MYRG

MYR Group Inc. 10-Q Summary: Period Ended September 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 September 30, 2009, and the nine-month period ended on the same date. The company serves over 125 electric utilities, cooperatives, and municipalities nationwide.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues for the three months ended September 30, 2009, decreased 9.4% compared to the same period in 2008. The nine-month revenue decline was 1.1%. This was driven by reduced activity in smaller T&D projects, a decrease in storm restoration services (which were unusually high in 2008), and a downturn in the C&I segment due to the economic environment.
• Margin Compression: Gross margins decreased from 14.1% to 12.8% for the quarter and from 14.1% to 12.3% for the nine-month period. This was primarily due to the loss of high-margin storm restoration work and increased estimated costs to complete certain T&D contracts.
• Profitability: Net income decreased 12.8% for the quarter and 19.1% for the nine-month period compared to 2008. Operating income declined 31.2% for the quarter and 26.7% for the nine-month period.
• Cash Flow Volatility: While the nine-month operating cash flow remained positive at $9.3 million, the third quarter alone saw a use of cash of $7.3 million, largely due to changes in working capital (increases in receivables and costs in excess of billings).
• Backlog Reduction: Total backlog decreased from $351.5 million in September 2008 to $251.6 million in September 2009, attributed to the completion of significant projects awarded in the prior year.

Outlook, Risks, and Unusual Items

• Unusual Items: The company recorded a $0.5 million non-taxable refund of a fine paid in 2005 following the dismissal of an OSHA-related criminal misdemeanor case. This was recorded as a direct reduction of contract costs, partially offsetting margin declines.
• Outlook: Management anticipates the industry will continue to operate at reduced levels until economic conditions improve or government funding for infrastructure is deployed. The company expects to grow organically and may consider strategic acquisitions.
• Liquidity: The company maintains $32.2 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 exceeding 43.0 to 1.0.
• Risks: Key risks include the cyclical nature of the industry, the impact of the economic downturn on customer spending, increased competition for available projects, and potential liabilities from multi-employer pension plans classified as "critical" or "endangered."

Investor Verification Checklist

• Verify the sustainability of the $0.5 million cost reduction from the OSHA fine refund, as this is a non-recurring item.
• Monitor the trend in backlog, which has declined significantly year-over-year, and assess the pipeline for new large-scale T&D projects.
• Review the impact of the economic downturn on the C&I segment, which saw a 7.8% revenue decline over the nine-month period.
• Assess the company's exposure to multi-employer pension plans labeled as "critical" or "endangered" and potential future contribution requirements.
• Track the company's ability to maintain positive operating cash flow given the volatility seen in the third quarter.