MYR Group Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. MYR provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Dollar amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $448.8 | $339.7 | $916.9 | $685.3 |
| Gross profit / margin | $43.2 / 9.6% | $38.6 / 11.4% | $86.0 / 9.4% | $74.4 / 10.9% |
| Operating income / margin | $9.4 / 2.1% | $10.4 / 3.1% | $19.0 / 2.1% | $18.8 / 2.8% |
| Net income attributable to MYR Group | $7.2 | $6.8 | $14.6 | $12.5 |
| Diluted EPS | $0.43 | $0.41 | $0.87 | $0.75 |
| Operating cash flow | — | $7.4 | $45.3 |
- Q2 revenue rose 32.1%; six-month revenue rose 33.8%, reflecting higher volumes in both segments and revenue from the Huen acquisition. Six-month revenue mix was 57.6% T&D and 42.4% C&I.
- Profitability was mixed: six-month gross profit increased, but gross margin fell 1.5 percentage points. T&D six-month operating income increased to $31.0 million; C&I operating income declined to $9.6 million from $15.0 million.
- For the six months, net income attributable to MYR Group increased 16.7%, while operating cash flow fell substantially year over year. Working-capital changes were a major cash-flow headwind.
Financial position and liquidity
- At June 30, cash was $4.4 million; current assets were $513.4 million and current liabilities $304.1 million, yielding working capital of $209.3 million.
- Total debt was $106.5 million: $52.4 million under the revolving facility and $54.1 million in equipment notes. Debt was $89.8 million at year-end 2018. The company reported $175.5 million of facility availability and compliance with financial covenants.
- Capital expenditures were $28.0 million in the first half. Financing activities included $24.0 million of new equipment-note borrowings. The company had $22.1 million of letters of credit outstanding.
- Operating lease adoption added $14.1 million of right-of-use assets and $14.3 million of operating lease liabilities at quarter-end; adoption did not affect earnings or cash flows.
Changes, outlook, and notable items
- Margin pressure reflected project cost-estimate changes, weather, labor inefficiencies, and unanticipated overtime and material delays on a majority-controlled joint-venture project. Estimate changes reduced first-half gross margin by 1.0 percentage point and operating income by $9.1 million, or diluted EPS by $0.25.
- Management expects strong bidding activity in small- and medium-sized transmission work, incremental U.S. distribution opportunities, and improved C&I bidding opportunities in the remainder of 2019. It cautioned that timing of large transmission awards and construction is difficult to predict; substantial construction on large projects awarded in 2019 may not begin until 2020. No specific financial guidance was provided.
- Backlog was $1.16 billion at June 30, up 2.1% from March 31 and from $1.01 billion a year earlier. Remaining performance obligations were $1.06 billion; $173.4 million was estimated not to be recognized within 12 months. Backlog and obligations may not convert to revenue or profit as expected.
- On July 15, after quarter-end, MYR acquired substantially all assets of CSI Electrical Contractors for approximately $79.7 million, funded with facility borrowings. The acquisition expands C&I in California; contingent payments may also apply.
- Six-month revenue included $21.4 million from significant change orders and claims under negotiation. The company also recorded $1.3 million of first-half other income, primarily from a reduction in Huen-related contingent consideration.
- Outstanding surety bonds had an original face amount of $637.3 million, against estimated remaining project costs of $326.6 million. Management did not expect ordinary-course legal matters, individually or in aggregate, to materially affect the company. Some contributing multi-employer pension plans were reported as “critical” status, though no related potential liability was then known.
Important facts for investors to verify
- Whether C&I project cost overruns, joint-venture delays, weather impacts, and labor inefficiencies persist, and whether negotiated reimbursements are recovered.
- Whether the weaker operating cash flow and increased working-capital requirements improve as revenue and contract billing progress.
- How CSI integration, acquisition funding, and any contingent consideration affect leverage, earnings, and covenant headroom.
- Whether backlog converts on schedule and at acceptable margins; customer cancellation rights and contract estimates create uncertainty.
- Exposure from surety bonds, insurance claims, labor and pension obligations, and variable-rate debt. The filing estimates a permanent 1% increase in variable rates would raise annual interest expense by approximately $0.5 million.