MYR Group Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. MYR provides electrical infrastructure construction services through Transmission & Distribution (T&D) and Commercial & Industrial (C&I).
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $210.5m | $152.8m | $546.1m | $441.9m |
| Gross profit / margin | $19.8m / 9.4% | $17.0m / 11.2% | $60.9m / 11.2% | $48.9m / 11.1% |
| Operating income | $6.6m | $6.2m | $20.2m | $16.8m |
| Net income | $4.2m | $3.9m | $12.4m | $10.0m |
| Diluted EPS | $0.20 | $0.19 | $0.59 | $0.48 |
| EBITDA (non-GAAP) | $11.7m | $10.2m | $34.2m | $28.6m |
Segment trends: Q3 T&D revenue rose 44.5% to $170.8m, while C&I revenue increased 14.7% to $39.6m. Nine-month T&D revenue increased 30.3% to $428.5m; C&I rose 3.9% to $117.6m. Nine-month T&D operating margin improved to 8.6% from 7.2%, while C&I margin fell to 2.8% from 4.9%.
Cash, liquidity and debt
- Operating cash flow was negative $4.7m for the first nine months, versus positive $12.3m in 2010. Higher receivables and contract work-in-progress associated with increased transmission activity and storm work contributed to the cash use.
- Investing cash outflow was $33.4m, primarily capital expenditures; financing cash outflow was $7.0m. Cash declined to $17.5m from $62.6m at year-end 2010.
- Working capital was $53.3m at September 30. Debt totaled $20.0m: a $10.0m term loan and $10.0m revolver borrowing. The $75.0m revolver had $47.8m available after $17.2m of letters of credit.
- The credit facility expires August 31, 2012; management intends to refinance before maturity. The company reported compliance with covenants, with interest coverage above 68:1 against a 3:1 minimum and leverage below 1:1 against a 3:1 maximum.
- Management expected 2011 capital expenditures of approximately $40m. The filing states available cash, borrowing capacity and expected operating cash flow were expected to cover operating needs, debt service and planned spending.
Material changes and outlook
- Q3 revenue growth was driven mainly by large transmission projects and $12.7m of distribution storm work, compared with $3.4m a year earlier. Nine-month storm revenue was $23.7m versus $12.8m.
- Q3 gross margin declined to 9.4%, principally reflecting about $2.3m of higher insurance expense tied largely to development of prior-year claims, along with early-stage project fleet under-utilization and greater subcontractor use. For the nine-month period, gross margin was broadly stable year over year.
- Nine-month C&I operating income declined 41.0%, reflecting pricing pressure, cost inefficiencies, higher material costs and insurance expense. Corporate expenses also increased.
- Backlog was $721.4m at September 30, up from $195.1m a year earlier; $235.7m was estimated not to be recognized within 12 months. Certain announced CAPX2020 and ETT/CREZ work was excluded because the scope had not been defined or agreed.
- Management said bidding for large transmission projects had eased from the strong pace of late 2010 and early 2011, and expected distribution and C&I markets to remain soft into 2012. Margins in those businesses were expected to remain pressured. Revenue and profit on large transmission awards may build gradually as construction advances.
Risks, contingencies and unusual items
- Project schedules and profitability are exposed to permitting, regulatory approvals, weather, right-of-way acquisition, financing, procurement, labor, subcontractor and cost-estimation risks. Percentage-of-completion estimates may be revised, including previously recognized profit.
- Outstanding performance bonds had an original face amount of approximately $912.3m, with $506.0m of bonded backlog remaining to be recognized. The company reported no prior bond reimbursements and did not expect significant claims, but would have reimbursement obligations if sureties paid claims.
- Other commitments included $7.0m of construction-equipment purchase obligations expected to require cash over six months, operating leases, and $17.2m of letters of credit. Several contributing multiemployer pension plans had critical status; management was not aware of potential significant liabilities.
- Routine litigation and legacy asbestos-related claims were disclosed. Management considered a material adverse outcome remote, while noting circumstances could change. Tax audits and approximately $0.7m of unrecognized tax benefits were also disclosed; any future change could not be quantified.
- Variable-rate debt is unhedged. The company reported no derivative instruments and estimated a 0.125% rate change would alter annual interest expense by $25,000 on September 30 borrowings.
- Q3 and nine-month results included higher insurance expense. The 2010 comparison also benefited from a $1.6m reversal of an executive severance liability in SG&A; this was a nonrecurring item.
Important facts for investors to verify
- Whether operating cash flow and collections improve as large projects progress, given the substantial working-capital use and cash decline.
- Progress and terms of refinancing the credit facility before its August 2012 maturity, and continued covenant compliance.
- Backlog conversion, project start timing and margins, including scopes not yet included in backlog.
- Whether insurance reserves, C&I pricing pressure, fleet utilization and planned capital spending affect future margins and liquidity.
- Potential developments in tax examinations, multiemployer pension plans, litigation and surety obligations.