Everus Construction Group, Inc. (ECG) Risk Analysis

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act and are required to prepare our financial statements according to the rules and regulations required by the SEC. Our failure to prepare and disclose this information in a timely manner or to otherwise comply with applicable law could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, the Sarbanes-Oxley Act requires that, among other things, we establish and maintain effective internal controls and procedures for financial reporting and disclosure purposes. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot guarantee that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting. Matters affecting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could have a material and adverse effect on us by, for example, leading to a decline in our share price and impairing our ability to raise additional capital.

Our historical information in this Annual Report refers to our business as operated by and integrated with MDU Resources for periods prior to the Separation and as a standalone public company for periods following the Separation. Our historical financial information prior to the Separation included in this Annual Report is derived from the audited consolidated financial statements and accounting records of MDU Resources and Everus Construction. Accordingly, the historical financial information prior to the Separation included in this Annual Report does not necessarily reflect the financial condition, results of operations and cash flows that we would have achieved as a separate, publicly traded company during those periods presented or those that we will achieve in the future, primarily as a result of the factors described below: - Prior to the Separation, our business was operated by MDU Resources as part of its broader corporate organization, rather than as an independent company, and MDU Resources or one of its affiliates performed certain corporate functions for us. Our historical financial results prior to the Separation reflect allocations of corporate expenses from MDU Resources for such functions and are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company. - Prior to the Separation, we shared economies of scope and scale in costs, employees and vendor relationships. Although we entered into a transition services agreement with MDU Resources prior to the Separation, these arrangements may not retain or fully capture the benefits that we enjoyed as a result of being integrated with MDU Resources and may result in us paying higher charges than in the past for these services. This could have a material adverse effect on our business, financial position, results of operations and cash flows for periods after the Separation. - Our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, had in the past been satisfied as part of the corporate wide cash management policies of MDU Resources for periods prior to the Separation. Following the Separation, our results of operations and cash flows are likely to be more volatile, and we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may or may not be available and may be more costly. - As part of MDU Resources prior to the Separation, our business benefited from MDU Resources' overall size and scope to procure more advantageous arrangements. After the Separation, as a standalone company, we may be unable to obtain similar arrangements to the same extent as MDU Resources did, or on terms as favorable as those MDU Resources obtained prior to the Separation. - The cost of capital for our business as a standalone company may be higher than MDU Resources' cost of capital prior to the Separation. Our historical financial information prior to the Separation does not reflect the debt that we incurred in connection with the Separation. - As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2022 ("Sarbanes-Oxley Act") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and are required to prepare our financial statements according to the rules and regulations required by the SEC. Complying with these requirements could result in significant costs and require us to divert substantial resources, including management's time, from other activities. Moreover, to comply with these requirements, we will need to migrate our systems, including information technology systems, implement additional financial and management controls, reporting systems and procedures, and hire additional accounting and finance staff. We have incurred and expect to continue to incur additional annual expenses related to these steps, and those expenses may be significant. If we are unable to upgrade our financial and management controls, reporting systems, information technology and procedures in a timely and effective fashion, our ability to comply with financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Other significant changes may occur in our cost structure, management, financing and business operations as a result of now operating as a standalone company. For additional information about the past financial performance of our business and the basis of presentation of the historical audited consolidated financial statements, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and the historical financial statements and accompanying notes in Item 8. Financial Statements and Supplementary Data contained elsewhere in this Annual Report.

When we acquire a business, goodwill is recorded for the excess amount paid for the business over the net fair value of the tangible and identifiable intangible assets of the business acquired. As of December 31, 2024, the balance sheet included goodwill of $143.2 million and other intangible assets of $116 thousand. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Under current accounting rules, goodwill and other identifiable intangible assets that have indefinite useful lives cannot be amortized, but instead must be tested at least annually for impairment, while identifiable intangible assets that have finite useful lives are amortized over their useful lives. Significant judgment is required in completing these tests. There can be no assurance that our estimates and assumptions will prove to be accurate predictions of the future. For further discussion of our impairment testing, refer to Note 2 – Basis of Presentation and Summary of Significant Accounting Policies and Note 5 – Goodwill and Other Intangible Assets in the audited consolidated financial statements and Critical Accounting Estimates included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, contained elsewhere in this Annual Report.

