MYR Group Inc. — Q3 2017 Form 10-Q
Business context and reporting period. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. This unaudited filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $373.5 | $283.3 | $1,029.8 | $798.8 |
| Gross profit / margin | $34.9 / 9.3% | $34.1 / 12.0% | $88.1 / 8.6% | $92.8 / 11.6% |
| Operating income / margin | $11.4 / 3.1% | $11.1 / 3.9% | $15.5 / 1.5% | $23.6 / 3.0% |
| Net income | $5.1 | $6.1 | $7.6 | $13.6 |
| Diluted EPS | $0.31 | $0.38 | $0.46 | $0.77 |
| EBITDA, non-GAAP | $20.1 | $20.5 | $45.2 | $52.7 |
Cash flow and liquidity. For the first nine months, operating activities used $21.8 million of cash, versus $40.5 million provided in 2016. Investing activities used $22.1 million, including $24.9 million of capital expenditures; financing activities provided $21.4 million, including $20.4 million of net revolving-credit borrowings. Cash was $1.7 million at September 30, 2017, down from $23.8 million at year-end 2016. Working capital was $179.8 million.
Long-term debt under the credit facility was $79.5 million, up from $59.1 million at December 31, 2016; capital lease obligations totaled $4.1 million. The $250 million facility also supported $20.9 million of letters of credit. The company reported $149.6 million of borrowing availability, a 2.0% weighted-average borrowing rate, and compliance with its financial covenants. Outstanding surety bonds had an original face amount of $410.9 million.
Material changes and operating drivers
- Nine-month revenue increased 28.9%, but gross profit fell 5.0% and net income fell 44.4%. Revenue growth reflected higher C&I customer spending, the late-2016 WPE acquisition, and increased transmission and distribution work.
- Q3 revenue rose 31.9%; net income declined to $5.1 million from $6.1 million. T&D revenue rose 4.6%, while segment operating income fell to $9.3 million from $14.6 million. C&I revenue more than doubled to $157.5 million, and segment operating income rose to $10.5 million from $5.0 million.
- For nine months, T&D revenue increased 14.7%, but segment operating income declined to $22.5 million from $40.8 million. C&I revenue rose 63.9% and segment operating income increased to $19.7 million from $9.6 million.
- Management attributed margin pressure chiefly to weather-related cost overruns and low productivity on two Midwest projects, and delays and schedule extensions on a Canadian T&D project. Smaller, shorter-duration work also reduced fleet utilization and increased mobilization costs; expansion-related costs were another offset to growth.
- Contract-estimate revisions reduced Q3 gross margin by 0.9 percentage points and nine-month gross margin by 0.7 points. The associated estimated reductions were $3.2 million and $7.7 million in operating income, respectively. The filing also reports $6.5 million of nine-month revenue recognized for significant change orders or claims still being negotiated.
Outlook, risks and contingencies
Management expected significant bidding activity on large transmission projects through the rest of 2017 and into 2018, while noting that regulatory approvals and right-of-way permits can delay awards and construction. Small- to medium-sized transmission bidding and construction activity remained strong. Management expected increased C&I bidding opportunities, including in newer markets. No specific revenue or earnings guidance was provided. Backlog was $701.7 million at September 30, up 10.9% from June 30; $101.4 million was estimated not to be recognized within 12 months. Backlog excludes the previously announced Denver Central 70 project, which management expected to add in 2018, and is not a standalone indicator of future revenue or profit.
- Cash conversion was pressured by working-capital movements, especially receivables and contract assets; management cited billing and collection timing and lower bonus and profit-sharing accruals. Variable-rate debt is unhedged: a sustained 1 percentage-point rate increase was estimated to reduce annual pretax income and cash flow by about $0.8 million.
- WPE purchase consideration included contingent margin-guarantee adjustments. The company recorded $1.5 million of related expense in Q3; future adjustments could occur in Q4 2017 and 2018, and losses exceeding escrow may not be fully recovered. Purchase accounting remained preliminary.
- Other exposures include $10.2 million of equipment purchase orders due over six months, self-insurance claims, performance and payment bonds, guarantees, union multi-employer pension plans, and ordinary-course litigation. Management said it was not aware of material unrecorded indemnity claims and did not expect pending legal matters to materially affect financial position, results, or cash flows.
- Key risks include project execution and cost-estimation uncertainty, adverse weather and delays, competition and award timing, labor availability and labor issues, customer collections, bonding capacity, acquisition integration, and Canadian-market exposure. Management said disclosure controls were effective; its evaluation excluded WPE’s internal controls.
Investor verification points
- Review subsequent project performance, recoveries or further write-downs on the Midwest and Canadian projects, and resolution of pending claims and change orders.
- Track receivable collections, contract assets, operating cash flow, and the unusually low period-end cash balance against borrowing availability.
- Verify the final WPE purchase-price allocation and any further escrow, margin-guarantee, or contingent compensation adjustments.
- Monitor segment margins, fleet utilization, backlog conversion and the timing of large project awards, including the Denver Central 70 project.
- Check debt, covenant headroom, variable-rate exposure, commitments, and the use of the remaining $19.3 million share-repurchase authorization.