MYR Group Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Contract revenue | $250.6 | $210.5 | $751.2 | $546.1 |
| Gross profit / margin | $29.6 / 11.8% | $19.8 / 9.4% | $85.7 / 11.4% | $60.9 / 11.2% |
| Operating income / margin | $14.2 / 5.6% | $6.6 / 3.2% | $40.1 / 5.3% | $20.2 / 3.7% |
| Net income | $8.7 | $4.2 | $24.5 | $12.4 |
| Diluted earnings per share | $0.41 | $0.20 | $1.15 | $0.59 |
| EBITDA, non-GAAP | $20.7 | $11.7 | $58.4 | $34.2 |
- Nine-month operating cash flow was $22.7, versus cash used of $4.7 in 2011. Investing activities used $31.2, primarily for capital expenditures of $32.1. Cash declined $17.4 during the nine months to $16.6.
- At September 30, current assets were $270.1 and current liabilities $196.3. Accounts receivable was $164.4; costs and estimated earnings exceeding billings were $63.1.
- No revolving borrowings were outstanding; $157.8 of the $175.0 credit facility was available. The company reported $17.2 of facility letters of credit and compliance with its financial covenants. Short-term borrowings were zero, compared with $10.0 at year-end 2011.
- Stockholders’ equity was $243.2, compared with $215.7 at December 31, 2011.
Material changes versus prior comparable periods
- Q3 revenue rose 19.0%; nine-month revenue rose 37.6%. Most growth came from large transmission projects. Nine-month T&D revenue increased 45.9% to $625.1; C&I revenue increased 7.3% to $126.1.
- Nine-month net income nearly doubled, while diluted EPS increased to $1.15 from $0.59. Improved project margins and fleet utilization contributed to higher margins; SG&A declined as a share of revenue to 6.1% from 7.5%.
- Q3 gross margin increased to 11.8% from 9.4%; management noted the 2011 comparison included an insurance-reserve increase that reduced gross margin by 1.1 percentage points.
- Backlog was $491.3 at September 30, 2012, versus $721.4 at September 30, 2011. The filing cautions that backlog calculation varies by contract type and is not a standalone predictor of future revenue.
Outlook, risks and contingencies
- Management expected the transmission-project market to remain strong over the next several years, despite fewer major projects recently being out for bid and award. It cited tighter industry capacity and shortages in some regions of skilled labor and specialized equipment. It also reported increased bidding activity in some C&I and electric distribution markets and intended to pursue organic growth and selective acquisitions or joint ventures. No quantified earnings or revenue guidance was provided.
- Management expected cash, available credit and operating cash flow to support operating needs, debt service and planned capital expenditures. Large projects may require additional working capital.
- Key risks include project cost-estimate changes under percentage-of-completion accounting, fixed-price contract cost overruns, project cancellation or timing, customer collections, labor and subcontractor availability, material and fuel costs, and reliance on surety bonding. Two customers each represented more than 10% of accounts receivable.
- Outstanding surety bonds had an original face amount of $917.6, with estimated remaining project costs of $387.0. The company also disclosed $15.0 of insurance-related and approximately $2.2 of contract-performance standby letters of credit, $6.1 of construction-equipment purchase orders, and future operating lease payments.
- Some contributing multi-employer pension plans were designated “critical”; the company reported no significant related liabilities known at filing but warned that withdrawal or surcharges could be material. Routine litigation and claims were not expected by management to materially affect results; historic asbestos-related claims were also discussed.
- The company had no derivatives or credit-facility borrowings at quarter-end. Variable-rate exposure would affect interest costs if borrowing resumes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether large transmission projects continue to drive revenue and whether margins and fleet utilization remain strong.
- Backlog conversion, new project awards, and the implications of the year-over-year backlog decline, considering the company’s stated backlog limitations.
- Collection and working-capital trends, especially increased receivables and retainage, and cash generation relative to capital spending.
- Credit-facility availability, covenant compliance, and the effect of bonding and letters of credit on capacity for new projects.
- Potential exposure from customer concentration, project estimates, insurance claims, labor and pension plans, and legal contingencies.