MYR Group Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. MYR Group provides specialty electrical construction services through its Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments in the United States and Canada.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $708.1 million | $649.6 million | $1,344.7 million | $1,242.1 million |
| Gross profit / margin | $80.9 million / 11.4% | $81.0 million / 12.5% | $161.3 million / 12.0% | $158.0 million / 12.7% |
| Operating income / margin | $26.2 million / 3.7% | $29.7 million / 4.6% | $51.1 million / 3.8% | $57.1 million / 4.6% |
| Net income | $19.7 million | $21.2 million | $40.4 million | $41.1 million |
| Diluted EPS | $1.15 | $1.24 | $2.36 | $2.41 |
| EBITDA (non-GAAP) | $43.9 million | $41.2 million | $83.5 million | $80.5 million |
- Revenue and segment mix: Q2 revenue rose 9.0% year over year, led by T&D, while C&I revenue declined. T&D revenue increased 27.0% to $415.2 million; C&I fell 9.3% to $292.9 million. T&D operating margin was 7.9% versus 10.0%; C&I was 3.2% versus 4.5%.
- Year-to-date segments: T&D revenue increased 21.6% to $780.1 million, while C&I declined 5.9% to $564.6 million. Segment operating margins fell to 8.1% from 9.6% for T&D and to 3.5% from 4.8% for C&I.
- Cash flow and liquidity: Six-month operating cash flow was $60.1 million, down from $88.6 million. Investing used $139.8 million, including the Powerline Plus acquisition and $30.4 million in capital expenditures. Financing provided $20.4 million. Cash was $22.1 million at June 30, versus $82.1 million at year-end; working capital was $219.0 million.
- Debt and capacity: Total debt was $55.4 million, including $51.4 million drawn on the $375 million revolving facility. Remaining borrowing availability was $310.3 million; letters of credit outstanding were $13.3 million. The company reported compliance with its credit covenants.
- Other balance-sheet items: Accounts receivable were $409.5 million and contract assets $280.7 million. Contract liabilities were $203.2 million. Operating and finance lease obligations totaled $37.0 million.
Material changes versus comparable periods
- Higher T&D activity and the Powerline Plus acquisition drove revenue growth, while C&I revenue weakened in certain geographies.
- Gross margin declined year over year in both Q2 and the first half. Management cited inflation, supply-chain disruption, COVID-related impacts, project inefficiencies, weather and an unfavorable change-order adjustment. Productivity gains and favorable project close-outs partly offset these pressures.
- Q2 net income fell 7.2% year over year; first-half net income fell 1.9%. Higher acquired-intangible amortization also weighed on operating income.
- Backlog increased to $2.44 billion at June 30, 2022, from $1.79 billion at December 31, 2021 and $1.57 billion a year earlier. Remaining performance obligations were $2.31 billion; these measures have different definitions and are not guarantees of future revenue.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expects continued bidding activity in small- and medium-sized transmission work and an incremental increase in distribution opportunities during the remainder of 2022. Large multi-year awards late in 2022 are not expected to materially affect that year’s results. C&I prospects depend on the timing and pace of market recovery.
- Management sees potential longer-term demand from grid reliability, infrastructure renewal, clean energy, transportation and water projects, while cautioning that supply-chain disruption, inflation, tariffs, regulatory delays and COVID-related market effects may delay work or raise costs.
- The Powerline Plus Companies were acquired January 4, 2022. Cash paid net of acquired cash was $110.6 million; acquisition-date contingent earn-out fair value was $10.6 million. The potential earn-out is uncapped; if minimum performance thresholds are met, payment would be approximately $17.7 million. Purchase accounting remained preliminary.
- Other income included approximately $2.3 million of Canadian Emergency Wage Subsidy funds in the first half, primarily attributable to a C&I company. Q2 effective tax rate was 29.4%, compared with 27.0% a year earlier; the first-half rates were 22.8% and 26.6%, respectively.
- As of June 30, the company had recognized $12.5 million of revenue related to large change orders and claims under negotiation, versus $6.0 million at June 30, 2021. Project-estimate changes reduced Q2 gross margin by 0.1 percentage point, but increased first-half margin by 0.3 point.
- Outstanding surety bonds had an aggregate original face amount of approximately $1.74 billion, with estimated remaining project costs of $742.3 million. The company also reported $14.3 million of equipment purchase commitments and $11.8 million of remaining CARES Act payroll-tax deferrals expected to be paid by year-end. Management did not expect ordinary-course litigation to materially affect results or cash flows.
- Other principal risks include fixed-price project cost overruns, labor availability and labor relations, weather and wildfire exposures, insurance limits and costs, project timing, customer termination rights, and the realization and profitability of backlog. A 1 percentage-point sustained increase in variable borrowing rates was estimated to reduce annual pretax income and cash flow by approximately $0.5 million.
Important facts for investors to verify
- Whether supply-chain, inflation and labor-cost pressures continue to erode project margins, particularly in C&I.
- How much of the reported backlog and remaining performance obligations converts to revenue on schedule and at expected profitability.
- Final Powerline Plus purchase accounting, integration performance and possible earn-out or margin-guarantee adjustments.
- Operating cash generation and working-capital needs, given the decline in first-half operating cash flow and lower cash balance.
- Use of revolving credit, covenant headroom, share repurchases and the ability to fund capital spending and commitments while preserving liquidity.