MYR Group Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; comparisons are with the same 2019 periods unless stated otherwise. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $513.1m | $448.8m | $1,031.5m | $916.9m |
| Gross profit | $61.3m | $43.2m | $122.9m | $86.0m |
| Gross margin | 11.9% | 9.6% | 11.9% | 9.4% |
| Operating income | $19.3m | $9.4m | $35.8m | $19.0m |
| Net income attributable to MYR Group | $13.4m | $7.2m | $23.3m | $14.6m |
| Diluted EPS | $0.80 | $0.43 | $1.39 | $0.87 |
- Q2 revenue rose 14.3%; six-month revenue rose 12.5%. Growth primarily reflected the July 2019 CSI acquisition and higher T&D activity. COVID-19 impacts and timing of C&I projects partly offset growth.
- Higher gross margin reflected better-than-anticipated productivity, higher-margin work and favorable project close-outs, partly offset by labor inefficiencies and lower revenue recognized on pending claims and change orders. Prior-year margins were also affected by inefficiencies on a joint-venture project that has since been completed.
- Six-month operating cash flow was $97.9m, versus $7.4m in 2019. Management attributed the increase chiefly to favorable working-capital movements, including stronger receivable collections, as well as higher net income. Investing activities used $15.3m, including $16.9m of capital expenditures; financing activities used $84.8m, principally for debt repayments.
Balance sheet, debt and liquidity
- At June 30, 2020, cash was $10.0m, working capital was $191.4m, and total assets were $950.1m. Current assets were $594.9m and current liabilities $403.5m.
- Total debt was $82.0m, down from $165.8m at December 31, 2019; this comprised $33.4m drawn on the revolving facility and $48.6m of equipment notes. Management reported $280.2m of borrowing availability and compliance with all financial covenants.
- The five-year credit facility provides up to $375m, subject to borrowing conditions, including an availability limit linked to EBITDA and debt. It requires a maximum leverage ratio of 3.0 and minimum interest coverage of 3.0. The six-month weighted-average rate on facility borrowings was 2.44%.
- Operating cash flow benefited in part from $9.1m of payroll and related tax payments deferred under the CARES Act. The company said operating cash flow and available borrowing capacity were expected to meet operating needs, debt service and capital expenditures.
Segments, backlog and material changes
- T&D: Q2 revenue was $276.8m, up 8.1%, and operating income was $23.8m, up 48.5%; operating margin increased to 8.6% from 6.3%. Six-month revenue was $536.0m, up 1.4%, and operating income was $41.8m, up 34.9%.
- C&I: Q2 revenue was $236.3m, up 22.5%, and operating income was $9.0m, up from $4.5m; operating margin increased to 3.8% from 2.3%. Six-month revenue was $495.5m, up 27.6%, and operating income was $18.3m, up from $9.6m. CSI contributed materially to C&I revenue growth.
- Backlog was $1.55bn at June 30, compared with $1.50bn at year-end 2019 and $1.16bn a year earlier. Remaining performance obligations were $1.45bn; the company estimated $231.9m would not be recognized within 12 months. Backlog and performance obligations are not guarantees of revenue or profit.
- CSI was acquired in July 2019 for approximately $80.7m, funded with facility borrowings. CSI-related contingent consideration and performance-based compensation affected 2020 results. At June 30, the company had recognized $40.1m of revenue associated with significant change orders or claims under negotiation, versus $21.4m at June 30, 2019.
Outlook, risks and contingencies
- COVID-19 slowed projects, particularly in C&I, due to government restrictions and customer-specific safety protocols. Although most stay-at-home orders had been phased out by quarter-end, the company expected project protocols to continue affecting schedules and workflow. Management could not predict the pandemic’s ultimate financial impact.
- Management anticipated steady bidding for small- and medium-sized transmission work, but warned that pandemic conditions could slow transmission and distribution construction in 2020. Large multi-year transmission awards could take time to progress to substantial construction, with significant activity on projects awarded in 2020 unlikely before 2021. C&I bidding and project recovery were described as dependent on broader economic recovery. No specific numerical earnings or revenue guidance was provided.
- Key risks include project cost overruns and estimation changes, customer cancellations or payment issues, labor and supply constraints, competition, weather, permitting delays, acquisition integration, and COVID-related disruptions. Fixed-price work and percentage-of-completion estimates can expose results to cost overruns or reversals of previously recognized profits.
- Outstanding surety bonds had an original face amount of approximately $1.079bn; estimated remaining costs to complete those bonded projects were $452.0m. The filing does not present the bond face amount as a recorded debt liability. The company also disclosed ordinary-course litigation and claims, but did not expect them to have a material adverse effect; it reported no material unrecorded liabilities for asserted indemnification claims.
- Variable-rate facility borrowings expose the company to interest-rate changes; it had no interest-rate hedges. A permanent 1% rate increase on revolving debt outstanding at quarter-end was estimated to reduce annual pretax income and cash flow by about $0.3m.
Important facts for investors to verify
- Whether COVID-19 protocols, project delays and economic conditions subsequently affected C&I activity, margins and cash conversion.
- How much of reported growth and backlog conversion is attributable to CSI, and the acquisition’s continuing costs, amortization and contingent payments.
- Whether margins remain sustainable given fixed-price exposure, labor inefficiencies, project estimates and the $40.1m of recognized claims and change orders still under negotiation.
- Whether working-capital cash flow benefits persist, particularly in light of payroll-tax deferrals, contract balances and customer collections.
- Future borrowing availability, covenant headroom, interest-rate exposure and potential claims or costs associated with surety bonds, insurance and multi-employer pension plans.