UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction
On September 25, 2018, IEA Energy Services LLC (“IEA”), a wholly owned, indirect subsidiary of Infrastructure and Energy Alternatives, Inc. (the “Company”), completed its previously announced acquisition (the “Acquisition”) of Consolidated Construction Solutions I LLC (“CCS I”) pursuant to the terms of the Purchase and Sale Agreement (the “Purchase Agreement”), dated as of August 9, 2018 by and among IEA, CCS I and Consolidated Construction Investment Holdings LLC, as seller.
The aggregate amount of the consideration payable pursuant to the Purchase Agreement was approximately $145.0 million. The Company funded the acquisition consideration and certain costs associated with the acquisition through borrowings under our Credit Agreement, which is attached as Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on September 26, 2018 and is incorporated by reference herein.
The foregoing description of the Purchase Agreement is qualified in its entirety by reference to the full text of the Purchase Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K/A filed by the Company on August 14, 2018 and incorporated herein by reference in its entirety.
The following unaudited pro forma combined financial statements are based on the historical financial statements of the Company and CCS I after giving effect to the acquisition, and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma combined financial statements, as prescribed by the Securities and Exchange Commission guidelines.
The following unaudited pro forma combined balance sheet as of June 30, 2018, is presented as if the purchase had occurred on June 30, 2018. The unaudited pro forma combined statements of operations for the six months ended June 30, 2018, and the year ended December 31, 2017, are presented as if the purchase had occurred on January 1, 2017 with recurring acquisition-related adjustments reflected assuming the transaction occurred at the beginning of the fiscal year presented and carried forward through any interim period presented and described in the accompanying notes.
The historical consolidated financial information has been adjusted in the unaudited pro forma combined financial data to give effect to pro forma events that are, based upon available information and certain assumptions, (i) directly attributable to the acquisition, (ii) factually supportable under the circumstances, and (iii) with respect to the unaudited pro forma combined statement of operations, expected to have a continuing impact on the combined results.
The following unaudited pro forma combined financial statements are prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates indicated or that may be achieved in the future. For example, the unaudited pro forma combined financial statements do not reflect any operating efficiencies, associated cost savings or additional costs that we may achieve with respect to the combined companies.
The unaudited pro forma combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma combined financial statements. In addition, the unaudited pro forma combined financial statements should be read in conjunction with (i) the Company’s audited consolidated financial statements and accompanying notes included in the CUrrent Report on Form 8-K filed by the COmpany on March 30, 2018, (ii) the Company’s unaudited condensed consolidated financial statements and accompanying notes included in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, (iii) CCS I’s audited consolidated financial statements for the year ended December 31, 2017 and accompanying notes included as Exhibit 99.1 to this Current Report on Form 8-K for the year ended December 31, 2017, and (iv) CCS I’s unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2018 and accompanying notes included as Exhibit 99.2 to this Current Report on Form 8-K.
INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 2018
($ in thousands, except per share data)
| IEA | CCS I | Pro Forma Adjustments | Purchase Price Allocation | Combined | |||||||||||||
| Assets | |||||||||||||||||
