MYR Group Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. MYR Group provides electrical infrastructure contracting through Transmission & Distribution (T&D) and Commercial & Industrial (C&I) segments.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $185.3 million | $140.3 million | $335.6 million | $289.2 million |
| Gross profit / margin | $19.5 million / 10.5% | $16.7 million / 11.9% | $41.1 million / 12.2% | $31.9 million / 11.0% |
| Operating income | $6.0 million | $5.8 million | $13.6 million | $10.5 million |
| Net income | $3.7 million | $3.4 million | $8.2 million | $6.1 million |
| Diluted EPS | $0.18 | $0.16 | $0.39 | $0.30 |
| Operating cash flow | $0.4 million | $12.8 million | $14.2 million | $13.4 million |
Margins and segment performance: Q2 revenue rose 32.1%, but gross margin fell to 10.5%, chiefly reflecting weaker C&I project margins and underused fleet assets as large transmission projects began. For the first half, T&D revenue increased 22.4% to $257.7 million and segment operating margin improved to 9.8% from 7.1%. C&I revenue declined 0.8% to $77.9 million and operating margin fell to 2.2% from 5.0%, due mainly to pricing pressure, cost inefficiencies and higher material costs on certain projects.
Cash, debt and liquidity
- Cash and equivalents were $35.4 million at June 30, down from $62.6 million at year-end 2010. First-half cash flow was $14.2 million from operations, offset by $22.5 million of investing outflows—principally capital spending—and $18.9 million of financing outflows, primarily $20.0 million in term-loan repayments.
- Working capital was $61.2 million. Long-term debt was $10.0 million, compared with $30.0 million at December 31, 2010. The term loan rate was 1.1875%; the credit facility expires August 31, 2012.
- Revolver availability was $60.0 million after a $15.0 million letter of credit. The company reported compliance with covenants; interest coverage exceeded 45.0x and leverage was below 1.0x, against limits of at least 3.0x and no more than 3.0x, respectively.
- First-half capital expenditures were $22.8 million. Management expects full-year 2011 capital expenditures of $30–$40 million and believes cash, available credit and operating cash flow will cover expected needs, while noting large projects may require additional working capital.
Material changes, outlook and risks
- First-half revenue increased 16.1%, led by T&D growth; net income rose 34.0%. T&D results benefited from improved productivity and margins on certain large transmission contracts, several of which were substantially completed in Q2. Those above-normal project margins may not recur.
- Backlog was $716.9 million at June 30, versus $199.6 million a year earlier; $273.9 million was estimated not to be recognized within 12 months. Management cautions backlog may not be realized or profitable. CAPX2020 and ETT CREZ work selected or agreed in principle was excluded because scope and terms were not yet defined or agreed.
- Management expected distribution and C&I markets to remain soft through the rest of 2011; bidding activity for large transmission projects had eased from the strong pace of late 2010 and early 2011. Large awarded projects may generate little revenue initially and their start can be delayed by permitting, approvals, right-of-way, financing, engineering or procurement.
- Key risks include fixed-price contract cost overruns, project-estimate revisions under percentage-of-completion accounting, competition and pricing pressure, labor and subcontractor availability, material costs, weather, customer credit and project timing. Performance bonds had an original face amount of $786.1 million, including $422.4 million of remaining bonded backlog. The company reported no material expected legal exposure, but noted ordinary-course claims, asbestos-related matters, and potential multi-employer pension exposure; some contributing plans were classified as critical.
- Interest rates on facility borrowings are variable and the company had no interest-rate hedges. A 0.125 percentage-point rate change would alter annual interest expense by about $12,500 on the reported $10 million borrowing balance. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether large awarded transmission projects start on schedule and convert into revenue and cash flow, and whether backlog definitions and exclusions remain comparable.
- Whether C&I margins and fleet utilization improve, and whether first-half T&D margin gains from substantially completed projects are sustainable.
- Actual capital spending, working-capital needs, cash generation and remaining revolver availability as project activity ramps up.
- Exposure under surety bonds, insurance reserves, collective-bargaining pension plans and pending legal or tax matters.