MYR Group Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are to the corresponding 2016 periods. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $356.2m | $261.9m | $656.3m | $515.6m |
| Gross profit / margin | $27.5m / 7.7% | $31.4m / 12.0% | $53.3m / 8.1% | $58.7m / 11.4% |
| Operating income / margin | $3.6m / 1.0% | $9.1m / 3.5% | $4.1m / 0.6% | $12.4m / 2.4% |
| Net income | $1.2m | $5.5m | $2.4m | $7.5m |
| Diluted EPS | $0.07 | $0.31 | $0.15 | $0.40 |
| EBITDA (non-GAAP) | $14.1m | $18.9m | $25.2m | $32.2m |
Revenue growth reflected higher large-transmission and distribution activity, increased C&I spending and the late-2016 Western Pacific Enterprises (WPE) acquisition. Profitability fell despite revenue growth, principally because of project cost overruns and lower T&D margins. For the first half, T&D revenue was $435.5m and segment operating income was $13.2m, versus $361.6m and $26.3m a year earlier. C&I revenue rose to $220.8m from $154.0m, and segment operating income increased to $9.2m from $4.6m.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $19.2m, down from $46.5m in 2016. Investing activities used $18.1m, including $20.6m of capital expenditures; financing activities used $15.8m, including $14.2m of revolving-credit repayments.
- Cash was $10.0m at June 30, 2017, versus $23.8m at year-end 2016. Working capital was $135.4m.
- Revolving-facility debt was $44.9m, down from $59.1m at year-end; capital lease obligations totaled $4.4m. The $250m credit facility had $181.4m of reported borrowing availability. Standby letters of credit outstanding were approximately $23.7m.
- The weighted average borrowing rate through June 30 was 2.14%. MYR reported compliance with its credit covenants. A sustained 1% rate increase on variable-rate revolving debt would increase annual interest expense by approximately $0.4m.
- Total assets were $569.9m and total liabilities were $302.7m. Accounts receivable was $222.2m; costs and estimated earnings in excess of billings were $93.1m.
Changes, outlook and material matters
- Project estimates and execution: Q2 gross margin was reduced by 2.1 percentage points from estimate changes; the first-half impact was 1.0 point. Management said these changes reduced operating income by $7.4m for Q2 and $6.8m for the first half, and net income by $4.4m and $4.1m, respectively. Q2 write-downs included $2.8m on two Midwest projects affected by weather, access, productivity and road-repair costs, and $2.6m on a Canadian T&D project affected by delays and schedule extensions. Management is pursuing recovery of Canadian project costs but had not recognized all related pending claims and change orders.
- Other margin pressures included a higher mix of smaller, shorter-duration T&D work, lower fleet utilization, mobilization costs and expansion expenses. Management also cited higher SG&A from geographic expansion and payroll, partly offset by lower bonus and profit-sharing costs.
- Management expects significant bidding activity for large transmission projects through the rest of 2017 and in 2018, but said permitting and right-of-way timing make awards and construction schedules difficult to predict; substantial work on large awards may not begin until 2018. Small- and medium-sized transmission opportunities remain strong. C&I bidding opportunities are expected to increase through the remainder of 2017. No quantitative earnings or revenue guidance was provided.
- Backlog was $632.5m at June 30, up from $475.0m a year earlier but down from $660.9m at March 31. T&D backlog declined $61.9m sequentially while C&I increased $33.5m. The company cautioned that backlog is not a stand-alone indicator of future revenue or profit; $70.1m of current backlog was estimated not to be recognized within 12 months.
- WPE-related contingent margin-guarantee consideration of $0.9m in Q2 and $1.7m in the first half was recorded in other income. WPE purchase accounting remained preliminary, with completion expected in the second half of 2017.
- The effective tax rate was 67.3% in Q2 and 47.2% for the first half, versus 37.8% and 38.0% in 2016, primarily due to inability to use losses in certain Canadian operations; first-half rate effects were partly offset by $1.0m of stock-award tax benefits.
- Surety bonds outstanding had an original face amount of $515.4m, with estimated remaining costs to complete those bonded projects of $29.6m. The company reported no known material unrecorded indemnity claims and did not expect pending ordinary-course legal matters, individually or in aggregate, to have a material adverse effect. Some contributing multi-employer pension plans were classified as critical, though MYR was not aware of a current potential liability.
- The board approved a new $20m share-repurchase program on July 27, effective after the existing program expires; it runs through August 15, 2018 or exhaustion of funds. Management said cash, operating cash flow and facility availability should support operating needs, debt service, capital expenditures, acquisitions and repurchases, while noting large projects or acquisitions could require additional capital.
- MYR planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Its impact was still under evaluation, including treatment of uninstalled materials, cancellation-for-convenience clauses and differences between backlog and remaining performance obligations. The company expected most operating leases longer than 12 months to be recognized on the balance sheet under the new lease standard.
Important facts for investors to verify
- Whether project estimates stabilize and the Midwest and Canadian project claims or change orders result in recoveries; these estimates materially affected reported earnings.
- Whether backlog converts into profitable work, particularly given sequential T&D backlog decline, project timing uncertainty and the changing mix of contract types.
- Cash conversion, working-capital movements and capital spending, including whether lower operating cash flow persists.
- Credit-facility availability and covenant headroom after considering letters of credit, repurchases and any large project or acquisition requirements.
- Final WPE purchase accounting and any further margin-guarantee adjustments, and the eventual effects of revenue- and lease-standard adoption.