| Current assets | |||||||||||||||||
| Cash and cash equivalents | $ | 23,793 | $ | 20,961 | $ | (110,113 | ) | (a) | |||||||||
| 220,500 | (b) | ||||||||||||||||
| (10,500 | ) | (c) | |||||||||||||||
| (107,593 | ) | (d) | |||||||||||||||
| (12,628 | ) | (i) | |||||||||||||||
| $ | 24,420 | ||||||||||||||||
| Accounts receivable, net of allowances of $24,925 and $0, respectively | 66,246 | 57,961 | — | 124,207 | |||||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 44,712 | 7,613 | — | 52,325 | |||||||||||||
| Prepaid expenses and other current assets | 2,361 | 3,057 | — | 5,418 | |||||||||||||
| Total current assets | $ | 137,112 | $ | 89,592 | $ | (20,334 | ) | — | $ | 206,370 | |||||||
| Property, plant and equipment, net of accumulated depreciation of $17,770 and $17,484, respectively | 31,244 | 38,222 | — | 26,778 | (e) | 96,244 | |||||||||||
| Goodwill | 3,020 | 715 | (715 | ) | (g) | 20,321 | (g) | 23,341 | |||||||||
| Intangibles, net of accumulated amortization of $2,061 and $1,941, respectively | — | 1,494 | (1,494 | ) | (f) | 35,000 | (f) | 35,000 | |||||||||
| Company-owned life insurance | 4,314 | — | — | 4,314 | |||||||||||||
| Other assets | 10 | 1,535 | — | 1,545 | |||||||||||||
| Deferred income taxes - long term | 4,508 | 5,322 | — | (1,000 | ) | (h) | 8,830 | ||||||||||
| Total assets | $ | 180,208 | $ | 136,880 | $ | (22,543 | ) | $ | 81,099 | $ | 375,644 | ||||||
| Liabilities and Stockholder's Equity (Deficit) | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable and accrued liabilities | 125,826 | 26,436 | — | 152,262 | |||||||||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 22,112 | 16,649 | — | 38,761 | |||||||||||||
| Current portion of capital lease obligations | 6,524 | 538 | — | 7,062 | |||||||||||||
| Current portion of notes payable | 27,419 | (24,925 | ) | (a) | 2,494 | ||||||||||||
| Term loan - short term | 3,360 | — | (3,360 | ) | (a) | — | |||||||||||
| Total current liabilities | $ | 157,822 | $ | 71,042 | $ | (28,285 | ) | — | $ | 200,579 | |||||||
| Capital lease obligations, net of current maturities | 14,148 | 740 | — | 14,888 | |||||||||||||
| Long-term debt | 51,835 | 33,535 | (51,835 | ) | (a) | ||||||||||||
| (30,193 | ) | (a) | |||||||||||||||
| 220,500 | (b) | ||||||||||||||||
| (10,500 | ) | (c) | |||||||||||||||
| 213,342 | |||||||||||||||||
| Deferred compensation | 5,263 | — | 5,263 | ||||||||||||||
| Contingent Consideration | 69,373 | — | 69,373 | ||||||||||||||
| Total liabilities | $ | 298,441 | $ | 105,317 | $ | 99,687 | — | $ | 503,445 | ||||||||
| Commitments and contingencies | |||||||||||||||||
| Preferred stock, par value, $1965000 per share; -110,313,000 shares authorized; shares and shares issued and outstanding at -3360000 and , respectively | 34,965 | — | 34,965 | ||||||||||||||
| Stockholders' equity (deficit) | |||||||||||||||||
| Common stock, par value, $20500000 per share; 220,500,000 shares authorized; shares issued and outstanding at -3360000 and , respectively | 2 | — | 2 | ||||||||||||||
| Additional paid in capital | — | — | |||||||||||||||
| Retained earnings (deficit) | (153,200 | ) | 31,563 | (107,593 | ) | (d) | 81,099 | (l) | |||||||||
| (12,628 | ) | (i) | |||||||||||||||
| (2,009 | ) | (e) (f) | (162,768 | ) | |||||||||||||
| Total stockholder's equity (deficit) | $ | (118,233 | ) | $ | 31,563 | $ | (122,230 | ) | $ | 81,099 | $ | (127,801 | ) | ||||
| Total liabilities and stockholder's equity (deficit) | $ | 180,208 | $ | 136,880 | $ | (22,543 | ) | $ | 81,099 | $ | 375,644 | ||||||
See accompanying notes to the unaudited pro forma combined financial statements
INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the six months ended June 30, 2018
($ in thousands)
| IEA | CCS I | Pro Forma Adjustments | Combined | ||||||||||
| Revenue | $ | 224,208 | $ | 139,020 | $ | 363,228 | |||||||
| Cost of revenue | 210,494 | 118,792 | 6,300 | (e) | |||||||||
| 1,313 | (f) | 336,899 | |||||||||||
| Gross profit | 13,714 | 20,228 | (7,613 | ) | 26,329 | ||||||||
| Selling, general and administrative expenses | 26,158 | 10,209 | 2,258 | (f) | |||||||||
| (1,100 | ) | (j) | 37,525 | ||||||||||
