MYR Group Inc. — Q3 2014 Form 10-Q
Business and period: Specialty electrical contractor serving the electrical infrastructure market through Transmission & Distribution (T&D) and Commercial & Industrial (C&I) segments. This filing covers the quarter and nine months ended September 30, 2014; financial statement amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $248.5 | $232.9 | $693.0 | $648.1 |
| Gross profit / margin | $32.7 / 13.2% | $32.5 / 13.9% | $90.3 / 13.0% | $91.0 / 14.0% |
| Operating income / margin | $13.4 / 5.4% | $13.1 / 5.6% | $35.9 / 5.2% | $39.8 / 6.1% |
| Net income / net margin | $8.4 / 3.4% | $8.3 / 3.6% | $22.4 / 3.2% | $24.7 / 3.8% |
| Diluted EPS | $0.39 | $0.38 | $1.03 | $1.14 |
| EBITDA (non-GAAP) | $21.9 | $20.4 | $60.9 | $61.3 |
Segment trends: Q3 T&D revenue fell 3.8% to $180.0 million and segment operating income declined to $16.9 million from $22.8 million; margin fell to 9.4% from 12.2%. C&I revenue rose 49.8% to $68.5 million, and operating income increased to $5.4 million from $2.4 million; margin improved to 7.9% from 5.2%. For the first nine months, T&D revenue declined 2.6% to $508.4 million and operating income fell to $47.6 million from $61.2 million. C&I revenue grew 46.0% to $184.6 million and operating income rose to $13.1 million from $6.5 million.
Cash flow and liquidity: Operating cash flow for the first nine months was $33.6 million, down from $71.5 million. Investing activities used $35.8 million, principally $36.0 million of capital expenditures; financing activities used $9.7 million, including $10.6 million for share repurchases. Cash declined $11.8 million from year-end to $64.6 million. At September 30, current assets were $316.7 million and current liabilities $192.6 million, representing working capital of $124.1 million. The company had no borrowings outstanding and reported $155.4 million available under its $175 million credit facility; it was in compliance with facility covenants.
Material changes and drivers
- Q3 revenue increased 6.7%, but gross margin declined 0.7 percentage point. Nine-month revenue increased 6.9%, while gross profit decreased 0.8% and net income fell 9.4%.
- Management attributed weaker T&D profitability to lower utilization of specialized equipment as large transmission projects neared completion, plus higher equipment repair and maintenance costs. Strong C&I growth reflected increased activity and improved conditions in Colorado and Arizona.
- Operating cash flow was substantially lower year over year, primarily reflecting a $20.9 million cash use from costs and estimated earnings in excess of billings, versus a $19.9 million cash source in the prior-year period.
- Contract-estimate revisions on certain transmission projects increased operating income by $2.4 million in Q3 and $11.7 million for the nine months. The company estimated these revisions added $1.5 million and $7.3 million to net income, respectively, or $0.07 and $0.34 to diluted EPS.
Outlook, risks and contingencies
Management expected bidding activity to remain strong in T&D and C&I through the remainder of 2014, while noting that competition continued to pressure transmission bid margins in some regions. It cited potential Canadian T&D opportunities into 2015 and expected 2014 capital spending to be similar to 2013. No specific revenue or earnings guidance was provided. Backlog was $409.0 million at September 30, up 2.8% from June 30 but down from $444.0 million a year earlier; $17.1 million was estimated not to be recognized within 12 months. Management cautioned that backlog is not a stand-alone indicator of future revenue or profit.
- Surety bonds had an aggregate original face amount of $978.7 million; estimated remaining cost to complete bonded projects was $144.8 million. Outstanding letters of credit totaled $19.6 million.
- A Florida traffic-accident judgment against a subsidiary included $3.6 million of punitive damages and $0.7 million of compensatory damages. The company recorded a $2.3 million reserve in Q3 2013 for estimated punitive damages, interest and appeal-bond costs; the judgment was under appeal.
- A Superfund-site lawsuit alleges up to $140 million of damages against multiple parties, including a subsidiary. The company said its potential liability could not be assessed; insurance reimburses some defense costs, with ultimate coverage uncertain.
- Other risks include project cost overruns and fixed-price contract exposure, labor availability and multi-employer pension plans, customer concentration, weather and market variability, and reliance on contract estimates. Some contributing pension plans were classified as “critical,” though the company was not aware of significant potential liabilities. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether T&D equipment utilization and margins recover as large projects finish, and whether project-estimate gains are repeatable.
- Whether C&I growth and improved margins persist, and how backlog converts into revenue and cash.
- The causes and durability of lower operating cash flow, including contract billing and working-capital timing.
- Potential exposure from the Florida appeal, the Ashland Superfund litigation, insurance coverage, bonding obligations and multi-employer pension plans.
- Capital spending, share repurchases, credit-facility availability and covenant compliance. The filing also states that the company did not expect to pay dividends.