MYRG

MYR Group Inc. Form 10-Q Summary

Business Context and Reporting Period

MYR Group Inc. is a leading specialty contractor serving the electrical infrastructure market in the United States, operating in two segments: Transmission and Distribution (T&D) and Commercial and Industrial (C&I). This report covers the quarterly period ended June 30, 2010.

Key Financial Metrics

(Amounts in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Decline: Revenues for the three months ended June 30, 2010, decreased 13.9% to $140.3 million compared to $162.9 million in the prior year period. The six-month revenue decrease was 2.3% to $289.2 million. The decline was driven by reduced activity on large T&D projects and increased competition in smaller C&I projects.
• Profitability: Net income for the three months dropped 22.3% to $3.4 million. For the six months, net income decreased 14.8% to $6.1 million. Gross margins for the six-month period compressed from 12.1% to 11.0% due to lower productivity on certain contracts and pricing pressures.
• Segment Performance:
  • T&D: Revenues declined 13.7% (3-month) and 6.2% (6-month). Operating income remained relatively stable in the quarter but declined 8.4% for the six months.
  • C&I: Revenues declined 14.5% (3-month) but increased 10.2% (6-month) due to a few large projects. However, operating income in C&I dropped significantly (51.8% in the quarter, 37.2% for six months) due to margin compression on large contracts.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased for the six-month period, largely due to the elimination of a $1.6 million severance liability following the amendment of executive employment agreements.

Outlook, Risks, and Contingencies

• Backlog: Total backlog decreased significantly from $316.6 million as of June 30, 2009, to $199.6 million as of June 30, 2010. Management attributes this to the completion of significant contracts awarded in late 2008 that have not yet been replaced by contracts of similar size.
• Liquidity and Debt: The company maintains $44.9 million in cash and $60.0 million in available borrowing capacity under its credit facility. It is in compliance with all debt covenants, including an interest coverage ratio of over 49.0 to 1.0 and a leverage ratio under 1.0 to 1.0.
• Capital Expenditures: Management expects total capital spending in 2010 to be less than in 2009. Capital expenditures for the first six months of 2010 were $7.1 million.
• Risks: Key risks include the cyclical nature of the industry, dependence on a few large customers (two customers accounted for 33% of revenue in the first six months of 2010), potential inability to replace large contracts, and exposure to variable interest rates on debt.
• Legal and Contingencies: The company has approximately $497.8 million in outstanding surety bonds. Management does not anticipate material adverse effects from current litigation or asbestos-related claims.

Investor Verification Checklist

• Backlog Replacement: Verify the company's ability to secure new large-scale T&D contracts to replace the backlog completed in the first half of 2010.
• Margin Pressures: Monitor gross margin trends in the C&I segment, which saw significant operating income declines despite revenue growth in the six-month period.
• Customer Concentration: Assess the financial stability of the top two customers, who collectively represented 33% of revenue for the six months ended June 30, 2010.
• Capital Allocation: Review future capital expenditure plans to ensure they align with the stated expectation of lower spending compared to 2009.
• Debt Covenants: Confirm continued compliance with the interest coverage and leverage ratios required by the $125 million credit facility.