, which have a higher effective interest rate than our term loan and are recorded as interest expense. Other income. Other income decreased by$1.3 million , to$3.2 million in the third quarter of 2020 from$4.5 million for the same period in 2019. This decrease was primarily the result of the impact of reducing a contingent liability in the third quarter of 2019, compared to a decrease in the warrant liability in the third quarter of 2020. See further discussion in Note 8. Earnings Per Share included in Item 1 of this Quarterly Report on Form 10-Q. Provision for income taxes. Provision for income taxes increased$6.7 million , to an expense of$6.2 million in the third quarter of 2020, compared to a benefit of$0.6 million for the same period in 2019. The effective tax rates for the period endedSeptember 30, 2020 and 2019 were 35.3% and (4.6)%, respectively. The higher effective tax rate in the third quarter of 2020 was primarily attributable to accrued dividends for the Series B Preferred Stock which are recorded as interest expense and not deductible for federal and state income taxes. The three months endedSeptember 30, 2020 have the full impact of all the Series B Preferred Stock that was issued in 2019 whereas the three months endedSeptember 30, 2019 only have a relatively small amount of non-deductible Series B Preferred Stock expenses. There were no changes in uncertain tax positions during the periods endedSeptember 30, 2020 and 2019. 29 --------------------------------------------------------------------------------
Nine Months Ended
The following table reflects our condensed consolidated results of operations in dollar and percentage of revenue terms for the periods indicated:
Nine Months Ended September 30,
(in thousands) 2020 2019
Revenue $ 1,360,999 100 % $ 939,764 100.0 %
Cost of revenue 1,214,828 89.3 % 849,728 90.4 %
Gross profit 146,171 10.7 % 90,036 9.6 %
Selling, general and administrative expenses 87,214 6.4 % 84,945 9.0 %
Income from operations 58,957 4.3 % 5,091 0.5 %
Interest expense, net (47,240) (3.5) % (35,822) (3.8) %
Other income 428 - % 22,557 2.4 %
Income from continuing operations before income
taxes 12,145 0.9 % (8,174) (0.9) %
(Provision) benefit for income taxes (10,025) (0.7) % 3,352 0.4 %
Net income (loss) $ 2,120 0.2 % $ (4,822) (0.5) %
(in thousands)
Nine Months Ended
2020 2019
% of Total % of Total
Segment Revenue Revenue Revenue Revenue
Renewables $ 900,059 66.1 % $ 495,834 52.8 %
Specialty Civil 460,940 33.9 % 443,930 47.2 %
Total revenue $ 1,360,999 100.0 % $ 939,764 100.0 %
Gross Profit Gross Profit
Segment Gross Profit Margin Gross Profit Margin
Renewables $ 100,183 11.1 % $ 44,777 9.0 %
Specialty Civil 45,988 10.0 % 45,259 10.2 %
Total gross profit $ 146,171 10.7 % $ 90,036 9.6 %
Revenue. Revenue increased 44.8%, or
Renewables Segment. Renewables revenue was$900.1 million for the first nine months of 2020, as compared to$495.8 million for the same period in 2019, an increase of$404.2 million , or 81.5%. The increase was primarily due to more favorable weather conditions at job sites, the benefit from mobilization of several wind projects at the end of 2019, an increase in the number and value of projects during the quarter and to a lesser extent the increase in the solar division. Specialty Civil Segment. Specialty Civil revenue was$460.9 million for the first nine months of 2020, as compared to$443.9 million for the same period in 2019, an increase of$17.0 million , or 3.8%. The increase was primarily due to an increase in the number of projects under construction in our heavy civil and rail divisions. Gross profit. Gross profit increased 62.3%, or$56.1 million , in the first nine months of 2020, compared to the same period in 2019. As a percentage of revenue, gross profit was 10.7% in the quarter, as compared to 9.6% in the prior-year period. The 2020 gross profit included the impact of recognizing increased potential future costs from the COVID-19 pandemic, which 30 --------------------------------------------------------------------------------
reduced gross margin and based on expected project completion, we could
recognize an increase of margin in the fourth quarter of up to
Renewables Segment. Gross profit was$100.2 million for the first nine months of 2020, as compared to$44.8 million for the same period in 2019. As a percentage of revenue, gross profit was 11.1% in the quarter, as compared to 9.0% in the prior-year period. The increase in gross profit percentage and dollars is related to the increased revenue, coupled with reduced adverse weather conditions in 2020 and a larger number and greater average value of construction projects. Specialty Civil Segment. Gross profit was$46.0 million for the first nine months of 2020, as compared to$45.3 million for the same period in 2019. As a percentage of revenue, gross profit was 10.0% in the quarter, as compared to 10.2% in the prior-year period. Gross profit was consistent year over year. Selling, general and administrative expenses. Selling, general and administrative expenses decreased 2.7%, or$2.3 million , in the first nine months of 2020, compared to the same period in 2019. Selling, general and administrative expenses were 6.4% of revenue in the first nine months