MYR Group Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. 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 of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $339.7 | $356.2 | $685.3 | $656.3 |
| Gross profit / margin | $38.6 / 11.4% | $27.5 / 7.7% | $74.4 / 10.9% | $53.3 / 8.1% |
| Operating income / margin | $10.4 / 3.1% | $3.6 / 1.0% | $18.8 / 2.8% | $4.1 / 0.6% |
| Net income | $6.8 | $1.2 | $12.5 | $2.4 |
| Diluted EPS | $0.41 | $0.07 | $0.75 | $0.15 |
| EBITDA (non-GAAP) | $19.8 | $14.1 | $37.9 | $25.2 |
- Q2 revenue fell 4.6%, as lower revenue from large transmission projects outweighed C&I growth. Six-month revenue increased 4.4%, reflecting higher C&I and distribution revenue, partly offset by lower large-project transmission revenue.
- Q2 gross profit rose 40.4%; six-month gross profit rose 39.7%. Management attributed improved margins chiefly to better project efficiency compared with 2017, which had been affected by write-downs on three projects, and to a favorable claim settlement in 2018. Improvements were partly offset by a weather-related project write-down, lower productivity and negotiations over a contract termination.
- Q2 segment revenue and operating income: T&D $196.9 and $11.0; C&I $142.8 and $9.6. T&D revenue declined 17.9% year over year, while C&I revenue increased 22.6%. For the first half, T&D revenue was $413.3 and operating income $24.6; C&I revenue was $272.0 and operating income $15.0.
- Q2 SG&A increased to $29.2 from $25.0, primarily due to higher bonus and profit-sharing costs. Six-month interest expense rose to $1.5 from $1.1. The effective tax rate was 28.8% for both 2018 periods, versus 67.3% in Q2 2017 and 47.2% for the 2017 first half; the lower 2018 rate was primarily associated with the U.S. tax law change, while inability to use certain Canadian operating losses remained a headwind.
Cash flow, balance sheet and capital
- First-half operating cash flow was $45.3, up from $19.2. Management cited higher net income and favorable changes in operating assets and liabilities, particularly timing of wage and employment taxes and higher bonus and profit-sharing accruals.
- First-half investing cash use was $25.6, including $28.0 of property and equipment purchases and $2.4 of sale proceeds. Financing cash use was $20.8, primarily $21.2 of net revolving-credit repayments; cash declined $1.1 to $4.2.
- At June 30, cash was $4.2, working capital was $176.8, and revolving debt was $57.8, down from $79.0 at December 31, 2017. Capital lease obligations totaled $3.2. The company reported $171.5 of borrowing availability and approximately $20.6 of letters of credit outstanding at quarter-end.
- The $250 million credit facility carries variable-rate borrowings; the weighted-average borrowing rate for the first half was 2.86%. MYR Group was in compliance with its financial covenants at June 30. Management estimated that a permanent 1% rate increase on revolving debt outstanding at that date would reduce annual pretax income and cash flow by approximately $0.6.
Outlook, significant developments and risks
- Management expected strong bidding activity for small- and medium-sized transmission projects and upgrades, and anticipated continued distribution-service demand. Large transmission awards were possible, but timing depends on regulatory approvals and right-of-way permits; substantial construction on large projects awarded in 2018 was not expected to begin until around mid-2019.
- Management expected C&I bidding opportunities to improve through the rest of 2018 and expected long-term C&I growth generally to track regional economic growth. The filing gives no formal numerical earnings or revenue guidance.
- Backlog was $1.013 billion at June 30, up from $958.5 million at March 31 and $632.5 million a year earlier. Remaining performance obligations were $930.6 million; $182.1 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, while cautioning that timing is not fully within its control and backlog is not a standalone predictor of future results.
- On July 2, 2018, after quarter-end, MYR Group acquired substantially all assets of the Huen Companies for approximately $47.1 million, subject to adjustments, funded with credit-facility borrowings. The acquisition expands C&I operations in Illinois, New Jersey and New York. Management expected Huen profits to be material to 2018 operating results; contingent payments may also be due based on performance and continued employment.
- Key exposures include project cost overruns and estimate changes—especially on fixed-price and unit-price work—labor availability, competition, customer termination or disputes, weather, collection and working-capital timing, variable interest rates, acquisition integration, bonding capacity, and multi-employer pension plans. Surety bonds outstanding had an original face amount of $606.1, with estimated remaining project completion costs of $247.3. The company reported no expected material adverse effect from its ordinary-course legal proceedings and was not aware of potential liabilities from critical-status multi-employer plans.
- MYR Group adopted revenue-recognition Topic 606 on a modified-retrospective basis in 2018. Adoption increased opening retained earnings by $0.7 net of tax and increased first-half revenue by $0.3; prior-year results were not restated.
Important facts for investors to verify
- Whether higher reported margins persist, and how the weather-related write-down and contract-termination negotiations resolve.
- Whether backlog and remaining performance obligations convert to revenue and cash on the expected schedule, given project timing, cancellations and estimate risk.
- Huen’s realized contribution to earnings, integration progress, contingent payments and the resulting post-acquisition debt and borrowing availability.
- Cash-flow sustainability: first-half operating cash flow benefited from timing-related liability accruals, while capital spending was $28.0.
- Customer and credit exposure: one customer represented 12.1% of accounts receivable at June 30, 2018; monitor collection, bonding and covenant capacity.