| Income from operations | (12,444 | ) | 10,019 | (8,771 | ) | (11,196 | ) | ||||||
| Other income (expense), net: | |||||||||||||
| Interest expense, net | (2,381 | ) | (3,565 | ) | — | (5,946 | ) | ||||||
| Other income | 11 | 33 | — | 44 | |||||||||
| Income before benefit (provision) for income taxes | (14,814 | ) | 6,487 | (8,771 | ) | (17,098 | ) | ||||||
| Benefit (provision) for income taxes | 2,337 | (493 | ) | 2,254 | (k) | 4,098 | |||||||
| Net income | $ | (12,477 | ) | $ | 5,994 | $ | (6,517 | ) | $ | (13,000 | ) | ||
See accompanying notes to the unaudited pro forma combined financial statements
INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 2017
($ in thousands)
| IEA | CCS I | Pro Forma Adjustments | Combined | ||||||||||
| Revenue | $ | 454,949 | $ | 280,713 | $ | — | $ | 735,662 | |||||
| Cost of revenue | 388,928 | 240,496 | 12,500 | (e) | |||||||||
| 2,625 | (f) | 644,549 | |||||||||||
| Gross profit | 66,021 | 40,217 | (15,125 | ) | 91,113 | ||||||||
| Selling, general and administrative expenses | 33,543 | 20,121 | 4,514 | (f) | 58,178 | ||||||||
| Income from operations | 32,478 | 20,096 | (19,639 | ) | 32,935 | ||||||||
| Other income (expense), net: | |||||||||||||
| Interest expense, net | (2,201 | ) | (8,044 | ) | — | (10,245 | ) | ||||||
| Other income | 111 | 303 | — | 414 | |||||||||
| Income before benefit (provision) for income taxes | 30,388 | 12,355 | (19,639 | ) | 23,104 | ||||||||
| Benefit (provision) for income taxes | (13,863 | ) | (3,553 | ) | 8,955 | (k) | (8,461 | ) | |||||
| Net income | $ | 16,525 | $ | 8,802 | $ | (10,684 | ) | $ | 14,643 | ||||
See accompanying notes to the unaudited pro forma combined financial statements
INFRASTRUCTURE AND ENERGY ALTERNATIVES, INC
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Note 1. Basis of presentation
The unaudited pro forma combined balance sheet as of June 30, 2018, is presented as if the purchase had occurred on June 30, 2018. The unaudited pro forma combined statements of operations for the six months ended June 30, 2018, and the year ended December 31, 2017, are presented as if the purchase had occurred on January 1, 2017 with recurring acquisition-related adjustments reflected in each of these periods.
Note 2. Preliminary Acquisition Accounting
The tables below represent the purchase consideration and the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The preliminary estimated fair values have been used to prepare pro forma adjustments in the pro forma combined financial statements. The final determination of fair value for certain assets and liabilities will be completed as soon as the information necessary to complete the analysis is obtained, which may differ materially from the preliminary estimates used in the pro forma adjustments. The primary areas of the preliminary estimates that are not yet finalized relate to property, plant and equipment, identifiable intangible assets, contract assets and liabilities, deferred income taxes, uncertain tax positions, and the fair value of certain contractual obligations.
| Preliminary identifiable assets acquired and liabilities assumed (in thousands) | |||
| Cash | $ | — | |
| Accounts Receivable | 67,351 | ||
| Contract assets | 7,613 | ||
| Other current assets | 3,057 | ||
| Property, plant and equipment | 65,000 | ||
| Intangible assets: | |||
| Customer relationships | 21,000 | ||
| Non-compete | 5,250 | ||
| Tradename | 8,750 | ||
| Deferred income taxes | 4,322 | ||
| Other non-current assets | 1,535 | ||
| Accounts payable and accrued liabilities | (26,436 | ) | |
| Contract liabilities | (16,649 | ) | |
| Other non-current liabilities | (7,114 | ) | |
| Total identifiable assets | 133,679 | ||
| Goodwill | 20,321 | ||
| Total purchase consideration | $ | 154,000 | |
Note 3. Pro Forma Adjustments
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma combined financial statements:
(a) To record approximately $220.5 million of new debt. Of this amount, approximately $200.0 million is from the Company's term loan and $20.5 million is from the Company's revolving credit facility.