of 2020, compared to 9.0% in the same period in 2019. The decrease in selling, general and administrative expenses was primarily driven by lower professional fees in 2020 compared to 2019 due to transaction fees on Series B Preferred Stock. This decrease was offset by increased compensation expense related to significantly larger operations in both of the Company's operating segments. Interest expense, net. Interest expense, net increased by$11.4 million , in the first nine months of 2020, compared to the same period in 2019. This increase was primarily driven by dividends on Series B Preferred Stock, which have a higher effective interest rate than our term loan and are recorded as interest expense. Other income (expense). Other income (expense) decreased by$22.1 million , to other income of$0.4 million in the first nine months of 2020, compared to other income of$22.5 million for the same period in 2019. This decrease was primarily the result of the impact of reducing a contingent liability by$22.5 million in 2019. See further discussion in Note 8. Earnings Per Share included in Item 1 of this Quarterly Report on Form 10-Q. Provision for income taxes. Provision for income taxes increased$13.4 million , to an expense of$10.0 million in the first nine months of 2020, compared to a benefit of$3.4 million for the same period in 2019. The effective tax rates for the period endedSeptember 30, 2020 and 2019 were 82.5% and 41.0%, respectively. The higher effective tax rate in the first nine months of 2020 was primarily attributable to accrued dividends for the Series B Preferred Stock which are recorded as interest expense and not deductible for federal and state income taxes. The nine months endedSeptember 30, 2020 have the full impact of all the Series B Preferred Stock that was issued in 2019 whereas the nine months endedSeptember 30, 2019 only have a relatively small amount of non-deductible Series B Preferred Stock expenses. There were no changes in uncertain tax positions during the periods endedSeptember 30, 2020 and 2019.
Backlog
For companies in the construction industry, backlog can be an indicator of future revenue streams. Estimated backlog represents the amount of revenue we expect to realize from the uncompleted portions of existing construction contracts, including new contracts under which work has not begun and awarded contracts for which the definitive project documentation is being prepared, as well as revenue from change orders and renewal options. Estimated backlog for work under fixed price contracts and cost-reimbursable contracts is determined based on historical trends, anticipated seasonal impacts, experience from similar projects and estimates of customer demand based on communications with our customers. Cost-reimbursable contracts are included in backlog based on the estimated total contract price upon completion. As ofSeptember 30, 2020 andDecember 31, 2019 , our total backlog was approximately$1.9 billion and$2.2 billion , respectively, compared to$2.6 billion as ofSeptember 30, 2019 . The decrease from the prior year end and the prior year period was primarily related to timing based on a slow down in the bid approval process related to COVID-19. See ''Coronavirus Pandemic Update'' for further discussion. The Company expects to recognize revenue related to its backlog of 18.7% for the remainder of 2020, 50.8% in 2021, and 30.5% in 2022 and beyond. 31
-------------------------------------------------------------------------------- The following table summarizes our backlog by segment as ofSeptember 30, 2020 andDecember 31, 2019 : (in millions) Segments September 30, 2020 December 31, 2019 Renewables $ 1,435.5 $ 1,582.5 Specialty Civil 472.2 588.7 Total $ 1,907.7 $ 2,171.2 Based on historical trends in the Company's backlog, we believe awarded contracts to be firm and that the revenue for such contracts will be recognized over the life of the project. Timing of revenue for construction and installation projects included in our backlog can be subject to change as a result of customer delays, regulatory factors and/or other project-related factors. These changes could cause estimated revenue to be realized in periods later than originally expected, or not at all. In the past, we have occasionally experienced postponements, cancellations and reductions on construction projects, due to market volatility and regulatory factors. There can be no assurance as to our customers' requirements or the accuracy of our estimates. As a result, our backlog as of any particular date is an uncertain indicator of future revenue and earnings. Backlog is not a term recognized under GAAP, although it is a common measurement used in our industry. Our methodology for determining backlog may not be comparable to the methodologies used by others. See ''Item 1A. Risk Factors'' in our Annual Report on Form 10-K filed with theSEC onMarch 12, 2020 for a discussion of the risks associated with our backlog.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash flows from operations, our cash
balances and availability under our Third A&R Credit Agreement. Our primary
liquidity needs are for working capital, debt service, dividends on our Series A
