MYR Group Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparisons are with the three and nine months ended September 30, 2014 unless stated otherwise. MYR Group provides electrical infrastructure construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $269.9m | $248.5m | $790.5m | $693.0m |
| Gross profit / margin | $28.6m / 10.6% | $32.7m / 13.2% | $89.7m / 11.4% | $90.3m / 13.0% |
| Operating income / margin | $9.9m / 3.7% | $13.4m / 5.4% | $34.5m / 4.4% | $35.9m / 5.2% |
| Net income | $6.2m | $8.4m | $21.4m | $22.4m |
| Diluted EPS | $0.29 | $0.39 | $1.01 | $1.03 |
| EBITDA (non-GAAP) | $20.1m | $21.9m | $62.9m | $60.9m |
Segment trends: Q3 T&D revenue grew 13.3% to $203.9m, while operating income fell to $13.9m from $16.9m and operating margin declined to 6.8% from 9.4%. C&I revenue fell 3.7% to $66.0m; operating income declined to $2.8m from $5.4m and margin to 4.2% from 7.9%. For the first nine months, T&D revenue rose 16.8% to $593.7m, with operating income nearly flat at $47.5m. C&I revenue increased 6.6% to $196.8m, while operating income fell to $9.5m from $13.1m.
Cash flow and liquidity: Operating cash flow for the first nine months was $10.7m, down from $33.6m. Investing activities used $52.2m, including $42.8m of capital expenditures and $11.4m for the ESB acquisition; financing activities used $5.7m, including $9.2m for share repurchases. Cash declined to $30.4m from $77.6m at December 31, 2014. Working capital was $142.5m. The company reported no debt outstanding and $155.7m available under its $175m credit facility; it was in compliance with its debt covenants.
At September 30, total assets were $559.7m and total liabilities were $218.5m. Accounts receivable was $193.1m; costs and estimated earnings in excess of billings were $78.0m, versus $45.7m of billings in excess of costs and estimated earnings.
Material changes versus prior periods
- Revenue increased 8.6% in Q3 and 14.1% year to date, primarily from higher T&D activity and the April acquisition of E.S. Boulos Company (ESB).
- Profitability weakened despite revenue growth: gross margin declined 2.6 percentage points in Q3 and 1.6 points year to date. Management cited competition, lower bid margins, shorter-duration work, lower fleet utilization, labor productivity issues, turnover and rework.
- Operating cash flow fell by $22.9m year to date. Management attributed the change mainly to working-capital timing, including receivables and contract assets, and reductions in self-insurance reserves and other current liabilities.
- Backlog was $425.1m at September 30, up 3.5% from June 30 and above $409.0m a year earlier. T&D backlog increased during the quarter; C&I backlog decreased. Backlog is not a stand-alone indicator of future revenue or profit.
Outlook, risks and unusual items
- Management expected bidding activity to remain strong in both segments through the remainder of 2015 and 2016. It also cited opportunities in Canada and potential growth through acquisitions or joint ventures; no quantified earnings or revenue guidance was provided.
- Management cautioned that intense competition, short project durations, project delays, adverse weather, labor availability and execution issues may pressure margins. Larger transmission projects can take time to reach revenue recognition and may include higher proportions of lower-markup materials and subcontractor costs. Distribution work is variable and generally carries lower margins than transmission work.
- Project estimate revisions reduced Q3 gross margin by 0.5 percentage point and operating income by $1.3m, lowering net income by $0.8m, or diluted EPS by $0.04. Year-to-date estimate revisions instead increased gross margin by 0.5 point and operating income by $3.5m, adding $2.2m to net income, or $0.10 per diluted share. Management said the first-nine-month results also benefited from performance incentives, change orders and close-outs, and that similar benefits are unlikely in future periods.
- ESB was acquired for approximately $11.4m in cash. Purchase accounting remained provisional, with valuation and working-capital adjustments still subject to finalization. Acquisition costs of approximately $0.4m were included in SG&A.
- After quarter-end, CFO Paul Evans was replaced by Betty Johnson. The company expected approximately $1.3m of incremental expense in Q4 from accelerated vesting of Mr. Evans’s equity awards, in addition to severance and benefits under his agreement; the filing does not state a total expected transition cost.
- Outstanding surety bonds had an original face amount of approximately $969.9m, with estimated remaining completion costs of $110.0m. Standby letters of credit totaled approximately $19.3m. The company disclosed ordinary-course litigation and claims but did not expect them, individually or collectively, to materially affect its financial position, results or cash flows. Some contributing multi-employer pension plans were classified as critical; the company reported no significant related liability known to it.
- The company expanded its share repurchase authorization to $42.5m through August 31, 2016; $18.1m remained available at September 30. It did not expect to pay dividends.
Important facts for investors to verify
- Whether margin pressure and labor productivity improve, and how much future earnings depend on favorable project estimate adjustments, incentives and close-outs.
- Conversion, timing and profitability of the $425.1m backlog, including project mix, material and subcontractor exposure, and the portion expected to be recognized within 12 months.
- Cash conversion and working-capital trends, particularly receivables and costs in excess of billings, alongside planned capital spending and any further acquisitions or repurchases.
- Final ESB purchase-price allocation and integration performance, plus the actual Q4 cost of the CFO transition.
- Exposure from bonded projects, insurance claims, litigation, pension plans and credit-facility covenants.