Demand for our services has been, and will likely continue to be, cyclical in nature and vulnerable to downturns in the general economy, as well as in the construction industry. Large construction projects often involve extended timelines and are subject to delays, cancellations, or reduced activity during economic downturns, further amplifying risks to our revenues and profitability. General concerns about the fundamental soundness of the economy may cause customers to defer projects, even if they have credit available to them. Prolonged uncertainties in the capital markets, or the returns of constrained capital market conditions, could have adverse effects on our customers, which would adversely affect our financial condition and results of operations.

Backlog is a common measurement in the construction services industry. Our determination of backlog can include projects that have a written award, a letter of intent, a notice to proceed, an agreed upon work order to perform work on mutually accepted terms, and conditions and change orders or claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. Contracts are subject to delays, defaults or cancellations; changes in scope of services to be provided; and adjustments to costs. Backlog may also be affected by project delays or cancellations resulting from weather conditions, external market factors and economic factors beyond our control, among other things. Accordingly, there is no assurance that backlog will be realized. The timing of contract awards, including contracts awarded underneath Master Service Agreements ("MSAs"), duration of large new contracts and the mix of services can significantly affect backlog. Backlog at any given point in time may not accurately represent the revenue or net income that is realized in any period, and backlog as of the end of the quarter or year may not be indicative of the revenue and net income expected to be earned in the following year. Backlog should not be relied upon as a standalone indicator of future results.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates we use are for items such as long-lived assets and goodwill; property depreciable lives; tax provisions; revenue recognized using the cost-to-cost measure of progress for contracts; expected credit losses; loss contingencies; costs on construction contracts; unbilled revenues; actuarially determined benefit costs; lease classification; present value of right-of-use assets and lease liabilities; fair values of acquired assets and liabilities under the acquisition method of accounting; and the valuation of stock-based compensation. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Critical accounting estimates are defined as estimates that require us to make assumptions about matters that are uncertain at the time the estimates were made, and changes in the estimates could have a material impact on our financial position or results of operations. Our critical accounting estimates are subject to judgments and uncertainties that affect the application of the significant accounting policies. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, our financial position or results of operations may be materially different when reported under varying conditions or when using different assumptions in the application of the following critical accounting estimates. For more information, refer to Note 2 – Basis of Presentation and Summary of Significant Accounting Policies in the audited consolidated financial statements and Critical Accounting Estimates included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Annual Report. In addition, our financial projections, including any guidance, long-term targets or outlook we may provide from time to time, are dependent on certain estimates and assumptions related to, among other things, our strategy, our long-term financial targets; end-market and sub-market growth; market share projections; revenue; product pricing; volume and product mix; market and economic volatility; tax rates; interest rates; commodity prices; dis-synergies; cost savings including synergies; accruals for estimated liabilities, including litigation reserves; measurement of benefit obligations for benefit plans; and our ability to generate sufficient cash flow to reinvest in our existing business, fund internal growth, make acquisitions, invest in joint ventures and meet debt obligations. In addition, our ability to achieve our projections is subject to various assumptions and uncertainties. There is no assurance that we will achieve such results in the time frames we project or at all. Our financial projections are based on historical experience and on various other estimates and assumptions that we believe to be reasonable under the circumstances and at the time they are made, and our actual results may differ materially from our financial projections. Any material variation between our financial projections and our actual results may adversely affect our profitability, cash flows and stock price.

In connection with the Separation, we entered into a five-year senior secured credit agreement, which provides for long-term debt in an aggregate principal amount of up to $525 million. Such indebtedness consists of a $300 million term loan and a $225 million revolving credit facility. This amount of debt could potentially have important consequences to us and our debt and equity investors, including: - requiring a substantial portion of our cash flow from operations to make interest payments on this debt;- making it more difficult to satisfy debt service and other obligations;- increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing;- increasing our vulnerability to general adverse economic and industry conditions;- reducing the cash flow available to fund capital expenditures and other corporate purposes to grow our business;- limiting our flexibility in planning for, or reacting to, changes in our business and the industry;- placing us at a competitive disadvantage relative to our competitors that may not be as highly leveraged with debt; and - limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase common shares. To the extent that we incur additional indebtedness, the foregoing risks could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.