Preferred Stock and Series B Preferred Stock, income taxes, capital
expenditures, insurance collateral, and strategic acquisitions. As of
We anticipate that our existing cash balances, funds generated from operations, and borrowings will be sufficient to meet our cash requirements for the next twelve months. No assurance can be given, however, that these sources will be sufficient, because there are many factors which could affect our liquidity, including some which are beyond our control. Please see "Item 1A. Risk Factors" in Part I of our Annual Report on Form 10-K filed with theSEC onMarch 12, 2020 for a discussion of the risks associated with our liquidity. Please also see ''Item 1A. Risk Factors'' of Part II of this Quarterly Report on Form 10-Q. OnOctober 30, 2020 , we entered into a First Amendment to our Third A&R Credit Agreement (the "Amendment"). The Amendment provides for, among other things, an increase in the revolving credit commitments previously available by$25.0 million , bringing the aggregate principal amount of the revolving credit commitments under the Third A&R Credit Agreement to$75.0 million , upon the terms and subject to the satisfaction of the conditions set forth in the Third A&R Credit Agreement, as amended by the Amendment. The Amendment also changes the calculation of the interest rate and the commitment fee. See Note 12. Subsequent Events to our condensed consolidated financial statements for more information on the terms of the Amendment.
Capital Expenditures
For the nine months endedSeptember 30, 2020 , we incurred$19.3 million in finance lease payments and an additional$6.7 million cash purchases for equipment. We estimate that we will spend approximately two percent of revenue for capital expenditures for 2020 and 2021. Actual capital expenditures may increase or decrease in the future depending upon business activity levels, as well as ongoing assessments of equipment lease versus buy decisions based on short and long-term equipment requirements. 32 --------------------------------------------------------------------------------
Working Capital
We require working capital to support seasonal variations in our business, primarily due to the effect of weather conditions on external construction and maintenance work and the spending patterns of our customers, both of which influence the timing of associated spending to support related customer demand. Our business is typically slower in the first quarter of each calendar year. Working capital needs are generally lower during the spring when projects are awarded and we receive down payments from customers. Conversely, working capital needs generally increase during the summer or fall months due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. Again, working capital needs are typically lower and working capital is converted to cash during the winter months. These seasonal trends, however, can be offset by changes in the timing of projects, which can be affected by project delays or accelerations and/or other factors that may affect customer spending. Generally, we receive 5% to 10% cash payments from our customers upon the inception of our Renewable projects. Timing of billing milestones and project close-outs can contribute to changes in unbilled revenue. As ofSeptember 30, 2020 , substantially all of our costs in excess of billings and earnings will be billed to customers in the normal course of business within the next twelve months. Net accounts receivable balances, which consist of contract billings as well as costs and earnings in excess of billings and retainage, increased to$402.8 million as ofSeptember 30, 2020 from$382.9 million as ofDecember 31, 2019 , due primarily to higher levels of revenue, timing of project activity, and collection of billings to customers. Our billing terms are generally net 30 days, and some of our contracts allow our customers to retain a portion of the contract amount (generally, from 5% to 10%) until the job is completed. As part of our ongoing working capital management practices, we evaluate opportunities to improve our working capital cycle time through contractual provisions and certain financing arrangements. Our agreements with subcontractors often may contain a ''pay-if-paid'' provision, whereby our payments to subcontractors are made only after we are paid by our customers. Sources and Uses of Cash
Sources and uses of cash are summarized below:
Nine Months Ended September 30,
(in thousands) 2020 2019
Net cash used in operating activities (58,798) (55,473)
Net cash provided by (used in) investing activities (1,729) 1,586
Net cash provided by (used in) financing activities (29,434) 25,750
Operating Activities. Net cash used in operating activities for the nine months
ended September 30, 2020 was $58.8 million , as compared to net cash used by
operating activities of $55.5 million over the same period in 2019. The increase
in net cash used by operating activities reflects the timing of receipts from
customers and payments to vendors in the ordinary course of business. The change
was primarily attributable to related to reduced collections of accounts
receivable and lower contract assets offset by increased payments on payables
and accrued liabilities.
