Business context and reporting period
MYR Group Inc. filed this Form 10-Q for the quarter ended June 30, 2012, with comparative results for the three and six months ended June 30, 2011. The company provides electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Unless noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $260.4 | $185.3 | $500.6 | $335.6 |
| Gross profit / margin | $30.1 / 11.5% | $19.5 / 10.5% | $56.2 / 11.2% | $41.1 / 12.2% |
| Operating income | $15.7 | $6.0 | $25.9 | $13.6 |
| Net income | $9.5 | $3.7 | $15.7 | $8.2 |
| Diluted EPS | $0.45 | $0.18 | $0.74 | $0.39 |
| Operating cash flow | $22.2 | $0.4 | $10.1 | $14.2 |
- First-half EBITDA, a non-GAAP measure, was $37.7 million versus $22.6 million. The company cautions that EBITDA is not a substitute for net income or operating cash flow.
- At June 30, cash was $24.3 million; current assets were $258.5 million and current liabilities $191.2 million. Accounts receivable was $154.2 million.
- Debt consisted of $10.0 million of revolving borrowings at 1.25%; $147.8 million remained available under the $175 million credit facility. The company reported compliance with its financial covenants.
- First-half capital expenditures were $20.4 million. Cash declined $9.7 million during the half, ending at $24.3 million.
Material changes versus prior comparable periods
- Q2 revenue rose 40.5% year over year, driven mainly by large transmission projects. First-half revenue increased 49.2%.
- T&D first-half revenue grew 63.3% to $420.8 million; C&I revenue increased 2.4% to $79.8 million. T&D accounted for 84.1% of first-half revenue.
- Q2 gross margin improved year over year, reflecting stronger margins on smaller and mid-sized projects and improved fleet utilization. First-half gross margin declined from 12.2% to 11.2%, primarily because several large projects had unusually high margins in early 2011, contributing about $5.8 million of above-average profit.
- First-half operating cash flow fell to $10.1 million from $14.2 million, with working-capital needs associated with increased project activity and receivables growth. Accounts receivable used $27.3 million of cash in the first half.
- Total backlog was $543.0 million at June 30, 2012, down from $716.9 million at June 30, 2011, mainly as large projects continued through construction. T&D backlog was $464.2 million; C&I backlog was $78.8 million.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance was provided. Management reported strong transmission bidding activity, including increased large- and medium-project bids in Q2 versus Q1, and anticipated an expanding transmission-project market over the next several years. It also noted tight capacity, including skilled-labor and specialized-equipment shortages in some regions.
- Management said economic uncertainty continued to lead some distribution and C&I customers to delay or reallocate capital spending, keeping competition strong. It expects to pursue organic growth and selectively consider acquisitions or joint ventures.
- Management stated that cash, borrowing availability and expected operating cash flow should be sufficient for operating needs, debt service and planned capital expenditures, while noting that large projects can require additional working capital.
- Key exposures include project-cost and completion estimates under percentage-of-completion accounting, fixed-price contract execution, working-capital timing, customer concentration, labor availability and union obligations, surety-bond access, and variable interest rates. One customer represented 14.8% of receivables.
- Outstanding surety bonds had an aggregate original face amount of approximately $914.1 million, with estimated remaining costs to complete of $351.4 million. The company had $17.2 million of letters of credit outstanding.
- Some contributing multi-employer pension plans were classified as “critical”; the company reported no significant related liability known at filing, but warned future withdrawal or surcharges could be material. Routine litigation and asbestos-related claims were disclosed; management did not expect a material adverse effect and considered a future material adverse outcome from asbestos claims remote.
- Federal tax returns for 2009 and 2010 were under IRS examination; state examinations could cover 2007–2010. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the lower year-over-year backlog converts to new awards and revenue, and how backlog definitions affect comparability and realization.
- Whether gross margins remain resilient as large projects progress, given the first-half comparison against unusually profitable projects in 2011.
- Receivables, retainages and other working-capital requirements, and their effect on cash generation as project activity grows.
- Current credit-facility availability, covenant compliance, and liquidity needs if large projects expand.
- Exposure to surety-bond claims, insurance reserves, pension-plan liabilities, litigation and tax examinations.