MYR Group Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; comparisons are with Q3 and the first nine months of 2017 unless stated otherwise. MYR Group provides specialty electrical construction services through Transmission & Distribution (T&D) and Commercial & Industrial (C&I) segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $399.5 | $373.5 | $1,084.8 | $1,029.8 |
| Gross profit / margin | $45.3 / 11.3% | $34.9 / 9.3% | $119.7 / 11.0% | $88.1 / 8.6% |
| Operating income / margin | $14.1 / 3.5% | $11.4 / 3.1% | $32.9 / 3.0% | $15.5 / 1.5% |
| Net income | $8.0 | $5.1 | $20.4 | $7.6 |
| Diluted EPS | $0.48 | $0.31 | $1.23 | $0.46 |
| EBITDA (non-GAAP) | $22.1 | $20.1 | $60.0 | $45.2 |
- Cash flow: Operating activities provided $58.7 million in the first nine months, versus $21.8 million used in the prior-year period. Investing activities used $83.3 million, including $47.1 million for the Huen acquisition and $39.7 million of capital expenditures. Financing activities provided $19.6 million. Cash declined to $0.3 million from $5.3 million at year-end 2017.
- Liquidity and debt: Working capital was $174.7 million. Total debt was $89.3 million, comprising $64.4 million outstanding on the revolving facility and $24.9 million in equipment notes; capital lease obligations were $2.9 million. The company reported $164.4 million of borrowing availability and compliance with its credit covenants at quarter-end.
- Balance-sheet movement: Total assets were $701.7 million, up from $603.8 million at December 31, 2017. Net contract assets increased to $77.9 million from $49.3 million, including contract assets of $124.1 million and contract liabilities of $46.2 million.
- Backlog and obligations: Backlog was $1.10 billion at September 30, up 8.3% sequentially and from $701.7 million a year earlier. Remaining performance obligations were $1.02 billion; $196.2 million was estimated not to be recognized within 12 months. The filing cautions that backlog is not a stand-alone indicator of future revenue or profit.
Material changes versus prior periods
- Q3 revenue rose 7.0%; nine-month revenue rose 5.3%. Growth was led by C&I, partly offset by lower revenue from large transmission projects.
- Nine-month C&I revenue increased 18.7% to $449.0 million, helped by the Huen acquisition, higher customer spending and organic expansion. T&D revenue decreased 2.4% to $635.8 million.
- Profitability improved: nine-month gross margin increased 2.4 percentage points, and net income rose to $20.4 million from $7.6 million. Management attributed margin improvement mainly to efficiency gains versus a prior year affected by write-downs on three projects.
- SG&A rose to $88.7 million for the nine months from $74.6 million, increasing from 7.2% to 8.2% of revenue. The company cited acquisition costs, higher compensation, and expenses to support operations.
- The effective tax rate fell to 28.0% for the nine months from 45.6%, primarily reflecting the U.S. federal tax-rate change; losses in certain Canadian operations continued to affect the rate.
Outlook, commentary, risks and unusual items
- Management expects continued bidding activity on large transmission projects through the remainder of 2018 and in 2019, but said regulatory approvals and right-of-way permits make award and construction timing difficult to predict; substantial work on later awards may not begin until the second half of 2019 or later. Small-to-medium transmission and distribution opportunities were described as strong.
- Management expects C&I bidding opportunities to improve and sees potential in markets entered through acquisitions and organic expansion. No specific financial guidance or quantified forecast was provided.
- On July 2, 2018, MYR acquired substantially all assets of the Huen Companies for $47.1 million, funded with credit-facility borrowings. A preliminary $10.7 million net-asset adjustment was recorded in accounts payable; purchase-price allocation remained subject to valuation and final adjustments. Huen contributed approximately $37.8 million of revenue and $0.2 million of pretax income in the reported period.
- Huen-related margin-guarantee contingent consideration of approximately $2.3 million was recorded in other expense in Q3 and the nine-month period; future adjustments could continue through 2019. Q3 also included $0.2 million of contingent executive compensation expense.
- Changes in estimates on certain projects reduced gross margin by 0.6 percentage points and operating income by $2.1 million in Q3; for the nine months, the reductions were 0.4 percentage points and $3.9 million. A separate project write-down related to weather, productivity and contract-termination negotiations also weighed on nine-month results.
- Key risks include project-cost overruns and percentage-of-completion estimate revisions, competition, labor availability and union issues, weather, customer cancellations or disputes, acquisition integration, and reliance on bonding and letters of credit. Outstanding surety bonds totaled $591.2 million, with estimated remaining completion costs of $333.7 million. The company also disclosed $16.8 million of equipment purchase orders due over the next 12 months and multi-employer pension-plan exposure, though it was not aware of a current potential liability from plan underfunding.
- Revolving borrowings are variable-rate and unhedged; management estimated a sustained 1% rate increase would raise annual interest expense by approximately $0.6 million. The company stated it had no material change to previously disclosed risk factors and did not expect disclosed litigation, individually or in aggregate, to have a material adverse effect.
- Revenue standard Topic 606 was adopted January 1, 2018 using the modified retrospective method; the company recorded a $0.7 million after-tax opening retained-earnings increase and a $0.3 million nine-month revenue increase.
Important facts for investors to verify
- Whether Huen’s final purchase-price allocation, working-capital adjustments and margin-guarantee outcomes differ materially from the preliminary estimates.
- Whether backlog converts to profitable revenue on the expected schedule, particularly given project timing, cancellable service agreements and contract-estimate risks.
- Whether operating cash generation remains adequate as contract assets and working-capital needs change, and whether available credit remains sufficient for acquisitions, capital spending and debt service.
- Whether margins can be sustained after the prior-year project write-downs and amid fixed-price contract exposure, higher SG&A and ongoing project-estimate changes.
- Whether the company continues to meet credit covenants and manages variable-rate debt, bonding capacity, insurance claims and labor-related obligations without material deterioration.