Investing Activities. Net cash used by investing activities for the nine months
ended September 30, 2020 was $1.7 million , as compared to net cash provided by
investing activities of $1.6 million over the same period in 2019. The decrease
in net cash provided by investing activities was primarily attributable to a
reduction of proceeds from the sale of property, plant and equipment.
Financing Activities. Net cash used in financing activities for the nine months
ended September 30, 2020 was $29.4 million , as compared to net cash provided of
$25.8 million over the same period in 2019. The reduction of cash provided by
financing activities of $55.2 million was primarily attributable to a sale
leaseback transaction of $24.3 million , proceeds from debt of $50.4 million and
proceeds from the issuance of Series B Preferred Stock of $100.0 million offset
by payments on long-term debt of $121.2 million in 2019.
Series A Preferred Stock
As ofSeptember 30, 2020 , we had 17,483 shares of Series A Preferred Stock issued and outstanding. Each share of Series A Preferred Stock had an initial stated value of$1,000 per share (or approximately$17.5 million in the aggregate). 33 -------------------------------------------------------------------------------- Dividends are paid on the Series A Preferred Stock as, if and when declared by our Board. To extent permitted and only as, if and when declared by the Board, dividends are required to be paid in cash quarterly in arrears on eachMarch 31 ,June 30 ,September 30 andDecember 31 on the stated value at a rate of 10% per annum. If not paid in cash, dividends will accrue on the stated value and will increase the stated value on and effective as of the applicable dividend date without any further action by the Board at 12% per annum. As ofSeptember 30, 2020 , the Company had increased the initial stated value by$3.7 million in the aggregate rather than pay cash dividends. So long as any shares of Series B Preferred Stock of the Company are currently outstanding or from and after the occurrence of any non-payment event or default event and until cured or waived, the foregoing rates will increase by 2% per annum. The Series A Preferred Stock do not have a scheduled redemption date or maturity date. Subject to the terms of the Series B Preferred Stock, we may, at any time and from time to time, redeem all or any portion of the shares of Series A Preferred Stock then outstanding. As a condition to the consummation of any change of control (as described in the certificate governing the Series A Preferred Stock), we are required to redeem all shares of Series A Preferred Stock then outstanding. We are also required to use the net cash proceeds from certain transactions to redeem the maximum number of shares of Series A Preferred Stock that can be redeemed with such net cash proceeds, except as prohibited by the Third A&R Credit Agreement. Based on the stated value of the Series A Preferred Stock as ofSeptember 30, 2020 after giving effect to the accrual of dividends, we would be required to pay quarterly cash dividends in the aggregate of$0.6 million on the Series A Preferred Stock. If our business does not generate enough cash to pay future cash dividends, the dividends will accrue at a rate of 12% per annum and increase the stated value of the Series A Preferred Stock, which will make cash dividends on the Series A Preferred Stock more difficult for us to make in the future. We do not presently expect to pay cash dividends, although an actual decision regarding payment of cash dividends on the Series A Preferred Stock will be made at the time of the applicable dividend payment based upon availability of capital resources, business conditions, other cash requirements, and other relevant factors. Series B Preferred Stock As ofSeptember 30, 2020 , we had 199,474 shares of Series B Preferred Stock issued and outstanding. Each share of Series B Preferred Stock had an initial stated value of$1,000 per share (or approximately$199.5 million in the aggregate). Our common stock and Series A Preferred Stock are junior to the Series B Preferred Stock. Dividends are paid in cash on the Series B Preferred Stock as, if and when declared by our Board. To the extent not prohibited by applicable law, and only as, if and when declared by the Board, dividends are required to be paid in cash quarterly in arrears on eachMarch 31 ,June 30 ,September 30 andDecember 31 . Any dividend period for which the Total Net Leverage Ratio is greater than 1.50:1.00, the dividend rate is 13.5% per annum and (ii) with respect to any dividend period for which the Total Net Leverage Ratio is less than or equal to 1.50:1.00, at a rate of 12% per annum.
