MYR Group Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Comparative figures are for Q1 2017 unless stated otherwise.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $345.6 million | $300.1 million | +15.2% |
| Gross profit / margin | $35.8 million / 10.3% | $25.7 million / 8.6% | Margin +1.7 percentage points |
| Operating income / margin | $8.4 million / 2.4% | $0.5 million / 0.2% | Improved |
| Net income | $5.6 million | $1.2 million | Improved |
| Diluted EPS | $0.34 | $0.07 | Improved |
| Operating cash flow | $22.0 million | $13.1 million | +$8.9 million |
| Capital expenditures, net of equipment-sale proceeds | $13.4 million | $9.1 million | Higher investment |
Management-reported EBITDA, a non-GAAP measure, was $18.0 million versus $11.1 million. SG&A rose to $28.3 million from $25.8 million, but declined as a share of revenue to 8.2% from 8.6%. The effective tax rate was 28.9%; Q1 2017 had a $0.4 million tax benefit.
Segments and material changes
- T&D: Revenue increased 10.6% to $216.4 million; operating income rose to $13.5 million from $5.1 million, with segment operating margin improving to 6.3% from 2.6%. Distribution revenue increased, and management cited improved efficiency compared with a prior-year quarter affected by inclement weather and a higher mix of smaller, shorter-duration work.
- C&I: Revenue increased 23.8% to $129.2 million, primarily from greater customer spending and volume at organic expansion locations. Operating income rose to $5.3 million from $4.4 million; margin edged down to 4.1% from 4.2%.
- Revenue growth was primarily attributable to higher C&I and distribution activity. Gross-margin improvement reflected better efficiency; project-estimate changes reduced Q1 2018 gross margin by 0.1%, compared with a 0.4% benefit in Q1 2017.
- Q1 2018 included $1.1 million of gains on routine equipment sales, versus $0.7 million in Q1 2017. Q1 2017 other income included contingent consideration related to the Western Pacific Enterprises acquisition.
Financial position and liquidity
- At March 31, 2018, cash was $1.7 million, working capital was $181.6 million, and current assets and liabilities were $363.5 million and $182.0 million, respectively.
- Long-term debt under the revolving facility was $67.4 million, down from $79.0 million at year-end 2017. Capital lease obligations totaled $3.4 million. Cash decreased by $3.6 million during the quarter to $1.7 million.
- The $250 million credit facility had $162.0 million of borrowing availability at quarter-end, after outstanding borrowings and letters of credit. The weighted-average borrowing rate was 2.75%; the company was in compliance with its covenants.
- Operating cash flow benefited from higher net income and changes in operating liabilities, including the timing of wage and employment taxes and higher bonus accruals. Investing cash outflow included $14.5 million of capital expenditures; financing cash outflow included $11.6 million of revolver repayments.
Backlog, outlook and risks
- Backlog was $958.5 million at March 31, up 41.1% from $679.1 million at December 31, 2017 and from $660.9 million a year earlier. The increase reflected the Denver Central 70 Project and various small- and mid-sized T&D projects. Remaining performance obligations were $881.8 million; $206.8 million was estimated not to be recognized within 12 months. Management expected the vast majority of remaining performance obligations to be recognized within 24 months.
- Management anticipated significant bidding activity for large transmission projects through the remainder of 2018 and into 2019, but noted regulatory approvals and right-of-way permits make award and construction timing difficult to predict; substantial work on large awards made in 2018 might not begin until 2019. Management expected continued improvement in C&I bidding opportunities. The filing provides no quantified earnings or revenue guidance.
- Management said available credit and future operating cash flow were expected to support operating needs, debt service, capital expenditures, acquisitions, joint ventures and share repurchases. Large projects or acquisitions could require additional capital. The company did not expect to pay dividends.
- Key risks include competitive pricing and margin pressure, project cost overruns under fixed- or unit-price contracts, estimation and percentage-of-completion risks, labor availability and labor issues, weather, contract cancellation or delays, customer credit and collections, bonding capacity, variable-rate debt, and execution of acquisitions. Backlog may not be realized or profitable; many customer agreements can be terminated on short notice.
Contingencies and unusual items
- Adoption of Topic 606 on January 1, 2018 increased opening retained earnings by $0.7 million, net of tax; Q1 revenue increased by $0.1 million under the new standard. Prior-year results were not restated.
- Q1 revenue included $16.1 million from significant change orders and claims under negotiation. Contract estimates are subject to revision; project estimate changes reduced operating income by $0.3 million, net income by $0.2 million, and diluted EPS by $0.01.
- Surety bonds outstanding had an original face amount of $540.4 million; estimated remaining cost to complete those projects was $101.7 million. The company also had $14.0 million of equipment purchase orders scheduled for payment over the next nine months.
- The company disclosed that some contributing multi-employer pension plans had been classified as “critical” status, but it was not aware of potential liabilities. It did not believe pending legal matters would materially adversely affect its financial position, results or cash flows. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether backlog and remaining performance obligations convert to revenue on the expected schedule, particularly given project award, permitting and cancellation risks.
- Whether Q1 margin improvement is sustainable after the unusually weather-affected Q1 2017 comparison and as project mix and contract estimates change.
- Collection and working-capital trends, including the increase in net contract assets to $74.5 million and the quarter-end cash balance of $1.7 million.
- Future capital needs, revolver availability, variable-rate exposure, covenant headroom and ability to obtain bonds and letters of credit as project activity grows.
- Resolution and collectability of the $16.1 million in change orders and claims, alongside the company’s contract-estimation and insurance exposures.