MYR GROUP INC. quarterly report, Q3 FY2019

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MYR Group Inc. — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Figures below are in U.S. dollars; financial statement amounts are generally in millions.

Financial performance

  • Q3 revenue: $583.2 million, up 46.0% from $399.5 million in Q3 2018. Growth reflected higher volumes in both segments and the CSI acquisition.
  • Q3 earnings: Gross profit was $59.2 million versus $45.3 million; net income attributable to MYR Group was $10.4 million versus $8.0 million. Diluted EPS was $0.62 versus $0.48.
  • Q3 margins: Gross margin declined to 10.2% from 11.3%; operating margin declined to 3.0% from 3.5%. SG&A was 7.1% of revenue versus 7.8%.
  • Nine-month results: Revenue was $1.500 billion, up 38.3%; net income attributable to MYR Group was $24.9 million versus $20.4 million. Diluted EPS was $1.49 versus $1.23.
  • Nine-month margins: Gross margin was 9.7% versus 11.0%, and operating margin was 2.4% versus 3.0%. Nine-month EBITDA, a non-GAAP measure defined by the company, was $69.7 million versus $60.0 million.
  • Segment performance, nine months: T&D revenue increased 29.5% to $823.4 million and operating income increased to $48.7 million from $38.5 million. C&I revenue increased 50.7% to $676.7 million, while operating income fell to $20.4 million from $25.2 million; C&I operating margin was 3.0% versus 5.6%.

Cash flow, debt and liquidity

  • Operating cash flow: $31.7 million provided in the first nine months, down from $58.7 million. Management attributed the decline primarily to working-capital changes, including higher receivables and contract assets associated with increased activity and contract claims/change orders.
  • Investing and financing: Investing activities used $116.2 million, including $79.7 million for CSI and $39.4 million of capital expenditures. Financing activities provided $86.0 million, mainly from revolving-credit borrowings and equipment notes. Cash ended the period at $9.1 million.
  • Liquidity: Working capital was $245.9 million. The company reported $229.3 million available under its revolving facility at September 30, 2019.
  • Debt: Total debt was $178.2 million, up from $89.8 million at December 31, 2018; this included $126.0 million drawn on the revolving facility and $52.2 million of equipment notes. The new five-year credit facility provides commitments of $375 million, with a potential $200 million expansion subject to conditions. The company was in compliance with its financial covenants.
  • Interest-rate exposure: Revolving debt is variable-rate and unhedged. The company estimated that a sustained 1 percentage-point rate increase would raise annual interest expense by approximately $1.3 million.

Material changes and notable items

  • MYR Group acquired substantially all assets of California-based CSI Electrical Contractors on July 15, 2019 for approximately $79.7 million, funded with credit-facility borrowings. CSI added approximately $65.0 million of revenue and approximately $1.7 million of pretax loss to reported results for the three and nine months ended September 30, 2019. Purchase-price allocation and certain adjustments remained preliminary.
  • Backlog was $1.366 billion at September 30, 2019, up from $1.147 billion at December 31, 2018 and $1.10 billion at September 30, 2018. C&I backlog increased substantially versus June 30, while T&D backlog decreased. Backlog is not a guarantee of future revenue or profit.
  • Remaining performance obligations were $1.269 billion; management expected the vast majority to be recognized within 24 months, though timing is not fully within the company’s control.
  • Contract-estimate changes reduced nine-month gross margin by 0.5 percentage points and operating income by $7.8 million, net income attributable to MYR Group by $3.3 million, and diluted EPS by $0.20. In Q3 alone, estimate changes increased gross margin by 0.2 percentage points.
  • The company recognized $31.1 million of revenue in the first nine months related to significant change orders and/or claims under negotiation, compared with $8.8 million in the prior-year period.
  • Adoption of the lease accounting standard in January 2019 added operating lease right-of-use assets and liabilities; the company stated adoption did not affect retained earnings, net earnings or cash flows.

Outlook, risks and contingencies

  • No quantified full-year earnings or revenue guidance is provided. Management anticipated continued C&I bidding improvement through the remainder of 2019, strong small- and medium-sized transmission activity, and potentially more U.S. distribution opportunities in 2020. Large transmission awards and construction timing remain difficult to predict, and significant work on large projects awarded in 2019 was not expected to begin before 2020.
  • Management cited lower-than-historical-margin projects, weather impacts, material delays, labor inefficiencies and project costs for which reimbursement was being pursued. Fixed-price and unit-price contracts expose the company to unrecoverable cost overruns; estimates of costs to complete and claims can change reported results.
  • Outstanding surety bonds had an original face amount of approximately $867.1 million, with estimated remaining costs to complete the bonded projects of $378.7 million. The company reported no expected material adverse effect from its ordinary-course legal proceedings. Certain contributing multi-employer pension plans were classified as “critical,” although the company was not aware of potential liabilities related to this issue.
  • Other stated risks include competition and margin pressure, labor availability and work stoppages, project cancellations or delays, customer credit and collection risk, acquisition integration, weather, permitting, and variable-rate debt. The filing reported no material changes to previously disclosed risk factors.
  • The company did not expect to pay dividends. Management concluded disclosure controls and procedures were effective as of September 30, 2019.

Key facts for investors to verify

  • Whether gross-margin pressure and weak C&I segment profitability persist, and whether negotiated claims or change orders yield recoveries.
  • CSI’s post-acquisition operating performance, final purchase-price allocation, and any future margin-guarantee or performance-related payments.
  • Working-capital conversion, contract-asset and receivables growth, and the trajectory of operating cash flow relative to earnings.
  • Debt levels, available facility capacity, covenant headroom, and the effect of variable interest rates.
  • Backlog conversion, project timing and profitability, including the risks that backlog may be delayed, canceled, or fail to generate expected margins.
  • Exposure from surety bonds, insurance and self-insurance estimates, contingent claims, and multi-employer pension plans.