If not paid in cash, dividends will accrue on the stated value and will
increase the stated value on Series B Preferred Stock effective as of the
applicable dividend date without any further action by the Board at a rate of
15%. As of
Until the Series B Preferred Stock is redeemed, neither we nor any of our subsidiaries can declare, pay or set aside any dividends on shares of any other class or series of capital stock, except in limited circumstances. We are required to redeem all shares of Series B Preferred Stock outstanding onFebruary 15, 2025 at the then stated value plus all accumulated and unpaid dividends thereon through the day prior to such redemption. Subject to compliance with the terms of any credit agreement, we are also required to redeem all of the Series B Preferred Stock as a condition to the consummation of certain changes in control (as defined in certificate governing the Series B Preferred Stock), as well as use the net cash proceeds from certain transactions to redeem shares of Series B Preferred Stock. Based on the stated value of the Series B Preferred Stock as ofSeptember 30, 2020 after giving effect to the accrual of dividends, we would be required to pay quarterly cash dividends in the aggregate of$6.6 million on the Series B Preferred Stock. If our business does not generate enough cash to pay future cash dividends, the dividends will accrue at a rate of 15% per annum and increase the stated value of the Series A Preferred Stock, which will make cash dividends on the Series B Preferred Stock more difficult for us to make in the future. Actual decisions regarding payment of cash dividends on the Series B Preferred Stock will be made at the time of the applicable dividend payment based upon availability of capital resources, business conditions, other cash requirements, and other relevant factors. 34 --------------------------------------------------------------------------------
Deferred Taxes - COVID-19
The CARES Act was enacted on
•Eliminating the 80% of taxable income limitation by allowing corporate entities
to fully utilize net operating losses ("NOLs") to offset taxable income in 2018,
2019 or 2020
•Allowing NOLs originating in 2018, 2019 or 2020 to be carried back five years
•Increasing the net interest expense deduction limit to 50% of adjusted taxable
income from 30% for tax years beginning
•Allowing taxpayers with alternative minimum tax ("AMT") credits to claim a
refund in 2020 for the entire amount of the credit instead of recovering the
credit through refunds over a period of years, as originally enacted by the Tax
Cuts and Jobs Act ("TCJA")
•Payroll tax deferral
The new NOL carryforward and interest expense deduction rules are favorable for IEA and will help defer future cash tax liabilities. IEA has filed an election to refund$0.5 million AMT credit inApril 2020 that was received in the third quarter. IEA has also made use of the payroll deferral provision to defer the 6.2% social security tax, which is approximately$9.0 million throughDecember 31, 2020 . This amount is required to be paid at 50% onDecember 31, 2021 andDecember 31, 2022 .
Amendment to Third A&R Credit Agreement
OnOctober 30, 2020 , the Company entered into a First Amendment to its Third A&R Credit Agreement (the "Amendment"). The Amendment provides for, among other things, an increase in the revolving credit commitments previously available by$25.0 million , bringing the aggregate principal amount of the revolving credit commitments under the Third A&R Credit Agreement to$75.0 million , upon the terms and subject to the satisfaction of the conditions set forth in the Third A&R Credit Agreement, as amended by the Amendment. In addition, the Amendment provides that on and after the Amendment's effective date and until delivery of the financial statements for the fiscal quarter endedDecember 31, 2020 , as required under the Amendment, the percentage per annum interest rate for revolving loans and swing line loans is, at the Company's option, (x) LIBOR plus a margin of 2.75% or (y) the applicable base rate plus a margin of 1.75%. Thereafter, for any day, the applicable percentage per annum interest rate for revolving loans and swing line loans is LIBOR or the base rate plus a margin depending upon the Company's first lien net leverage ratio as of the last day of the most recently ended consecutive four fiscal quarter period, as set forth below: First Lien Net Leverage Ratio LIBOR Loans Base Rate Loans Less than 1.00:1.00 2.50% 1.50% Less than 2.00:1.00 but greater than or equal to 2.75% 1.75%
1.00:1.00
Less than 3.00:1.00 but greater than or equal to 3.00% 2.00%
2.00:1.00
Less than 3.50:1.00 but greater than or equal to 3.25% 2.25%
3.00:1.00
Greater than or equal to 3.50:1.00 3.50% 2.50% The Amendment also further specifies the unused commitment fee rate. On and after the Amendment's effective date and until delivery of the financial statements for the fiscal quarter endedDecember 31, 2020 , as required under the Amendment, the rate is 0.40% per annum. Thereafter, for any day, the applicable percentage per annum depends upon the Company's senior secured net leverage ratio, as set forth below: 35 -------------------------------------------------------------------------------- Senior Secured Net Leverage Ratio Applicable Unused Commitment Fee Rate Less than 1.00:1.00 0.35% Less than 2.00:1.00 but greater than or equal 0.40% to 1.00:1.0 Less than 3.00:1.00 but greater than or equal 0.45% to 2.00:1.00 Greater than or equal to 3.00:1.00 0.50% The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Amendment, which is filed herewith as Exhibit 10.1.
