MYR Group Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016 unless noted. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Contract revenue | $300.1 million | $253.6 million; up 18.3% |
| Gross profit / margin | $25.7 million / 8.6% | $27.3 million / 10.8% |
| Operating income / margin | $0.5 million / 0.2% | $3.3 million / 1.3% |
| Net income / diluted EPS | $1.2 million / $0.07 | $2.0 million / $0.10 |
| EBITDA, company-defined non-GAAP | $11.1 million | $13.3 million |
| Cash from operating activities | $13.1 million | $14.4 million |
| Cash and cash equivalents | $6.9 million | $23.8 million at Dec. 31, 2016 |
| Working capital | $108.0 million | $106.3 million at March 31, 2016 |
| Facility borrowings | $39.6 million | $59.1 million at Dec. 31, 2016 |
Q1 investing activities used $9.1 million, including $10.0 million of capital expenditures, partly offset by equipment-sale proceeds. Financing activities used $21.1 million, primarily reflecting $19.5 million of revolving-credit repayments and $2.2 million of share repurchases; the filing says the repurchases were shares surrendered to satisfy stock-compensation tax obligations. Capital lease obligations totaled $4.6 million, including $1.1 million current. The $250 million credit facility had $186.7 million available at quarter-end, after borrowings and letters of credit.
Changes versus the prior-year quarter
- Revenue rose $46.5 million, led by C&I growth and higher distribution work. C&I revenue increased 47.7% to $104.4 million; T&D revenue increased 7.0% to $195.7 million.
- Profitability weakened despite higher sales. Gross margin fell 2.2 percentage points, and operating income declined to $0.5 million. Management attributed pressure mainly to inclement weather, a greater mix of smaller and shorter-duration T&D jobs, reduced fleet utilization, and higher mobilization and demobilization costs.
- T&D operating income fell to $5.1 million from $10.7 million, with segment operating margin down to 2.6% from 5.8%. C&I operating income rose to $4.4 million from $2.2 million, and its segment margin improved to 4.2% from 3.1%.
- Net income included a $0.4 million income-tax benefit, mainly because adoption of a stock-compensation accounting standard put $0.8 million of excess tax benefits through the income statement. Other income included $0.9 million of WPE acquisition-related contingent consideration tied to contract margin guarantees.
- Operating cash flow declined $1.4 million year over year. Cash fell $16.9 million from year-end, principally as the company repaid revolving debt and funded capital expenditures and financing activities.
Outlook, risks and unusual items
- Management expected significant bidding activity on large transmission projects in 2017 and 2018, but said regulatory approvals and right-of-way permits make award timing uncertain; substantial construction on large awards may not begin until 2018. Small- and medium-sized transmission bidding and construction activity remained strong.
- Management expected continued improvement in C&I bidding opportunities during 2017, supported by market conditions and expansion into new geographies. It cited expansion into California in 2016 and Utah in 2017, and the October 2016 WPE acquisition in western Canada.
- Backlog was $660.9 million at March 31, 2017, down 4.1% from December 31, 2016 but up from $434.8 million a year earlier. Management cautioned that backlog is not a stand-alone predictor of future revenue or profit; $43.9 million was estimated not to be recognized within 12 months.
- The company reported compliance with credit-facility covenants. Requirements include a maximum leverage ratio of 3.0 and minimum interest coverage ratio of 3.0. A permanent 1% increase in rates on outstanding variable-rate debt was estimated to reduce annual pretax income and cash flow by about $0.4 million; the company reported no interest-rate hedges.
- Risks include weather and project delays, labor availability and union-related obligations, competition and pricing, contract-cost estimates and claims, customer spending and regulation, acquisition integration, bonding capacity, and backlog conversion. The filing reported $526.8 million of outstanding surety bonds, with estimated remaining costs to complete those bonded projects of $56.7 million. Certain multi-employer pension plans were described as “critical” status, although the company said it was not aware of potential liabilities.
- Management said the credit facility and expected operating cash flow should support operating needs, debt service, capital expenditures, acquisitions and repurchases, while noting large projects or acquisitions could require additional capital. The company did not expect to pay dividends. It had $20.0 million remaining under its repurchase authorization, which continued through August 15, 2017.
- Project-estimate revisions increased Q1 2017 gross margin by 0.4 percentage points and operating income by $1.1 million, adding $0.6 million to net income, or $0.04 per diluted share. In Q1 2016, revisions reduced gross margin by 0.6 percentage points and net income by $0.9 million.
- Management stated that ordinary-course litigation was not expected, individually or in aggregate, to materially adversely affect financial position, results or cash flows. No material risk-factor changes were reported. Disclosure controls were deemed effective; the internal-control evaluation excluded WPE during its post-acquisition integration period.
Important facts for investors to verify
- Whether revenue growth translates into improved gross and operating margins, particularly in T&D, as weather, project mix and fleet utilization change.
- How much of backlog converts to revenue and profit, and the timing of large transmission awards and related construction activity.
- The sustainability of reported earnings given the $0.8 million stock-compensation tax benefit, $0.9 million WPE contingent consideration, and favorable Q1 project-estimate revisions.
- WPE purchase-accounting adjustments and any remaining margin-guarantee or performance-related payments; final purchase accounting was expected in the second half of 2017.
- Liquidity and covenant headroom, including the effect of variable interest rates, capital spending, bonding requirements and any significant project or acquisition needs.
- Potential exposure from insurance claims, bonded projects, collective-bargaining and multi-employer pension plans, and other legal or contractual contingencies.