MYR Group Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2016, compared with the same period in 2015. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments in the United States and parts of Canada.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $253.6 million | $244.1 million |
| Gross profit / margin | $27.3 million / 10.8% | $29.4 million / 12.0% |
| Operating income / margin | $3.3 million / 1.3% | $11.6 million / 4.8% |
| Net income | $2.0 million | $7.2 million |
| Diluted EPS | $0.10 | $0.34 |
| EBITDA (non-GAAP) | $13.3 million | $20.5 million |
| Operating cash flow | $14.4 million | $1.4 million |
Revenue grew 3.9%, but net income fell about 72%. Gross margin contracted 1.2 percentage points. T&D revenue declined 3.3% to $183.0 million and segment operating margin fell to 5.8% from 8.9%. C&I revenue rose 28.6% to $70.7 million, while its operating margin fell to 3.1% from 5.2%.
At March 31, 2016, cash was $26.0 million, working capital was $106.3 million and total assets were $504.6 million. The company reported no borrowings under its revolving credit facility and $150.7 million of availability. It had $0.745 million of capital-lease obligations. Current liabilities were $183.8 million and current assets were $290.0 million. Cash decreased $13.8 million during the quarter, principally reflecting $25.7 million of financing cash outflow, including share repurchases. Investing activities used $2.7 million.
Material changes and notable items
- SG&A increased to $23.9 million from $18.6 million, including $3.3 million of new-market expansion costs, $1.0 million associated with activist-investor activities, higher payroll and medical claims costs.
- Q1 2015 benefited from favorable closeouts on several large projects. Q1 2016 gross margin was also pressured by competition, shorter-duration work, below-estimate labor productivity and unfavorable weather.
- Changes in project estimates reduced Q1 2016 gross margin by 0.6 percentage points, operating income by $1.5 million, and net income by $0.9 million (or $0.05 per diluted share). The comparable 2015 estimate changes increased gross margin by 1.5 percentage points.
- Backlog was $434.8 million, down 3.6% from December 31, 2015 but up from $398.4 million a year earlier. T&D backlog decreased $30.0 million sequentially; C&I backlog increased $13.9 million.
- The company repurchased 1.226 million shares during the quarter. The board expanded the repurchase authorization to $142.5 million and extended it through April 30, 2017; $73.1 million remained available at quarter-end.
- New acquisitions included E.S. Boulos Company, acquired in April 2015, and High Country Line Construction, acquired in November 2015.
Outlook, risks and contingencies
Management expected bidding activity to remain strong in both segments through the remainder of 2016 and 2017, and expected 2016 capital spending to be lower than in recent years, with greater use of leasing. It cited slower-than-expected starts in some new markets and uncovered fixed costs. The filing provides no numerical earnings or revenue guidance. Management stated that cash, credit availability and expected operating cash flow should meet anticipated needs, while noting that large projects or acquisitions could require additional capital. The company was discussing an amendment and extension of, or replacement for, its credit facility.
Key risks include intense competition and lower bid margins; fixed-price project execution, labor productivity and cost-estimate risk; weather and project delays; variability in customer spending and contract timing; labor availability and collective-bargaining exposure; and reliance on backlog, bonding capacity, subcontractors and suppliers. Management noted that large, longer-duration projects may take time to contribute revenue and can involve a higher share of materials and subcontractors, which may reduce margins.
At quarter-end, outstanding surety bonds had an original face amount of $872.1 million, with estimated remaining costs to complete of $104.6 million. Letters of credit totaled $24.3 million. The company reported no material unrecorded indemnification claims and did not expect ordinary-course legal matters to have a material adverse effect. Some contributing multi-employer pension plans were classified as “critical,” although management was not aware of significant related liabilities. U.S. federal tax returns for 2012–2014 were under examination; state returns for 2011–2014 were also subject to examination. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether margins and project execution improve, particularly in T&D, and whether the Q1 estimate revisions are isolated or recurring.
- How backlog converts into revenue and profit; backlog is not a standalone indicator of future results.
- Whether expansion costs and competition continue to pressure SG&A and segment operating margins.
- Cash requirements and remaining authorization for repurchases, alongside planned capital spending and use of equipment leases.
- Renewal or replacement of the credit facility, covenant compliance, and actual borrowing availability after letters of credit.
- Exposure to bonded projects, insurance claims, customer concentration (one customer represented 17.8% of receivables), and tax or legal matters.