MYR Group Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. MYR Group provides specialty electrical construction services through its Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Amounts below are in U.S. dollars.
Financial performance
- Revenue: $518.5 million, up 10.8% from $468.1 million a year earlier. C&I revenue rose 32.6% to $259.2 million, primarily reflecting the 2019 CSI acquisition; T&D revenue fell 4.9% to $259.3 million as a medium-sized transmission project neared completion.
- Profit and margins: Gross profit was $61.6 million versus $42.9 million; gross margin improved to 11.9% from 9.2%. Operating income was $16.4 million versus $9.6 million, and operating margin was 3.2% versus 2.1%. Net income attributable to MYR Group was $9.9 million versus $7.4 million; diluted EPS was $0.59 versus $0.44. Net margin was 1.9% versus 1.6%.
- Segment operating results: T&D operating income increased to $18.0 million from $14.9 million, with margin of 6.9% versus 5.5%. C&I operating income rose to $9.3 million from $5.1 million, with margin of 3.6% versus 2.6%. Corporate costs were $10.9 million, up from $10.4 million.
- Cash flow: Operating activities provided $35.2 million, compared with $8.2 million used in Q1 2019. Investing activities used $8.3 million, including $9.1 million of capital expenditures; financing activities used $5.1 million. Cash increased $21.6 million to $34.0 million.
- Liquidity and debt: Working capital was $250.6 million. Total debt was $161.4 million, including $101.6 million drawn under the revolving facility and $59.8 million of equipment notes. The company reported $185.1 million of facility availability and was in compliance with its financial covenants. Current assets were $628.8 million and current liabilities $378.2 million.
- Other indicators: Backlog was $1.54 billion, up 2.7% from December 31, 2019; remaining performance obligations were $1.43 billion. The effective tax rate was 29.1%, compared with 27.8%. Management-reported EBITDA, a non-GAAP measure, was $27.4 million versus $20.9 million.
Material changes and notable items
- Revenue growth was driven principally by CSI, acquired in July 2019, while C&I also experienced project-timing effects and a late-quarter COVID-19 slowdown. T&D revenue declined, but segment operating income improved.
- Higher gross margin reflected better-than-anticipated productivity on certain projects, partly offset by labor inefficiencies and weather. SG&A increased by $12.0 million, primarily due to CSI and employee costs supporting growth.
- Q1 2020 included $36.4 million of revenue from significant change orders and/or claims under negotiation, compared with $6.8 million in Q1 2019. Management said project estimate changes increased gross margin by 0.1 percentage point in Q1 2020; the comparable changes reduced it by 0.8 percentage point in Q1 2019.
- Other expense included approximately $1.0 million of CSI contingent-consideration expense related to contract margin guarantees. The company also recorded $0.4 million of CSI contingent compensation expense.
- Adoption of the expected-credit-loss standard (ASC 326) reduced opening retained earnings by $0.3 million. The company recorded no stock-based compensation grants in Q1; awards were subsequently granted on April 27, 2020.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management anticipated possible slowdowns beginning in Q2 2020 in transmission, distribution and C&I activity because of COVID-19, with recovery dependent on the broader U.S. and Canadian economic recovery. Management noted that most operations were considered essential, but emphasized that the pandemic’s ultimate effects were uncertain.
- Management cited potential higher costs, workforce and supply-chain disruptions, project restrictions, delays, and adverse effects on customers, liquidity, operations and cash flows. It was controlling costs and capital expenditures while continuing selected investments in personnel and specialized equipment.
- Management saw longer-term opportunities in utility reliability and infrastructure investment, renewable energy, health care, transportation, data centers, warehousing and water projects. Timing of large transmission awards and construction remained uncertain.
- Approximately $1.035 billion of surety bonds were outstanding; estimated remaining costs to complete the bonded projects were $414.8 million. Other disclosed exposures include insurance and claims, indemnities, labor and multi-employer pension plans, project execution and contract-estimate risk. The company said it was not aware of material unrecorded indemnity liabilities and did not expect existing legal proceedings to materially affect its financial position, results or cash flows.
- Variable-rate revolving debt exposes the company to interest-rate risk; a sustained 1 percentage-point increase in rates was estimated to increase annual interest expense by approximately $1.0 million. The facility has maximum leverage and minimum interest-coverage covenants, and certain payments are restricted under specified leverage or liquidity conditions.
Important facts for investors to verify
- How COVID-19 affected project activity, labor availability, costs and customer spending after March 31, 2020, and whether backlog converted into revenue as expected.
- The collectability and timing of the $223.7 million in contract assets and the resolution of change orders, claims and labor-inefficiency reimbursements.
- CSI’s contribution to C&I results, integration and performance, including future margin-guarantee adjustments and contingent payments.
- Cash generation, capital spending, facility availability and covenant headroom if operating conditions weaken.
- Whether reported gross-margin improvements and backlog translate into sustainable profits, given fixed-price contract, project-cost and completion-estimate risks.