MYR Group Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the same 2022 periods unless noted. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $939.5 | $799.8 | $2,639.7 | $2,144.6 |
| Gross profit | $92.4 | $86.3 | $266.9 | $247.7 |
| Gross margin | 9.8% | 10.8% | 10.1% | 11.5% |
| Operating income | $32.0 | $27.0 | $91.9 | $78.1 |
| Net income | $21.5 | $18.4 | $66.9 | $58.8 |
| Diluted EPS | $1.28 | $1.09 | $3.98 | $3.45 |
- Q3 revenue rose 17.5%; nine-month revenue rose 23.1%. Growth reflected transmission, distribution and C&I activity, including clean-energy projects.
- Q3 net income increased 16.7%; nine-month net income increased 13.8%. Despite higher revenue, gross margin declined in both periods, limiting profit growth.
- Q3 segment operating margins: T&D 6.6% versus 7.6%; C&I 3.6% versus 3.1%. Nine-month margins: T&D 7.1% versus 7.9%; C&I 3.3% in both periods.
- Nine-month EBITDA, a non-GAAP measure, was $135.4 versus $123.8. The company cautions that EBITDA excludes recurring costs and is not a substitute for GAAP results or operating cash flow.
Cash, debt and liquidity
- Cash was $30.5 at September 30, 2023, down from $51.0 at December 31, 2022. Working capital was $291.6.
- Nine-month operating cash flow was $28.4, down from $73.7. The company attributed the decrease mainly to working-capital timing, particularly receivables and contract assets associated with construction activity.
- Capital expenditures were $63.8; investing activities used $59.8. Financing activities provided $10.9, including $26.4 of net revolving-credit borrowings. Cash declined $20.6 over the nine months.
- Total debt was $62.3, including $39.3 drawn on a new $490 revolving facility entered into May 31, 2023, and $23.0 in equipment notes. The facility had $431.8 of borrowing availability after outstanding borrowings and letters of credit. The weighted-average rate on facility borrowings for the nine months was 6.96%.
- The company was in compliance with credit-agreement covenants at quarter-end. The facility has a maximum net leverage ratio of 3.0 and minimum interest coverage ratio of 3.0. Variable-rate debt creates interest-rate exposure; management estimated a sustained 1% rate increase would raise annual interest expense by approximately $0.4.
Material changes and operating items
- Higher labor and project inefficiencies, supply-chain disruptions, inclement weather, inflation and a prior-period sales-tax accrual adjustment pressured margins. Favorable change orders and productivity on certain projects partly offset these effects.
- Changes in project estimates reduced Q3 2023 gross margin by 1.3 percentage points and reduced operating income by $11.5, net income by $8.0 and diluted EPS by $0.47. For the first nine months, the respective impacts were a 1.2-point gross-margin reduction, $32.2 lower operating income, $22.4 lower net income and $1.33 lower diluted EPS.
- Recognized revenue tied to large change orders and claims under negotiation was $57.1 at September 30, 2023, compared with $19.6 at year-end 2022. These amounts depend on negotiations and estimates.
- Net contract assets increased to $179.3 from $73.6 at year-end, mainly reflecting timing of billings relative to work performed.
- Backlog was $2.62 billion, up from $2.50 billion at year-end 2022 but down $116.4 from June 30, 2023. Remaining performance obligations were $2.40 billion; the company expects the vast majority to be recognized within 24 months. Backlog and performance obligations are not assured revenue or profit.
- The company recorded $3.3 of gains on property and equipment sales for the nine months. No shares were repurchased under the $75.0 million authorization through September 30; the program was scheduled to expire November 8, 2023, unless funds were used earlier.
Outlook, risks and contingencies
Management expects continuing opportunities in utility transmission and distribution, clean energy, infrastructure and selected C&I markets, but gave no specific financial guidance. It noted that large transmission awards and construction timing depend on permitting and regulatory processes; substantial work on large projects awarded late in 2023 might not begin until 2024. Management expected incremental distribution opportunities during the remainder of 2023, while market volatility could slow C&I growth.
- Risks include project cost overruns and estimate revisions, inflation, labor availability and costs, supply-chain constraints, severe weather, customer contract timing or termination, and potential economic or regulatory slowdowns.
- Approximately $2.30 billion of surety bonds were outstanding, with estimated remaining costs to complete bonded projects of $732.2. The company said it believed significant funding claims were unlikely. Outstanding purchase orders for construction equipment totaled approximately $37.4, payable in 2023 and 2024.
- Union labor agreements involve multi-employer pension plans; the company noted some plans were classified as “critical” but said it was not aware of potential liabilities. Ordinary-course litigation and claims were not expected by management to have a material adverse effect.
- The company stated there were no material changes to previously disclosed risk factors. Disclosure controls were judged effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether negotiated change orders and claims supporting $57.1 of recognized revenue are collected or otherwise resolved, and whether further project estimate changes affect earnings.
- Whether gross margins recover from 2023 levels and whether labor, weather, inflation and supply-chain pressures continue to affect project execution.
- Whether operating cash flow improves as elevated receivables and contract assets convert to cash; monitor billings, collections and contract-liability trends.
- How backlog converts to profitable work, given the quarterly decline and the company’s warning that backlog is not a stand-alone predictor of revenue or profits.
- Facility borrowing, interest costs and covenant headroom, alongside surety obligations, equipment commitments and the company’s capital allocation decisions.