MYR Group Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are against December 31, 2013. MYR Group provides specialty electrical construction through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $215.6 million | $201.3 million; up 7.1% |
| Gross profit / margin | $27.1 million / 12.6% | $27.3 million / 13.6% |
| Operating income / margin | $10.1 million / 4.7% | $11.4 million / 5.7% |
| Net income | $6.3 million | $7.0 million |
| Diluted EPS | $0.29 | $0.32 |
| EBITDA (non-GAAP) | $18.2 million | $18.4 million |
| Operating cash flow | $(9.0) million | $12.5 million provided |
- Revenue growth was primarily from C&I: segment revenue rose 31.3% to $53.6 million. T&D revenue increased 0.9% to $162.0 million.
- Segment operating income was $14.0 million for T&D, down from $16.7 million, and $3.4 million for C&I, up from $2.7 million. Corporate costs were $7.2 million, versus $8.0 million.
- Cash and cash equivalents were $54.4 million at quarter-end, down from $76.5 million at year-end. Working capital was $119.1 million. Investing activities used $12.4 million, primarily for capital expenditures; financing activities used $0.7 million.
- No borrowings were outstanding under the $175 million credit facility; $156.6 million was available. The company reported compliance with financial covenants. Interest expense was $0.2 million.
- Total assets were $516.8 million and total liabilities were $214.3 million at March 31. The filing reports $18.4 million of standby letters of credit outstanding under the facility.
Material changes and notable items
- Despite higher revenue, gross profit edged down and gross margin contracted by 1.0 percentage point. Management cited severe winter weather and lower productivity, reduced equipment utilization, and higher repair and maintenance costs. Improvements on several large transmission projects partly offset these pressures.
- Management reported that revised cost estimates on several transmission projects generated approximately 1.7% of additional gross margin in Q1 2014. Separately, its discussion attributed an approximately 3.1% gross-margin benefit to improved margins on several large transmission projects; these figures describe related but not clearly reconciled disclosures.
- Backlog was $385.6 million, up 18.2% from December 31, 2013, but below $467.1 million at March 31, 2013. The company cautions that backlog is not a stand-alone predictor of future revenue or profit.
- Cash used in operations reflected working-capital timing, including a $7.1 million cash use from costs and estimated earnings in excess of billings. Comparable 2013 operating cash flow was positive.
Outlook, risks and contingencies
- Management expected strong bidding activity for transmission projects through the rest of 2014 and saw improvement in distribution and C&I markets. It anticipated 2014 capital spending similar to 2013, and believed cash, credit availability and future operating cash flow would meet expected needs. No specific revenue or earnings guidance was provided.
- The company was pursuing opportunities in Alaska and reviewing and bidding opportunities in Canada; it also cited potential strategic acquisitions and joint ventures. Large projects or acquisitions could require additional capital.
- Risks include project execution and fixed-price cost overruns, weather and seasonality, labor availability and union issues, customer concentration and collection risk, bonding capacity, and the uncertainty of estimates under percentage-of-completion accounting. One customer represented 16.3% of accounts receivable.
- Outstanding surety bonds had an original face amount of approximately $865.4 million; estimated remaining cost to complete those bonded projects was $126.2 million. The company also disclosed $6.9 million of construction-equipment purchase orders due over the next four months and future operating-lease commitments.
- Legal matters include an appealed Florida verdict against a subsidiary, with approximately $2.3 million reserved for estimated punitive damages, interest and appeal-bond costs; compensatory damages were expected to be insured. A separate Superfund-site case alleges up to $140 million in total damages against multiple parties; the subsidiary’s potential share could not be assessed. Management did not expect the disclosed proceedings, individually or collectively, to materially adversely affect the company.
- Some contributing multi-employer pension plans were designated “critical”; management said it was not aware of potential significant liabilities. Federal tax years 2009 and 2010 were under IRS examination. Management reported effective disclosure controls and no material change in internal controls.
Important facts for investors to verify
- Whether transmission-project estimate revisions and other margin improvements are repeatable, and how winter-weather effects and equipment costs evolve.
- Whether backlog converts to revenue and profitable work, particularly given its decline from the prior-year quarter.
- Whether operating cash flow recovers as contract billing, collections and working-capital timing change.
- Potential exposure from the Florida appeal, the Ashland Superfund litigation, insurance claims, pension plans, and bonding obligations.
- Credit-facility availability and covenant compliance if borrowing needs rise, including to fund growth or acquisitions.