MYR Group Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments in the United States and western Canada.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $607.9 million | $583.2 million | $1,639.4 million | $1,500.1 million |
| Gross profit / margin | $76.5 million / 12.6% | $59.2 million / 10.2% | $199.4 million / 12.2% | $145.2 million / 9.7% |
| Operating income | $24.9 million | $17.3 million | $60.7 million | $36.3 million |
| Net income attributable to MYR Group | $17.3 million | $10.4 million | $40.6 million | $24.9 million |
| Diluted EPS | $1.02 | $0.62 | $2.42 | $1.49 |
| EBITDA, non-GAAP | $36.2 million | $28.2 million | $95.2 million | $69.7 million |
Q3 revenue rose 4.2%; nine-month revenue rose 9.3%. Nine-month gross profit increased 37.3%. Improved margins reflected more higher-margin and storm-related work, productivity gains, and, in Q3, settlements on previously unrecognized project claims and change orders. COVID-related slowdowns, project inefficiencies, and lower or pending claims partially offset these factors. SG&A increased to $51.4 million in Q3 and $137.7 million for nine months, driven by employee-related costs, CSI acquisition costs, and contingent compensation.
Segments: Q3 T&D revenue was $299.7 million and operating income was $32.4 million (10.8% margin), versus $294.9 million and $17.7 million (6.0%). C&I revenue was $308.2 million and operating income was $11.7 million (3.8%), versus $288.3 million and $10.8 million (3.7%). For nine months, T&D revenue was $835.8 million and operating income $74.2 million; C&I revenue was $803.7 million and operating income $30.0 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $128.6 million, compared with $31.7 million in 2019. Management attributed the increase to higher net income and favorable working-capital movements, including contract billing and payment timing and $17.2 million of payroll tax payments deferred under the CARES Act.
- Investing activities used $25.3 million, including $27.5 million of capital expenditures. Financing activities used $96.6 million, including $65.2 million of revolver repayments and $30.4 million of equipment-note principal repayments, mostly prepayments.
- Cash was $18.9 million at September 30, 2020. Working capital was $199.2 million. Total debt was $70.2 million, down from $165.8 million at December 31, 2019; this included $38.6 million drawn on the revolving facility and $31.6 million of equipment notes.
- The $375 million credit facility had $310.4 million of borrowing availability at quarter-end; letters of credit outstanding were approximately $11.3 million. The company reported compliance with all financial covenants. Facility covenants require a maximum leverage ratio of 3.0 and minimum interest coverage ratio of 3.0.
Business outlook, risks and notable items
- Backlog was $1.72 billion at September 30, 2020, compared with $1.50 billion at December 31, 2019; it increased 11.0% from June 30. Remaining performance obligations were $1.60 billion, with $392.2 million estimated not to be recognized within 12 months. Backlog and performance obligations are not guarantees of revenue or profit.
- Management expects continuing COVID-19 protocols to affect project schedules and workflow, particularly in C&I, and cannot predict the pandemic’s ultimate impact. A prolonged downturn could reduce project activity, disrupt labor or supply chains, and affect liquidity and results.
- Management described utility transmission and distribution investment needs and expects incremental U.S. distribution opportunities in 2021, while warning that project timing, permitting, and the COVID-19 recovery make forecasts uncertain. C&I bidding and recovery depend on broader economic conditions.
- Project estimate changes reduced nine-month 2020 gross margin by 0.4 percentage points and operating income by $7.6 million; the filing says diluted EPS was reduced by $0.33. Q3 estimate changes reduced gross margin by 0.3 percentage points and operating income by $1.9 million.
- At September 30, the company had $19.1 million of revenue recognized on significant change orders or claims under negotiation. Surety bonds outstanding had an original face amount of approximately $1.36 billion, against estimated remaining completion costs of $660.2 million. Management did not expect ordinary-course legal proceedings, individually or collectively, to materially affect the company.
- CSI acquisition-related items included $2.5 million of contingent executive compensation expense for the first nine months and approximately $0.6 million of contract margin-guarantee adjustments recorded in other expense.
- On October 22, 2020, the board authorized a new $50 million share repurchase program, effective November 2, 2020 and expiring November 2, 2021 or when funds are exhausted. MYR said it did not currently expect to pay dividends.
Key facts for investors to verify
- Whether higher margins and project claim settlements are repeatable, and how estimates on pending claims and fixed-price contracts evolve.
- Whether operating cash flow remains strong after the impact of contract working-capital timing and CARES Act payroll tax deferrals.
- How COVID-19 affects C&I demand, project schedules, labor availability, supply costs, and the timing of backlog conversion.
- Progress against backlog and remaining performance obligations, including cancellations, project timing, and realized profitability.
- Debt repayment, facility availability, covenant headroom, and the funding and execution of the new share repurchase authorization.