Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets [Abstract]

(8) Goodwill and Intangible Assets

Goodwill

The following table presents the changes in the carrying amount of goodwill since its inception through September 30, 2019:


					Specialty
(in thousands)	Civil			Building	Contractors		Total
Gross goodwill	$	492,074	$	424,724	$	156,193	$	1,072,991
Accumulated impairment		(76,716)		(411,269)		—		(487,985)
Balance as of December 31, 2018		415,358		13,455		156,193		585,006
Second quarter 2019 impairment		(210,215)		(13,455)		(156,193)		(379,863)
Balance as of September 30,2019^(a)	$	205,143	$	—	$	—	$	205,143

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(a)As of September 30, 2019, accumulated impairment was $867.8 million.

The aggregate carrying amount of goodwill allocated to the Company’s three reporting units as of December 31, 2018 was $585.0 million. The Company tests the goodwill allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company performed its 2018 annual impairment test as of October 1, 2018 using a weighted average of (1) an income approach and (2) a market approach to determine the fair value of each reporting unit and concluded that the goodwill was not impaired since the estimated fair value of each reporting unit exceeded its respective net book value. In addition, the Company determined the implied control premium (the excess of the aggregated fair values of its reporting units over its market capitalization) was consistent with and within a reasonable range of actual premiums paid in industry-specific merger and acquisition (“M&A”) transactions over a sustained period of time.

During the interim periods since the date of the last annual test, and prior to the second quarter of 2019, the Company concluded that no triggering events had occurred. In the second quarter of 2019, in connection with the preparation of its quarterly financial statements, the Company assessed the changes in circumstances that occurred during the quarter to determine whether it was more likely than not that the fair values of any of its reporting units were below their carrying amounts. While there was no single determinative event or factor, potential triggering events identified in the accounting guidance (ASC 350, Intangibles – Goodwill and Other) developed during the second quarter of 2019, which led the Company to conclude that, when considering the events and factors in totality, it was more likely than not that the fair values of each of its reporting units were below their carrying amounts. The triggering factors included:

The Company faced a declining stock price and observed a sustained decrease subsequent to the filing of the Company’s first quarter Form 10-Q on May 8, 2019, in both absolute terms and relative to its peers. Consistent with the average stock prices of companies in its peer group, the Company’s stock price had been trending lower over several prior periods; however, during the second quarter of 2019, the Company’s stock price dropped to a 52-week low while the average stock price of companies in its peer group increased. The Company believes that delays experienced in resolving certain claims and unapproved change orders, which when combined with the increased working capital needs and significant negative operating cash flows in the first quarter of 2019, has contributed significantly to the sustained decrease in the Company’s stock price;

The Company experienced significant negative operating cash flows from each of its reporting units in the first quarter of 2019, and that trend continued at the beginning of the second quarter; and

The Company’s debt rating was downgraded by a major credit rating agency on May 17, 2019.

As the Company determined that it was more likely than not that the fair values of its reporting units were below their carrying amounts, the Company performed an interim impairment test as of June 1, 2019 (the “Interim Test”) and, as described below, recognized a non-cash impairment loss totaling $379.9 million.

The decrease in the Company’s stock price reduced its total market capitalization and increased the implied control premium to a level beyond observable market-comparable data. As a result, when performing the Interim Test, the Company increased the discount rates and the projected investments in working capital compared to the assumptions used in the previous October 1 test, which extended the timing of certain expected future cash flows in the calculation of fair value under the income-based approach. The Company believes these are changes reflective of market participant inputs and the recent decrease in the Company’s market valuation.

Consistent with the previous October 1, 2018 test, the Company utilized a weighted average of (1) an income approach and (2) a market approach to determine the fair value of the Company and each of its reporting units for the Interim Test. The income approach is based on estimated present value of future cash flows for each reporting unit. The market approach is based on assumptions about how market data relates to each reporting unit. The weighting of these two approaches is based on their individual correlation to the economics of each reporting unit and is impacted by factors such as the availability of comparable market data for each reporting unit.

Assessing impairment inherently involves management judgments as to the assumptions used to calculate fair value of the reporting units and the impact of market conditions on those assumptions. The key inputs that the Company uses in its assumptions to estimate the fair value of its reporting units under the income-based approach are as follows:

Weighted average cost of capital (“WACC”), the risk-adjusted rate used to discount the projected cash flows;

Cash flows generated from existing work and new awards; and

Projected operating margins.

Expected future after-tax operating cash flows of each reporting unit are discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions concerning future operating performance including cash flows generated from existing work and new awards, projected operating margins, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows, as well as future economic conditions, which may differ from actual future cash flows. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in estimating the present value of future cash flows, is based on estimates of the WACC of market participants relative to the reporting units. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC.

To develop the cash flows generated from new awards and future operating margins, the Company tracks known prospects of significance for each of its reporting units and considers the estimated timing of when the work is expected to be bid, started and completed. The Company also gives consideration to its relationships with the prospective owners; the pool of competitors that are capable of performing large, complex work; business strategy; and the Company’s history of success in winning new work in each reporting unit. With regard to operating margins, the Company gives consideration to its historical reporting unit operating margins in the end markets that the prospective work opportunities are most significant, expected margins from existing work, current market trends in recent new work procurement, and business strategy.

The Company also estimated the fair value of its reporting units under a market-based approach by applying industry-comparable multiples of revenues and operating earnings to its reporting units’ revenues and operating earnings. The conditions and prospects of companies in the engineering and construction industry depend on common factors such as overall demand for services.

