MYR Group Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparative periods ended September 30, 2012. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $232.9 million | $250.6 million | $648.1 million | $751.2 million |
| Gross profit / margin | $32.5 million / 13.9% | $29.6 million / 11.8% | $91.0 million / 14.0% | $85.7 million / 11.4% |
| Operating income / margin | $13.1 million / 5.6% | $14.2 million / 5.6% | $39.8 million / 6.1% | $40.1 million / 5.3% |
| Net income | $8.3 million | $8.7 million | $24.7 million | $24.5 million |
| Diluted EPS | $0.38 | $0.41 | $1.14 | $1.15 |
| Operating cash flow | $33.5 million | $12.6 million | $71.5 million | $22.7 million |
- Margins and segments: Higher gross margin reflected better project execution, improved equipment utilization, and a lower relative share of materials and subcontractor costs. T&D revenue was $187.2 million in Q3, down 8.4%; segment operating income rose to $22.8 million from $20.2 million, with margin improving to 12.2% from 9.9%. C&I revenue was $45.7 million, down 1.2%; operating income was $2.4 million, approximately flat. For the nine months, T&D revenue declined 16.5% to $521.7 million while operating income rose to $61.2 million; C&I revenue was $126.4 million, approximately flat, and operating income increased 22.8% to $6.5 million.
- Cash, liquidity and debt: At September 30, cash was $62.9 million and working capital was $108.0 million. MYR had no borrowings outstanding and reported $157.5 million available under its revolving credit facility; it was in compliance with financial covenants. Nine-month capital expenditures were $31.5 million; investing cash outflow was $30.6 million. Operating cash flow benefited from working-capital timing, including progress on large projects and increased customer billings relative to costs.
- Balance sheet: Total assets were $513.7 million versus $466.3 million at year-end 2012; total liabilities were $229.5 million versus $211.7 million. Accounts receivable was $181.1 million. One customer represented 18.3% of receivables at September 30, 2013.
- Backlog: $444.0 million at September 30, down from $474.5 million at June 30, 2013 and $491.3 million a year earlier. Management cautions that backlog is not a stand-alone indicator of future revenue or profit; $34.2 million was estimated not to be recognized within 12 months.
Changes, outlook and management commentary
- Revenue decreased 7.1% in Q3 and 13.7% year to date. Management attributed the declines mainly to lower materials and subcontractor costs on large transmission projects; reduced storm work lowered Q3 revenue by $7.9 million. Those costs represented about 31% of total Q3 contract costs and 30% year to date, versus about 45% in the comparable 2012 periods.
- Despite lower revenue, year-to-date net income rose slightly and EBITDA, a non-GAAP measure, increased to $61.3 million from $58.4 million. Q3 net income declined year over year. SG&A increased, including a $2.3 million legal reserve and higher employee compensation and benefits.
- Management expected strong bidding activity across project sizes through the remainder of 2013 and into 2014, while noting significant construction on large multi-year projects awarded in 2013 would likely begin in 2014. It expected lower materials and subcontractor costs as a share of costs in Q4 2013 than in Q4 2012, and anticipated C&I could benefit if western U.S. economic conditions continued to improve. Competition remained strong and pressured bid margins.
- MYR opened operations in Anchorage and Fairbanks in September 2013, anticipating market growth, and was reviewing opportunities in Canada. Management expected 2013 capital spending to be similar to 2012 and said cash, credit availability and expected operating cash flow should support operations, planned spending and potential strategic investments. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- A Florida traffic-accident jury verdict resulted in a proposed judgment of about $0.7 million compensatory and $3.6 million punitive damages. MYR disputed the proposed judgment and sought to limit punitive damages to approximately $2.0 million; it recorded a $2.3 million reserve for punitive damages, interest and appeal-bond costs. The company said compensatory damages, if ultimately upheld, would be insured.
- A separate environmental contamination lawsuit involving alleged historic manufactured-gas-plant activity has potential exposure that the company said could not be estimated.
- Outstanding surety bonds had an original face amount of approximately $901.1 million, with estimated remaining completion costs of $236.7 million. The company had a $17.5 million standby letter of credit related to insurance obligations.
- Some contributing multi-employer pension plans were designated “critical”; MYR reported no known significant potential liability at the time. Other key risks include project-cost estimates and fixed-price contract execution, labor availability and disputes, customer spending, competition, weather, collections, bonding capacity and realization of backlog.
- Management revised cost estimates on several large transmission projects, contributing approximately 0.6 percentage points to Q3 gross margin and 0.8 points to year-to-date gross margin. Estimates for contract completion, insurance reserves and receivables can differ from actual outcomes.
Important facts for investors to verify
- Whether stronger margins and operating cash flow persist as project mix and working-capital timing change.
- Backlog conversion, new awards and the timing of construction on large projects; backlog may not be realized or profitable.
- Outcome and reserve adequacy for the Florida litigation and the unestimable environmental claim.
- Customer concentration, receivable collection, surety capacity and compliance with credit-facility covenants.
- Whether management’s bidding, market-expansion and capital-spending expectations are achieved; the filing provides no formal earnings guidance.