MYR Group Inc. — Q2 2013 Form 10-Q
Business and period: MYR Group is a U.S. specialty electrical contractor operating in Transmission and Distribution (T&D) and Commercial and Industrial (C&I). This unaudited filing covers the three and six months ended June 30, 2013, compared with the same 2012 periods.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $213.9m | $260.4m | $415.3m | $500.6m |
| Gross profit / margin | $31.3m / 14.6% | $30.1m / 11.5% | $58.6m / 14.1% | $56.2m / 11.2% |
| Operating income / margin | $15.4m / 7.2% | $15.7m / 6.0% | $26.8m / 6.4% | $25.9m / 5.2% |
| Net income | $9.5m | $9.5m | $16.4m | $15.7m |
| Diluted EPS | $0.44 | $0.45 | $0.76 | $0.74 |
| EBITDA (non-GAAP) | $22.5m | $21.8m | $40.8m | $37.7m |
| Operating cash flow | $25.5m | $22.2m | $38.0m | $10.1m |
Margins and drivers: Revenue fell 17.9% in Q2 and 17.1% for the first half, primarily because large transmission projects required less material and subcontractor spending. Management said this lower pass-through cost mix, better project execution, higher equipment utilization, and improved margins on certain large transmission projects lifted gross margins. Revised cost estimates and improved project performance on large transmission projects contributed about 1.3 percentage points of Q2 gross margin and 1.0 point for the six-month period. SG&A rose to $16.1m in Q2 and $32.2m in the first half, partly due to staffing, compensation, and benefits; as a share of revenue it increased to 7.6% and 7.8%, respectively.
Segments: First-half T&D revenue declined 20.5% to $334.6m, while operating income rose to $38.4m from $37.7m and segment margin improved to 11.5% from 9.0%. C&I revenue increased 1.1% to $80.7m and operating income rose 40.4% to $4.2m; its margin improved to 5.1% from 3.7%. Q2 C&I operating income, however, decreased to $1.4m from $1.9m.
Financial position, liquidity and debt
- At June 30, cash was $37.6m, working capital was $100.6m, and total assets were $476.8m.
- The company had no borrowings under its $175m revolving credit facility and reported $155.3m available to borrow. It was in compliance with its financial covenants. Interest expense was $0.4m for the first half.
- First-half investing cash outflow was $21.4m, including $21.9m of capital expenditures; financing activities provided $1.2m. Cash increased $17.8m from year-end 2012.
- Outstanding letters of credit were $19.7m. The company had $944.8m in original face amount of surety bonds outstanding, with estimated remaining costs to complete the bonded projects of $250.5m.
Outlook, risks and contingencies
Management reported strong bidding activity for large, multi-year transmission projects and expected that significant construction on projects awarded through 2013 bidding may not begin until 2014 or 2015. It said C&I bidding conditions had improved and expected that segment to benefit if economic conditions in the western United States continued to improve. Management expected 2013 capital spending to be similar to 2012 and said cash, credit availability, and operating cash flow should support operations, debt service, planned capital spending, and potential strategic investments. The filing provides no specific revenue or earnings guidance.
Backlog was $474.5m at June 30, 2013, up from $467.1m at March 31, but down from $543.0m a year earlier. Management cautioned that backlog is not a stand-alone indicator of future revenue or profit. The company identifies project execution and cost estimates, fixed-price contract exposure, labor availability and work stoppages, customer spending, seasonality and severe weather, credit collection, insurance, surety capacity, and multi-employer pension plans among its risks.
Ordinary-course lawsuits and claims were not expected by management to have a material adverse effect. A subsidiary was named in a suit alleging possible historical involvement in contamination at an Ashland, Wisconsin site; potential liability could not be estimated. The IRS was examining federal tax returns for 2009 and 2010. Unrecognized tax benefits were approximately $1.0m. The company also disclosed critical-status multi-employer pension plans but said it was not aware of potential significant related liabilities.
Most important facts to verify
- Whether improved transmission-project margins and productivity are repeatable, particularly given the benefit from revised cost estimates.
- How the lower revenue reflects project mix and reduced material and subcontractor pass-through, and what it implies for future margins and cash conversion.
- Whether backlog converts to profitable work on schedule, including timing of large awards and construction starts.
- Potential exposure from the Ashland litigation, insurance and surety obligations, tax examinations, and multi-employer pension plans.
- Credit-facility availability and covenant compliance as capital spending, project needs, or acquisitions change.