MYR Group Inc. — Q1 2013 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2013, MYR Group operated as a U.S. specialty electrical contractor through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Results are unaudited and compared with the three months ended March 31, 2012.
Key financial metrics
- Revenue: $201.3 million, down 16.2% from $240.2 million. Gross profit rose 4.6% to $27.3 million; gross margin improved to 13.6% from 10.9%.
- Profitability: Operating income was $11.4 million versus $10.2 million; net income was $7.0 million versus $6.2 million. Diluted EPS was $0.32 versus $0.29. Net margin was 3.5% versus 2.6%. EBITDA, a non-GAAP measure, was $18.4 million versus $16.0 million.
- Segments: T&D revenue declined 21.7% to $160.5 million; segment operating income was nearly flat at $16.7 million, with margin rising to 10.4% from 8.2%. C&I revenue increased 15.8% to $40.8 million; operating income rose to $2.7 million from $1.1 million, and margin improved to 6.7% from 3.1%.
- Cash flow and investment: Operating cash flow was positive $12.5 million, compared with negative $12.0 million a year earlier. Investing cash outflow was $12.3 million, including $12.5 million of property and equipment purchases. Cash increased $1.5 million to $21.3 million.
- Liquidity and debt: Working capital was $92.6 million. No borrowings were outstanding under the credit facility; borrowing availability was $155.3 million. The company reported $19.7 million of letters of credit under the facility and compliance with its financial covenants.
- Balance sheet: At March 31, 2013, total assets were $446.9 million, total liabilities $183.2 million, and stockholders’ equity $263.6 million. Current assets were $253.1 million and current liabilities $160.5 million.
Material changes versus the prior comparable period
- Lower T&D activity, including reduced revenue from several large transmission projects and less storm work, drove the overall revenue decline. Prior-year revenue also included a higher proportion of materials and subcontractor costs.
- Improved project execution, equipment utilization, contract margins, and a more labor-and-equipment-intensive cost mix helped raise gross margin and operating income despite lower revenue.
- C&I results improved with higher revenues and margins across projects. Management attributed improvement partly to better conditions in its served markets.
- Backlog was $467.1 million at March 31, 2013, down from $639.9 million at March 31, 2012. Of current backlog, $51.9 million was estimated not to be recognized within the next 12 months.
- Operating cash flow improved chiefly as large projects progressed and working-capital needs eased; the company reported $2.4 million of cash provided by certain major contract working-capital accounts, versus $28.6 million used in Q1 2012.
Outlook, risks, contingencies, and unusual items
- Management expected strong bidding activity for large multi-year transmission projects during 2013, while noting that substantial construction on projects awarded through 2013 bidding could be delayed until 2014 or 2015. It expected C&I to benefit from improving regional economic conditions and planned continued investment in property and equipment; 2013 capital spending was expected to be similar to 2012. No quantified revenue or earnings guidance was provided.
- Management believed cash, credit availability, and future operating cash flow would be sufficient for operating needs, debt service, and planned capital expenditures. Larger grid-rebuilding initiatives or acquisitions could require additional capital.
- Surety bonds had an aggregate original face amount of approximately $960.4 million; estimated remaining cost to complete those bonded projects was $239.6 million. The company also had $7.5 million in construction-equipment purchase orders scheduled for cash outlay over six months.
- Insurance and claims accruals, fixed-price project execution, labor availability, weather, customer spending, collection timing, and backlog conversion were identified as business risks. Several contributing multi-employer pension plans had critical status, although the company was not aware of significant potential liabilities.
- A subsidiary was named in litigation alleging possible historic involvement in contamination at an Ashland, Wisconsin site; potential liability could not be estimated. Federal tax returns for 2009 and 2010 were under IRS examination. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The company reported no material change to its previously disclosed risk factors, no derivative instruments, and no debt outstanding. Management concluded disclosure controls were effective as of March 31, 2013.
Important facts for investors to verify
- Whether backlog converts to revenue and profit on expected schedules; backlog is not a stand-alone indicator of future results.
- Whether improved project margins and C&I performance are sustainable as the mix of large projects, materials, subcontractors, labor, and equipment changes.
- Working-capital and cash-flow trends, planned capital spending, credit-facility availability, and ongoing covenant compliance.
- Exposure to bonded-project completion costs, insurance claims, pension-plan funding, the Ashland litigation, and tax examinations.