MYR Group Inc. — Q2 2021 Form 10-Q
Business context and reporting period
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 western Canada. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the same 2020 periods.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $649.6 million | $513.1 million | $1,242.1 million | $1,031.5 million |
| Gross profit / margin | $81.0 million / 12.5% | $61.3 million / 11.9% | $158.0 million / 12.7% | $122.9 million / 11.9% |
| Operating income / margin | $29.7 million / 4.6% | $19.3 million / 3.8% | $57.1 million / 4.6% | $35.8 million / 3.5% |
| Net income | $21.2 million | $13.4 million | $41.1 million | $23.3 million |
| Diluted EPS | $1.24 | $0.80 | $2.41 | $1.39 |
First-half EBITDA, a company-defined non-GAAP measure, was $80.5 million versus $58.9 million. First-half operating cash flow was $88.6 million versus $97.9 million. Capital expenditures were $21.0 million, and cash and cash equivalents at quarter-end were $68.3 million.
At June 30, 2021, working capital was $221.5 million. Debt was $8.8 million, comprising equipment notes; there were no revolver borrowings. The $375 million revolving facility had $362.7 million of borrowing availability after outstanding letters of credit of approximately $12.3 million. The company reported compliance with its credit agreement covenants. On July 2, it prepaid a $3.8 million equipment note.
Changes versus prior comparable periods
- Q2 revenue rose 26.6%; first-half revenue rose 20.4%. Both segments grew, with C&I revenue up 36.6% in Q2 and T&D up 18.1%.
- Q2 gross margin improved 0.6 percentage points, and first-half margin improved 0.8 points. Management attributed improvement mainly to project productivity and favorable close-outs, partly offset by labor and equipment inefficiencies.
- First-half SG&A rose to $101.5 million from $86.2 million, primarily from higher incentive compensation and contingent compensation tied to prior acquisitions. Lower debt reduced interest expense.
- Backlog was $1.57 billion at June 30, down from $1.65 billion at December 31, 2020 and 4.7% below March 31, 2021. Remaining performance obligations were $1.45 billion, with $288.9 million estimated not to be recognized within 12 months.
- Operating cash flow declined year over year despite higher net income, primarily because of less favorable working-capital movements and other-liability timing.
Outlook, risks, contingencies and unusual items
- Management sees potential long-term demand from U.S. infrastructure, utility reliability and renewable-generation investment, and reported active bidding for small- and medium-sized transmission work. Large multi-year awards are subject to regulatory and permitting timing; substantial construction on large projects awarded in the remainder of 2021 was not expected likely before 2022.
- C&I opportunity recovery remains dependent on the pace of U.S. and Canadian economic recovery. Management cautioned that COVID-related disruption, pricing volatility and materials-availability delays could slow project opportunities and awards. No specific numerical earnings or revenue guidance was provided.
- Q2 changes in project estimates increased gross margin by 0.8 percentage points and operating income by $5.1 million (net income by $3.6 million; diluted EPS by $0.21). First-half estimate changes added $3.9 million to operating income and $0.16 to diluted EPS.
- Recognized revenue on significant negotiated change orders and claims was $6.0 million as of June 30, 2021, compared with $40.1 million as of June 30, 2020; amounts remain under negotiation.
- Surety bonds outstanding had an original face amount of approximately $1.30 billion; estimated remaining cost to complete those bonded projects was $605.4 million. The company also reported $14.2 million of equipment purchase orders with payments scheduled over six months and $25.4 million of remaining CARES Act payroll-tax deferrals payable within two years.
- Risks include fixed-price project cost overruns, labor and equipment availability or inefficiencies, materials-price increases, weather and natural disasters, contract timing and cancellation, bond and insurance exposure, and multi-employer pension obligations. The filing reported no material change to previously disclosed risk factors and no legal proceeding expected to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether improved project productivity and close-outs are repeatable, and how much reported profit depended on favorable estimate changes.
- Whether backlog converts to revenue and margin on expected timing, given its sequential decline and the cancellation flexibility of some master service agreements.
- Trends in receivables, contract assets and liabilities, billings, and operating cash conversion.
- Potential effects of labor, equipment, material-cost, weather and COVID-related constraints on fixed-price project execution.
- Exposure from negotiated claims, bonded work, insurance reserves and multi-employer pension plans, and the company’s continuing covenant and liquidity headroom.