The Company believes that the discount rates, timing of cash flows and other inputs and assumptions used in the Interim Test were consistent with those that a market participant would use based on the events described above which occurred during the second quarter of 2019 and were reflective of the market assessment of the fair value of its reporting units at that time. In addition, the Company believes that its estimates and assumptions about future revenues and margin projections in the Interim Test were reasonable and consistent with the estimates and assumptions used in the annual goodwill impairment test as of October 1, 2018. As an additional step to corroborate the Interim Test results, the Company compared its implied control premium with those of recent comparable market transactions and concluded that the implied control premium was within the range of control premiums observed in prior industry-specific M&A transactions.

Similar to previous valuations, the Company noted that small changes to valuation assumptions could have a significant impact on the concluded value. The assumption changes described above were relatively larger in the Specialty Contractors reporting unit than in the Civil or Building reporting units, as Specialty Contractors had not met recent market expectations at the time of the Interim Test.

As of September 30, 2019, the Company determined that no triggering events occurred or circumstances changed since the date of our Interim Test that would more likely than not reduce the fair value of the Civil reporting unit below its carrying amount. However, since the Interim Test reduced the carrying value of the Civil reporting unit to approximate its fair value, there is a risk of additional goodwill impairment if future events related to the Civil reporting unit are less favorable than what the Company assumed or estimated in its Interim Test. The Company will continue to monitor events occurring or circumstances changing which may suggest that goodwill should be reevaluated during interim periods prior to the annual impairment test. These events and circumstances include, but are not limited to, a sustained decline in our stock price and market capitalization, as well as quantitative and qualitative factors specific to the Civil reporting unit which indicate potential triggering events that would more likely than not reduce the fair value of the Civil reporting unit below its carrying amount.

Intangible Assets

Intangible assets consist of the following:


	As of September 30, 2019								Weighted
					Accumulated				Average
				Accumulated	Impairment		Carrying		Amortization
(in thousands)	Cost			Amortization	Charge		Value		Period
Trade names (non-amortizable)	$	117,600	$	—	$	(67,190)	$	50,410	Indefinite
Trade names (amortizable)		74,350		(20,645)		(23,232)		30,473	20 years
Contractor license		6,000		—		(6,000)		—	N/A
Customer relationships		39,800		(20,784)		(16,645)		2,371	12 years
Construction contract backlog		73,706		(73,706)		—		—	N/A
Total	$	311,456	$	(115,135)	$	(113,067)	$	83,254

	As of December 31, 2018								Weighted
					Accumulated				Average
				Accumulated	Impairment		Carrying		Amortization
(in thousands)	Cost			Amortization	Charge		Value		Period
Trade names (non-amortizable)	$	117,600	$	—	$	(67,190)	$	50,410	Indefinite
Trade names (amortizable)		74,350		(18,780)		(23,232)		32,338	20 years
Contractor license		6,000		—		(6,000)		—	N/A
Customer relationships		39,800		(19,992)		(16,645)		3,163	12 years
Construction contract backlog		73,706		(73,706)		—		—	N/A
Total	$	311,456	$	(112,478)	$	(113,067)	$	85,911

Amortization expense for the three and nine months ended September 30, 2019 was $0.9 million and $2.7 million, respectively. Amortization expense for the three and nine months ended September 30, 2018 was $0.9 million and $2.7 million, respectively. As of September 30, 2019, amortization expense is estimated to be $0.9 million for the remainder of 2019, $3.5 million in 2020, $3.4 million in 2021, $2.6 million in 2022 and $2.5 million in both 2023 and 2024.

Certain trade names have an estimated indefinite life and are not amortized to earnings, but instead are reviewed for impairment annually, or more often if events occur or circumstances change which suggest that the non-amortizable trade names should be reevaluated. The Company has also monitored events and circumstances as well as any entity-specific quantitative or qualitative factors, which occurred during interim periods since the annual test, that suggest intangible assets should be reevaluated for impairment. During the interim periods since the date of the last annual test, and prior to the second quarter of 2019, management concluded that there have been no triggering events that would more likely than not reduce the fair value of the Company’s intangible assets below their carrying amounts.

In conjunction with its interim goodwill test during the second quarter of 2019, the Company also evaluated its non-amortizable trade names for potential impairment due to the second quarter triggering factors related to goodwill mentioned above. The Company performed its interim impairment test by comparing the carrying value of its indefinite-lived intangible assets to their calculated fair value, which is determined by the income approach (relief from royalty method). This income-based valuation approach involves similar key assumptions to the goodwill impairment analysis discussed above. The interim impairment test performed in the second quarter of 2019 resulted in an estimated fair value for the non-amortizable trade names that substantially exceeded their respective net book values; therefore, no impairment charge was necessary for the second quarter. While the key assumptions used in the impairment test of the non-amortizable trade names are similar to those used in the evaluation of goodwill, historically, the headroom (the excess of calculated fair value over carrying value) has been relatively higher for non-amortizable trade names than for goodwill. Unlike goodwill, trade names possess inherent value based on market perception which is valued considering the cost savings available through ownership and the avoidance of paying royalties associated with revenue generation. The discounted value is not impacted by cash flow related assumptions such as working capital investment. Consequently, goodwill was impaired while the non-amortizable trade name intangible assets were not.

As of September 30, 2019, management concluded that no triggering events occurred or circumstances changed since the date of the interim impairment test that would more likely than not reduce the fair value of the Company’s intangible assets below their carrying amounts.

The Company also performed a qualitative assessment to evaluate its long-lived tangible and intangible assets with finite lives due to the changes in circumstances since the Company’s 2018 annual impairment analysis. Based on this assessment in which there were no identified changes to market prices, the manner of use or the planned purchase or sale of assets/asset groups, the Company concluded that no triggering events occurred since the date of its last annual test that would more likely than not reduce the fair value of its long-lived tangible and intangible assets with finite lives below their carrying amounts.