MYR Group Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $468.1 million | $345.6 million | +35.4% |
| Gross profit / margin | $42.9 million / 9.2% | $35.8 million / 10.3% | Profit +19.9%; margin down 1.1 percentage points |
| Operating income / margin | $9.6 million / 2.1% | $8.4 million / 2.4% | Income +14.5%; margin down 0.3 points |
| Net income attributable to MYR Group | $7.4 million | $5.6 million | +30.3% |
| Diluted EPS | $0.44 | $0.34 | +$0.10 |
| EBITDA (non-GAAP) | $20.9 million | $18.0 million | +15.9% |
| Operating cash flow | $(8.2) million | $22.0 million | Down $30.2 million |
| Capital expenditures | $9.9 million | $14.5 million | — |
Revenue growth reflected higher volumes in both segments and the contribution from Huen, acquired in July 2018. T&D revenue rose 26.0% to $272.5 million; segment operating income rose 10.3% to $14.9 million, while its operating margin fell to 5.5% from 6.3%. C&I revenue increased 51.3% to $195.5 million, including Huen; operating income declined to $5.1 million from $5.3 million, and margin decreased to 2.6% from 4.1%.
Financial position and liquidity
- Cash was $1.3 million at March 31, 2019, down from $7.5 million at year-end 2018. Working capital was $212.2 million.
- Total debt was $109.9 million, comprising $79.9 million drawn on the revolving facility and $30.0 million of equipment notes. Long-term debt on the balance sheet was $106.2 million; the current portion was $3.7 million.
- Borrowing availability under the credit facility was $148.9 million. The company reported compliance with its financial covenants. The facility requires a maximum leverage ratio of 3.0 and minimum interest coverage ratio of 3.0.
- Net cash used in operating activities was driven chiefly by working-capital needs as revenue expanded, including higher contract assets and lower contract liabilities, and bonus payments. Cash from financing included $21.6 million of net revolving borrowings.
- Contract assets rose to $188.1 million from $160.3 million at year-end; contract liabilities fell to $28.5 million from $58.5 million. Net contract assets increased to $159.6 million from $101.7 million.
- Adoption of the new lease standard added $16.3 million of operating lease right-of-use assets and $16.0 million of operating lease liabilities; the company said adoption did not affect earnings, retained earnings or cash flows.
Material changes, outlook and risks
- Gross margin was pressured by inclement weather, non-reimbursable project costs, and unanticipated overtime and material delays on a majority-controlled joint-venture project. Project estimate changes reduced Q1 2019 gross margin by 0.8%, operating income by $4.0 million, MYR-attributable net income by $1.5 million and diluted EPS by $0.09. The comparable Q1 2018 impacts were 0.1%, $0.3 million, $0.2 million and $0.01, respectively.
- Other income included approximately $0.8 million from a reduction in contingent consideration tied to Huen contract margin guarantees. The company also recorded $0.3 million of Huen-related contingent compensation expense. A C&I customer bankruptcy increased bad-debt expense.
- Backlog was $1.14 billion, down 0.9% from $1.15 billion at December 31, 2018, but up from $958.5 million a year earlier. Remaining performance obligations were $1.06 billion; the company expected most to be recognized within 24 months. Backlog and performance obligations are not guaranteed revenue and exclude some cancelable master service agreement work.
- Management expected strong bidding activity for small- and medium-sized transmission work and an incremental increase in U.S. distribution opportunities in 2019. Large transmission awards may take time to progress to construction; substantial work on projects awarded in 2019 was not expected likely before 2020. Management also expected C&I bidding opportunities to improve during the rest of 2019.
- Management said available credit and anticipated operating cash flow should support operations, debt service, capital spending, acquisitions, joint ventures and share repurchases, while noting large projects or acquisitions could require additional capital. The company did not expect to pay dividends.
- Key risks include project cost overruns and estimation revisions, weather and seasonality, competitive pricing, labor availability and work stoppages, customer or contract termination and collection risk, acquisition and joint-venture execution, bonding and insurance exposure, and variable-rate debt. A permanent 1 percentage-point rise in rates on revolving debt outstanding at quarter-end was estimated to increase annual interest expense by about $0.8 million.
- Outstanding surety bonds had an original face amount of $646.1 million, with estimated remaining completion costs of $320.0 million. The company reported no material expected adverse effect from pending legal matters and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether project performance and estimate revisions—particularly the joint-venture and fixed-price work—continue to weigh on gross margins.
- Whether working-capital investment and contract-asset growth convert to cash, given negative operating cash flow and reduced cash balances.
- Actual conversion and profitability of backlog and remaining performance obligations, including the effect of cancelable agreements and project timing.
- Revolving debt, interest costs, covenant headroom and available borrowing capacity as the company funds growth and working capital.
- Final cash and earnings implications of Huen acquisition adjustments, contingent margin guarantees, and the joint-venture project expected to complete in 2019.