MYR Group Inc. — Q2 2016 Form 10-Q
Business and period: Specialty electrical construction contractor operating in Transmission & Distribution (T&D) and Commercial & Industrial (C&I). This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $261.9m | $276.5m | $515.6m | $520.6m |
| Gross profit / margin | $31.4m / 12.0% | $31.7m / 11.5% | $58.7m / 11.4% | $61.1m / 11.7% |
| Operating income / margin | $9.1m / 3.5% | $13.0m / 4.7% | $12.4m / 2.4% | $24.6m / 4.7% |
| Net income | $5.5m | $8.1m | $7.5m | $15.2m |
| Diluted EPS | $0.31 | $0.38 | $0.40 | $0.72 |
| EBITDA (non-GAAP) | $18.9m | $22.3m | $32.2m | $42.9m |
Cash flow and liquidity: Six-month operating cash flow was $46.5m, versus $9.0m in 2015, aided by working-capital movements, including improved receivable collections and billing timing. Investing activities used $10.4m, including $12.2m of capital expenditures. Financing activities used $72.6m, primarily for share repurchases. Cash was $3.4m at June 30, down from $39.8m at year-end 2015; working capital was $66.8m.
Debt: The company had $20.0m drawn under its new $250m five-year revolving facility, plus $4.6m of capital lease obligations. It reported $205.7m of facility availability, including the effect of outstanding letters of credit. The facility requires a maximum leverage ratio of 3.0 and minimum interest coverage of 3.0; variable-rate borrowings expose the company to higher interest costs.
Changes and operating trends
- Six-month revenue fell 1.0%; net income fell about 51%. Q2 revenue declined 5.3% and net income declined about 32% year over year. Higher SG&A, lower T&D revenue and weaker segment operating results contributed to the earnings decline.
- Six-month T&D revenue declined 7.2% to $361.6m, while C&I revenue increased 17.7% to $154.0m. T&D operating margin decreased to 7.3% from 8.6%; C&I operating margin declined to 3.0% from 5.2%.
- Backlog was $475.0m at June 30, up 9.3% from March 31, 2016 and compared with $410.7m a year earlier. The company cautions that backlog is not a standalone indicator of future revenue or profits.
- Shares repurchased in the first half totaled approximately 4.0m for $93.0m of cash outlay. The company reported that its $142.5m program was exhausted on July 12; on July 28, the board authorized a further $20m, bringing the program to $162.5m through August 15, 2017, with a less aggressive pace planned.
Outlook, commentary and risks
- Management expected bidding activity to remain strong in both segments for the rest of 2016 and in 2017; the filing gives no specific revenue, earnings or margin guidance. Management anticipated lower 2016 capital spending and greater use of leasing to finance fleet needs.
- Management cited intense competition, smaller and shorter T&D projects, lower fleet utilization, mobilization costs and delays between project awards and recognized revenue. Larger bids may include more materials and subcontractor costs, which generally carry lower markups. Distribution spending can vary with weather, customer budgets and regulation.
- New-market expansion initiatives started more slowly than expected and created uncovered fixed costs. Six-month SG&A rose $8.8m, including $5.3m of expansion costs and $1.0m related to activist investor activities, as well as higher payroll and medical claims costs.
- Project claims, pending change orders, weather and below-estimate productivity affected results. Changes in project estimates reduced six-month gross margin by 0.7 percentage points and operating income by $3.7m, or net income by $2.3m ($0.12 diluted EPS); Q2 estimate changes increased operating income by $0.2m.
- Key exposures include fixed-price project execution and cost estimates, labor availability and collective bargaining, customer credit and concentration, weather, bonding capacity, insurance claims, and multi-employer pension plans. Surety bonds outstanding had an original face amount of $870.5m; estimated remaining cost to complete those bonded projects was $105.1m. One customer represented 14.7% of accounts receivable at quarter-end.
- The company said ordinary-course litigation was not expected to have a material adverse effect and reported no material changes to the risk factors in its 2015 Form 10-K. U.S. federal tax returns for 2012–2014 and state returns for 2011–2014 were under examination.
Investor verification points
- Assess whether backlog converts to profitable work, particularly given project timing, fixed-price exposure and competitive bidding.
- Track project claims, change orders, productivity, weather impacts and subsequent revisions to cost-to-complete estimates.
- Evaluate cash generation after substantial repurchases, the reduced cash balance, remaining facility availability and compliance with debt covenants.
- Monitor T&D and C&I margin trends, expansion-market fixed costs, and whether the announced lower capital spending and increased leasing affect operating costs.
- Review outcomes of tax examinations, insurance and legal claims, bonding requirements, customer concentration, and potential multi-employer pension exposure.