MYR Group Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments.
Key financial results
Amounts in millions of dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $283.3 | $269.9 | $798.8 | $790.5 |
| Gross profit / margin | $34.1 / 12.0% | $28.6 / 10.6% | $92.8 / 11.6% | $89.7 / 11.4% |
| Operating income / margin | $11.1 / 3.9% | $9.9 / 3.7% | $23.6 / 3.0% | $34.5 / 4.4% |
| Net income | $6.1 | $6.2 | $13.6 | $21.4 |
| Diluted EPS | $0.38 | $0.29 | $0.77 | $1.01 |
| EBITDA (non-GAAP) | $20.5 | $20.1 | $52.7 | $62.9 |
- Cash flow and liquidity: Operating cash flow was $40.5 million for the first nine months, versus $10.7 million a year earlier; the filing’s quarterly reconciliation reports Q3 operating cash flow of negative $6.0 million. Cash was $0.6 million at September 30, down from $39.8 million at year-end 2015. Working capital was $87.6 million. Current assets were $286.0 million and current liabilities $198.3 million.
- Debt and capital spending: The company had $33.4 million drawn on its $250 million revolving facility, with reported borrowing availability of $192.3 million. Capital lease obligations were $5.1 million. Nine-month capital expenditures were $17.9 million. The facility carries variable rates; the average rate on borrowings through September 30 was 1.69%.
- Balance sheet and capital returns: Total assets were $499.6 million, total liabilities $250.9 million, and stockholders’ equity $248.7 million. The company repurchased 4.23 million shares in the first nine months for $101.5 million; shares outstanding declined to 16.1 million from 20.0 million at year-end.
Changes versus prior comparable periods
- Q3 revenue rose 5.0%; net income was essentially flat. Gross margin improved 1.4 percentage points, while SG&A increased by $4.2 million to $23.2 million.
- Nine-month revenue increased 1.1%, but net income fell 36% and operating income fell 32%. SG&A rose $13.1 million to $69.6 million, including $7.2 million of new-market expansion costs and $1.0 million related to activist investor activities.
- For the first nine months, T&D revenue declined 4.3% and operating income declined to $40.8 million from $47.5 million. C&I revenue increased 17.3% to $230.8 million, while operating income was nearly unchanged at $9.6 million.
- Backlog was $620.6 million at September 30, up 30.6% from June 30 and from $425.1 million a year earlier. The quarterly increase was primarily attributable to a roughly $125 million multi-year Cross Texas Transmission award.
Outlook, risks and unusual items
- Management expected bidding activity to remain strong in both segments through the remainder of 2016 and in 2017. It anticipated lower 2016 capital spending and lower share repurchases than in 2015 and 2016, and said operating cash flow and credit availability should cover expected needs. No numerical earnings or revenue guidance was provided.
- Management cautioned that highly competitive bidding, shorter-duration projects, lower fleet utilization, project delays, weather, labor productivity and project execution can pressure margins. Some larger transmission bids have higher material and subcontractor content, potentially reducing overall margins.
- Percentage-of-completion estimate revisions increased Q3 operating income by $2.0 million and net income by $1.2 million ($0.07 diluted EPS); for the nine-month period, revisions reduced operating income by $3.6 million and net income by $2.2 million ($0.12 diluted EPS).
- At September 30, the company had $910.1 million of surety bonds outstanding, with estimated remaining costs to complete those bonded projects of $71.6 million. It reported no material unrecorded asserted indemnity liabilities and did not expect pending legal matters to materially affect results. Some contributing multi-employer pension plans were classified as critical; the company reported no significant related liability known at filing.
- After quarter-end, on October 28, MYR acquired substantially all assets of Western Pacific Enterprises for approximately C$16.1 million, subject to working-capital adjustments, funded with facility borrowings. Contingent payments may be due based on performance and continued employment. Management did not expect the acquisition to materially affect 2016 operating results.
Important facts for investors to verify
- Whether the backlog increase, particularly the Cross Texas award, converts to revenue and profit on expected timing and margins.
- Whether expansion costs and higher SG&A are offset by sustainable organic growth, especially in new markets and C&I.
- Cash conversion and working-capital trends, given low period-end cash and negative Q3 operating cash flow despite positive nine-month cash flow.
- Remaining share-repurchase authorization, debt usage, variable-rate exposure and compliance with credit-facility covenants.
- Project estimate revisions, pending change orders and claims, bonded-project execution, and the integration and contingent costs of the WPE acquisition.