Contractual Obligations
The following table sets forth our contractual obligations and commitments for
the periods indicated as of
Payments due by period
Total Remainder of 2021 2022 2023 2024 Thereafter
(in thousands) 2020
Debt (principal) (1) 179,648 3,717 1,229 15,859 29,735 129,108 -
Debt (interest) (2) 43,803 3,115 12,144 11,971 10,277 6,296 -
Debt - Series B Preferred
Stock (3) 199,474 - - - - - 199,474
Dividends - Series B
Preferred Stock (4) 130,553 6,600 26,401 26,401 26,401 26,401 18,349
Finance leases (5) 60,390 6,620 24,716 20,949 5,675 1,819 611
Operating leases (6) 54,184 3,136 10,887 9,123 6,934 3,454 20,650
Total $ 668,052 $ 23,188 $ 75,377 $ 84,303 $ 79,022 $ 167,078 $ 239,084
(1)Represents the contractual principal payment due dates on our outstanding
debt.
(2)Includes variable rate interest using September 30, 2020 rates.
(3)Represents the mandatorily redeemable debt - Series B Preferred with expected
redemption date of February 15, 2025 .
(4)Future declared dividends have been included at 12% but payment determination
will be evaluated each quarter resulting in differing accumulated dividend
rates.
(5)We have obligations, exclusive of associated interest, recognized under
various finance leases for equipment totaling $60.4 million at September 30,
2020 . Net amounts recognized within property, plant and equipment, net in the
condensed consolidated balance sheet under these financed lease agreements at
September 30, 2020 totaled $72.7 million .
(6)We lease real estate, vehicles, office equipment and certain construction
equipment from unrelated parties under non-cancelable leases. Lease terms range
from month-to-month to terms expiring through 2038.
For detailed discussion and additional information pertaining to our debt
instruments, see Note 6. Debt and Note 7. Commitments and Contingencies in the
notes to our condensed consolidated financial statements, included in Part I,
Item 1.
Off-Balance Sheet Arrangements
As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business. Our significant off-balance sheet transactions include liabilities associated with letter of credit obligations, surety and performance and payment bonds entered into in the normal course of business, liabilities associated with deferred compensation plans, liabilities associated with certain indemnification and guarantee arrangements. As ofSeptember 30, 2020 andDecember 31, 2019 , the Company was contingently liable under letters of credit issued under its revolving credit facility or its old credit facility in the amount of$23.5 million and$21.0 million , respectively, related to projects.
As of
36
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See Note 6. Debt in the notes to our condensed consolidated financial
statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q,
for discussion pertaining to our off-balance sheet arrangements. See Note 1.
Business, Basis of Presentation and Summary of Significant Accounting Policies
and Note 11. Related Party Transactions in the notes to condensed consolidated
financial statements, included in Part I, Item 1, for discussion pertaining to
certain of our investment arrangements.
Recently Issued Accounting Pronouncements
See Note 1. Business, Basis of Presentation and Summary of Significant Accounting Policies in the notes to our condensed consolidated financial statements, included in Part I, Item 1.
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