(b) To record the payoff of the Company's previous credit facility and CCS I debt:
| (in thousands) | |||
| IEA term loan short-term | $ | 3,360 | |
| CCS I current portion of note payable | 24,925 | ||
| IEA long-term debt | 53,800 | ||
| CCS I long-term debt | 30,193 | ||
| IEA deferred financing fees | (1,965 | ) | |
| Pro forma adjustment to reflect repayment of debt | $ | 110,313 | |
(c) To record approximately $10.5 million of deferred financing fees and debt issuance costs related to new debt recorded in adjustment (a).
(d) To eliminate CCS I historical equity balances and cash provided to the Seller.
(e) To record the difference between the historical amount of CCS I's fixed assets and our preliminary estimate of fair value and the related impact to depreciation expense. On a preliminary basis, we increased the book value of CCS I's fixed assets by $26.8 million. The resulting adjustment to depreciation expense was an increase of approximately $6.3 million for the pro forma six months ended June 30, 2018, which is recorded in cost of revenue. The resulting adjustment to depreciation expense was an increase of approximately $12.5 million for the pro forma year ended December 31, 2017.
(f) Reflects the elimination of CCS I pre-existing intangible assets and recognition of the estimated preliminary fair value of identifiable intangible assets acquired. To determine the estimated fair value of intangibles acquired, we engaged a third party valuation specialist to assist management. Our valuation estimates are preliminary and subject to change. The estimated preliminary fair value of identifiable intangible assets acquired is comprised of the following (in thousands):
| Useful Life | Fair Value | Pro Forma Amortization Expense Six Months Ended June 30, 2018 | Pro Forma Amortization Expense Year Ended December 31, 2017 | |||||||
| Customer relationships | 7 years | 21,000 | 1,500 | 3,000 | ||||||
| Backlog | 2 years | 5,250 | 1,313 | 2,625 | ||||||
| Tradename | 5 years | 8,750 | 875 | 1,750 | ||||||
| $ | 35,000 | 3,688 | 7,375 | |||||||
| Historical CCS I amortization expense | (117 | ) | (236 | ) | ||||||
| Pro forma adjustments to amortization expense | $ | 3,571 | $ | 7,139 | ||||||
The customer relationships were valued utilizing the “excess earnings method” of the income approach. The estimated discounted cash flows associated with existing customers and projects were based on historical and market participant data. Such discounted cash flows were net of fair market returns on the various tangible and intangible assets that are necessary to realize the potential cash flows.
The fair value of backlog was determined using a discounted “income approach” model. The estimated discounted cash flows were based on expected future revenues for contracts already awarded and include considerations of both contracted margins and expected margins expected to be achieved over the remaining life of these contracts.
The fair value of the tradename was determined based on the “relief from royalty” method of the income approach. The discounted cash flows were estimated using a royalty rate selected based on consideration of several factors, including external research of third party trade name licensing agreements and their royalty rate levels, and management estimates.
(g) To record goodwill as a result of the acquisition. Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Goodwill is not amortized, but is assessed at least annually for impairment or when a change in facts and circumstances prompts an assessment. Based on the current tax treatment goodwill is not expected to be deductible for income tax purposes.
(h) To record preliminary tax adjustments related to the acquisition, resulting in a net decrease in deferred tax assets of $1.0 million.
The preliminary $1.1 million net decrease in deferred tax assets from CCS I is primarily due to deferred tax liabilities on a fair market value step up on fixed assets and intangibles including those acquired from CCS I partially offset by a deferred tax assets on CCS I's pre- acquisition tax losses.
(i) To record approximately $12.6 million of the Company and CCS I transaction costs associated with the acquisition, consisting of adviser fees of $6.1 million and $6.5 million change in control payments/bonuses to certain CCS I employees. These fees are recorded against retained earnings solely for the purposes of this presentation. There is no continuing impact of these one-time transaction costs on the combined operating results and, as such, these fees are not included in the unaudited pro forma combined statement of operations.
(j) Represents the elimination of nonrecurring transaction costs incurred by CCS I during the six months ended June 30, 2018 of $1.1 million.
(k) To record the income tax effect as a result of the transaction, calculated using our statutory rate of 25.7% for the six months ended June 30, 2018, and 45.6% for the year ended December 31, 2017.
(l) See footnote 2 for explanation of purchase accounting allocation.