MYR Group Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. MYR Group provides specialty electrical construction services through Transmission & Distribution (T&D) and Commercial & Industrial (C&I) segments.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Contract revenue | $244.1 million | $215.6 million | +13.2% |
| Gross profit / margin | $29.4 million / 12.0% | $27.1 million / 12.6% | Profit +8.5%; margin down 0.6 percentage points |
| Operating income / margin | $11.6 million / 4.8% | $10.1 million / 4.7% | +14.5% |
| Net income / diluted EPS | $7.2 million / $0.34 | $6.3 million / $0.29 | Net income +14.3% |
| EBITDA (non-GAAP) | $20.5 million | $18.2 million | +12.5% |
| Operating cash flow | $1.4 million provided | $9.0 million used | Improved by $10.3 million |
| Capital expenditures | $16.4 million | $12.4 million | Increased |
Segments: T&D revenue rose 16.8% to $189.2 million; operating income was $16.8 million, with margin increasing to 8.9% from 8.6%. C&I revenue rose 2.5% to $54.9 million; operating income fell to $2.8 million from $3.4 million, and margin declined to 5.2% from 6.3%, mainly due to increased costs on one large project.
Financial position and liquidity
- Cash and cash equivalents were $61.8 million at March 31, down from $77.6 million at December 31, 2014. Working capital was $141.4 million.
- No debt was outstanding. The company reported $155.7 million available under its $175 million revolving credit facility and was in compliance with its financial covenants.
- Cash declined $15.8 million during the quarter, primarily reflecting $15.4 million of net investing cash outflow, including capital expenditures. Financing used $1.8 million, including $3.1 million of share repurchases, partly offset by stock-option proceeds and tax benefits.
- Outstanding standby letters of credit were approximately $19.3 million. The company had $823.5 million of surety bonds outstanding, with estimated remaining costs to complete bonded projects of $113.7 million.
Material changes, outlook, and notable items
- Revenue growth was driven primarily by higher T&D activity. Gross margin declined due chiefly to lower equipment utilization as large transmission projects neared completion and lower storm revenue. Management also cited strong competition and pressure on transmission bid margins in some regions.
- Favorable contract margin adjustments from change orders, cost efficiencies, additional work, and project close-outs contributed approximately 1.5 percentage points to Q1 2015 gross margin and increased operating income by $3.7 million and net income by $2.3 million, or $0.11 per diluted share. Management said similar benefits are unlikely to recur to the same extent.
- Backlog was $398.4 million at March 31, down 8.1% from December 31, 2014; T&D backlog declined $44.8 million while C&I backlog increased $9.5 million. The filing cautions that backlog is not a stand-alone indicator of future revenue or profit.
- Management expected bidding activity to remain strong in both segments for the rest of 2015, saw potential for Canadian T&D opportunities, and expected 2015 capital spending to be similar to the prior two years. No specific revenue or earnings guidance was provided.
- On April 13, 2015, the company acquired substantially all assets of E.S. Boulos Company for approximately $11.4 million, funded with cash, expanding its T&D presence in the Northeast and C&I reach beyond existing markets.
- Q1 included a $0.9 million gain on equipment sales. In April, L. E. Myers negotiated a settlement of Ashland Superfund litigation, with its contribution of $230,000 funded largely by insurance carriers.
- Other disclosed commitments included approximately $9.7 million of construction-equipment purchase orders scheduled for cash outlay over the next three months. The company noted potential exposure from project execution and cost estimates, fixed-price contracts, labor and multi-employer pension plans, insurance claims, bonding, weather, competition, and acquisitions. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether contract-margin estimate revisions and close-out benefits recur, and how project performance affects percentage-of-completion estimates.
- Whether backlog converts to revenue and profitable work, particularly as large transmission projects finish and equipment utilization changes.
- Whether C&I project costs and margins recover, and whether T&D bid competition continues to pressure margins.
- The cash-flow impact of capital spending, equipment commitments, the E.S. Boulos acquisition, and share repurchases; confirm continued credit-facility availability and covenant compliance.
- Developments in bonding, insurance and legal exposures, including multi-employer pension plans and the Ashland settlement.