We may be unable to compete for or work on certain projects if we are not able to obtain the necessary surety bonds. Our construction contracts frequently require that we obtain from surety companies, and provide to our customers, payment and performance bonds as a condition to the award of such contracts to secure our payment and performance obligations. Under standard terms in the surety market, surety companies issue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of collateral as a condition to issuing any bonds. Current or future market conditions, as well as changes in the sureties' assessment of our or their own operating and financial risk, may cause the surety companies to decline to issue, or substantially reduce the amount of, bonds for our work or to increase our bonding costs. An interruption or reduction in the availability of bonding could negatively affect our results of operations.

We may be unable to achieve the full strategic and financial benefits expected to result from the Separation, or such benefits may be delayed or not occur at all. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others, that: (a) management may be required to spend significant amounts of time and effort on post-Separation activities, which may divert management's attention from operating and growing our business; (b) we may be more susceptible to market fluctuations and other adverse events than if we were still a part of MDU Resources; (c) our business will be less diversified than MDU Resources' business prior to the Separation; and (d) other actions required to separate us from MDU Resources that could disrupt our operations. If we fail to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, it could have a material adverse effect on our financial position, results of operations and cash flows.

In connection with the Separation and Distribution, we entered into a separation and distribution agreement with MDU Resources and into various other agreements, including a transition services agreement, a tax matters agreement and an employee matters agreement. The separation and distribution agreement, the tax matters agreement and the employee matters agreement determined the allocation of assets and liabilities between the companies following the Separation for those respective areas and includes any necessary indemnifications related to liabilities and obligations. The transition services agreement provides for the performance of certain services by MDU Resources for our benefit, or in some cases certain services provided by us for the benefit of MDU Resources, for a limited period of time after the Separation. We will rely on MDU Resources to satisfy its obligations under these agreements. If MDU Resources is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have agreements with other providers of these services once certain transaction agreements expire or terminate, we may not be able to operate our business effectively, which may have a material adverse effect on our financial position, results of operations and cash flows.

As part of our growth strategy, we may pursue acquisitions or joint ventures to expand, complement, or diversify our business. However, acquisitions carry inherent risks and challenges that could negatively impact our business, financial condition, results of operations, or cash flows. Future acquisition opportunities that align with our strategic objectives may be limited, and we may face significant competition from other potential acquirers, some of whom may have greater financial resources or offer more favorable terms. This competition could limit our ability to grow through acquisitions or increase acquisition costs, potentially reducing any anticipated financial benefits. Acquisitions may expose us to operational challenges and risks, including, among others: - the diversion of management's attention from the day-to-day operations of the company;- the complexities and difficulties associated with managing our business as it grows;- managing a significantly larger company than before completion of an acquisition;- the assimilation of new employees and the integration of business cultures;- training and facilitating our internal control processes within the acquired organization;- difficulties incorporating the operations and personnel, or inability to retain key personnel, of an acquired business;- additional financial reporting and accounting challenges associated with an acquired business;- challenges in combining service offerings and sales and marketing activities; and - the assumption of unknown liabilities of the acquired business for which there are inadequate reserves and the potential impairment of acquired intangible assets. Failure to effectively manage the integration process could adversely impact our business, financial condition, results of operations, and cash flows.

Our ability to generate internal growth may be affected by, among other factors, our ability to: - attract new customers;- successfully bid for new projects;- increase the number of projects performed for existing customers;- expand geographically;- adapt the range of services we offer to address customers' evolving construction needs;- secure appropriate levels of construction equipment; and - hire and retain qualified personnel; In addition, our customers may reduce the number or size of projects available to us due to their inability to obtain capital. Customers may also reduce projects in response to economic conditions. Many of the factors affecting our ability to generate internal growth may be beyond our control, and we cannot be certain that strategic initiatives will be successful or that we will be able to generate cash flow sufficient to fund operations and to support internal growth. If efforts are unsuccessful, we may not be able to achieve internal growth, expand operations or grow our business.