MYR Group Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
MYR Group Inc. is a leading specialty contractor serving the electrical infrastructure market in the United States, operating through two primary segments: Transmission and Distribution (T&D) and Commercial and Industrial (C&I). This report covers the quarterly period ended June 30, 2009, and the six-month period ended on the same date. The company serves over 125 electric utilities, cooperatives, and municipalities nationwide.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Contract Revenues | $162,923 | $295,858 |
| Gross Profit | $18,777 | $35,810 |
| Gross Margin | 11.5% | 12.1% |
| Net Income | $4,315 | $7,198 |
| Diluted EPS | $0.21 | $0.35 |
| EBITDA | $10,649 | $18,870 |
| Operating Cash Flow | $17,166 | $16,578 |
| Cash and Equivalents | $44,015 | $44,015 |
| Long-Term Debt | $30,000 | $30,000 |
| Working Capital | $66,000 (approx.) | $66,000 (approx.) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 10.7% for the quarter and 4.2% for the six months compared to the prior year periods. This growth was driven by increased activity in large T&D projects (contracts >$10 million), partially offset by a decline in smaller T&D projects and a reduction in C&I segment revenues due to the economic environment.
- Margin Compression: Gross margins declined from 13.6% to 11.5% for the quarter and from 14.1% to 12.1% for the six months. Management attributed this to the absence of high-margin large projects seen in 2008 and increased estimated costs to complete certain T&D contracts.
- Profitability: Net income decreased 6.2% for the quarter and 23.6% for the six months year-over-year, reflecting the margin pressure despite revenue growth.
- Backlog: Total backlog increased significantly to $316.6 million as of June 30, 2009, up from $240.5 million in the prior year, with T&D backlog rising to $232.1 million.
Outlook, Risks, and Management Commentary
Management expects to continue growing organically and selectively consider strategic acquisitions. The company anticipates that cash on hand ($44.0 million) and available credit ($60.0 million under the Credit Agreement) will be sufficient to meet operating needs and capital expenditures. However, participation in large-scale grid rebuilding initiatives may require additional working capital.
Risks and Contingencies:
- Economic Sensitivity: The C&I segment faces reduced spending and increased bidding competition due to the current economic downturn.
- Union Labor: Approximately 92% of field labor is unionized. Several multi-employer pension plans have been classified as "critical" or "endangered," which could lead to increased contribution requirements.
- Legal Proceedings: A subsidiary's 2005 OSHA conviction was reversed by the Seventh Circuit Court of Appeals in April 2009, and the Department of Justice notified the company in August 2009 that it would move to dismiss the case with prejudice.
- Contracting Risks: The company relies on percentage-of-completion accounting, and actual costs may exceed estimates on fixed-price contracts. Additionally, 52.7% of the backlog is bonded, creating potential liability if performance fails.
Investor Verification Checklist
- Verify the sustainability of T&D revenue growth given the reliance on a few large projects.
- Monitor the impact of increased estimated costs to complete on future gross margins.
- Assess the potential financial impact of "critical" status multi-employer pension plans on future cash flows.
- Review the company's ability to maintain debt covenants (interest coverage and leverage ratios) as interest rates fluctuate.
- Confirm the realization of the $316.6 million backlog, particularly the portion dependent on unit-price or time-and-materials contracts.