MYR Group Inc. — Q3 2021 Form 10-Q
Business and period: Specialty electrical construction contractor serving utility infrastructure and commercial/industrial markets through Transmission & Distribution (T&D) and Commercial & Industrial (C&I) segments. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $610.2 million | $607.9 million | $1,852.2 million | $1,639.4 million |
| Gross profit / margin | $83.9 million / 13.8% | $76.5 million / 12.6% | $241.9 million / 13.1% | $199.4 million / 12.2% |
| Operating income / margin | $31.0 million / 5.1% | $24.9 million / 4.1% | $88.0 million / 4.8% | $60.7 million / 3.7% |
| Net income | $23.2 million | $17.3 million | $64.3 million | $40.6 million |
| Diluted EPS | $1.35 | $1.02 | $3.75 | $2.42 |
| EBITDA (non-GAAP) | $42.3 million | $36.2 million | $122.8 million | $95.2 million |
- Segment trends: Q3 T&D revenue rose 2.3% to $306.5 million and operating margin improved to 11.5% from 10.8%. C&I revenue declined 1.5% to $303.6 million, while operating margin improved to 4.7% from 3.8%. For the nine-month period, revenue increased 13.5% in T&D and 12.5% in C&I.
- Cash flow and capital spending: Nine-month operating cash flow was $108.2 million, down from $128.6 million. Investing activities used $30.2 million, including $32.7 million of capital expenditures. Financing activities used $27.6 million, primarily for $24.4 million of equipment-note repayments. Cash increased to $73.0 million from $22.7 million at year-end 2020.
- Liquidity and debt: Working capital was $244.9 million. Total debt was $5.0 million, comprising equipment notes; there were no borrowings under the $375 million revolving facility. The company reported $362.7 million of borrowing availability and $12.3 million of outstanding letters of credit. It was in compliance with its credit covenants at quarter-end.
- Balance sheet and contract positions: Total assets were $1.064 billion and stockholders’ equity was $496.2 million. Net contract assets were $69.6 million, up from $27.4 million at December 2020, mainly reflecting billing and performance timing.
Changes versus prior comparable periods
- Q3 revenue was nearly flat year over year, up 0.4%, while net income rose 34.0%. Higher gross margin reflected productivity, favorable job close-outs and change orders; gains were partly offset by labor and equipment inefficiencies.
- Nine-month revenue increased 13.0% and net income rose to $64.3 million from $40.6 million. Both segments contributed to growth; 2020 C&I revenue had been affected by COVID-related work slowdowns in some areas.
- Nine-month operating cash flow decreased by $20.4 million despite higher earnings, primarily due to unfavorable changes in operating assets and liabilities, including timing of bonus accruals, employee-related payments and prepaid materials.
- Debt declined substantially from $29.4 million at December 2020, following scheduled payments and retirement of three equipment notes.
Outlook, risks and unusual items
- Management described active bidding in small- and medium-sized transmission work and some distribution markets, and sees potential long-term opportunity from utility investment, infrastructure needs and renewable-energy demand. Large transmission awards may be delayed by permitting and regulatory processes; significant construction on awards late in 2021 was not expected likely to begin before 2022.
- The company provided no specific numerical revenue or earnings guidance. It expects available cash, operating cash flow and borrowing capacity to meet anticipated operating needs, debt service, capital expenditures and other planned uses, including $13.4 million of remaining CARES Act payroll tax deferrals due by the end of 2022. Management did not expect to pay dividends.
- Backlog was $1.63 billion at September 30, 2021, down from $1.65 billion at December 31, 2020 and $1.72 billion a year earlier; it rose 4.3% from June 30. Remaining performance obligations were $1.51 billion, with $297.5 million estimated not to be recognized within 12 months. Management cautions that backlog is not a stand-alone indicator of future revenue or profit and may be affected by timing, cancellations and project execution.
- Estimate sensitivity: Changes in project estimates increased Q3 gross margin by 1.4 percentage points and operating income by $8.2 million, net income by $5.9 million and diluted EPS by $0.35. For the nine months, estimate changes increased operating income by $7.2 million, net income by $5.2 million and diluted EPS by $0.30. Percentage-of-completion accounting depends on cost-to-complete estimates and could require future reductions or reversals.
- Management cited continued COVID-related disruption, regulatory delays, pricing volatility, rising insurance, equipment, labor and material costs, labor and equipment inefficiencies, and uncertainty around project timing. Fixed-price work carries cost-overrun risk; customer contracts, including many master service agreements, may be terminable on short notice.
- Surety bonds outstanding had an original face amount of approximately $1.28 billion, with estimated remaining project costs of $531.5 million. The company also disclosed insurance deductibles and exposure, purchase commitments of $11.2 million, and potential multi-employer pension-plan risks. Management did not expect ordinary-course litigation, individually or in aggregate, to have a material adverse effect.
Important facts for investors to verify
- How much of reported margin and earnings growth reflects sustainable project execution versus favorable job close-outs, change orders and estimate revisions.
- Whether labor, equipment, insurance and material cost pressures or project delays affect margins and cash conversion in subsequent periods.
- Backlog and remaining performance obligations conversion, including cancellation exposure, timing of large projects and expected profitability.
- Working-capital movements, especially contract assets, contract liabilities and the timing of billings, collections and employee-related payments.
- Liquidity and covenant headroom after accounting for letters of credit, bonding requirements, equipment commitments and potential project or insurance claims.