MYR Group Inc. — Q2 2014 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; unaudited. MYR Group is a specialty electrical contractor operating in Transmission and Distribution (T&D) and Commercial and Industrial (C&I).
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $228.9m | $213.9m | $444.5m | $415.3m |
| Gross profit / margin | $30.5m / 13.3% | $31.3m / 14.6% | $57.6m / 13.0% | $58.6m / 14.1% |
| Operating income / margin | $12.4m / 5.4% | $15.4m / 7.2% | $22.5m / 5.1% | $26.8m / 6.4% |
| Net income | $7.7m | $9.5m | $14.0m | $16.4m |
| Diluted EPS | $0.36 | $0.44 | $0.64 | $0.76 |
| EBITDA (non-GAAP) | $20.7m | $22.5m | $39.0m | $40.8m |
- Revenue grew 7.0% in both the quarter and first half, led by C&I. T&D revenue declined 4.4% in Q2 and 1.8% in the first half; C&I revenue rose 56.7% and 43.9%, respectively.
- First-half segment operating income was $30.7m for T&D, down from $38.4m, and $7.7m for C&I, up from $4.2m. Lower T&D equipment utilization and higher repair and maintenance costs weighed on results; improved C&I activity and job efficiency supported gains.
- Changes in estimates on several large transmission projects increased gross margin by 1.9 percentage points in Q2 and 2.2 points in the first half. They added $4.3m and $9.7m, respectively, to operating income and $0.13 and $0.28 to diluted EPS. These estimate-related benefits were more than offset overall by equipment-related cost pressures.
Cash, liquidity and balance sheet
- At June 30, cash was $54.6m, down from $76.5m at year-end 2013; working capital was $125.3m. Current assets were $322.7m and current liabilities $197.3m.
- First-half operating cash flow was $4.3m versus $38.0m a year earlier. The filing attributes the decline mainly to working-capital timing, including a $15.7m cash use from costs and estimated earnings exceeding billings, compared with a $24.9m cash source in the prior period.
- Capital expenditures were $25.2m; investing activities used $25.1m. Financing activities used $1.1m, including $1.6m of share purchases. Cash declined by $21.9m during the period.
- No borrowings were outstanding under the $175m revolving credit facility. Borrowing availability was $156.6m after $18.4m in letters of credit. The company was in compliance with its financial covenants. Interest expense was $0.4m for the first half.
Backlog, outlook and risks
- Backlog was $397.9m at June 30, up 3.2% from March 31 but down from $474.5m a year earlier. Management cautions that backlog is not a stand-alone indicator of future revenue or profit; $39.1m was estimated not to be recognized within 12 months.
- Management expected strong bidding activity in both segments for the remainder of 2014 and saw potential T&D opportunities in Alaska and Canada. It cited transmission bid-margin pressure in some areas and said large transmission projects nearing completion were reducing specialty-equipment utilization. No specific revenue or earnings guidance was provided.
- Management expected 2014 capital spending to be similar to 2013 and said cash, credit availability and anticipated operating cash flow should support operations, debt service, investment opportunities and the repurchase plan. It noted that large projects or acquisitions could require additional capital.
- Material contingencies include $937.8m of outstanding surety bonds, with estimated remaining costs to complete bonded projects of $171.5m; $18.4m of standby letters of credit; and $5.5m of construction-equipment purchase orders due over the next three months.
- Legal matters include an appealed Florida judgment against a subsidiary involving approximately $0.7m compensatory and $3.6m punitive damages; the company had recorded a $2.3m reserve for estimated punitive damages, interest and appeal-bond costs. A separate Superfund-site lawsuit alleges damages up to $140m; the subsidiary’s potential share could not be assessed, and insurance reimbursement may not cover all costs. Management did not expect the proceedings overall to materially affect the company.
- Other risks include project execution and fixed-price cost overruns, reliance on contract estimates, customer and market concentration, labor availability, insurance and pension-plan exposure, bonding access, and fluctuations in project timing and cash flow. Two customers each represented over 10% of accounts receivable at quarter-end. Management reported disclosure controls were effective and no material changes to internal control.
Key facts for investors to verify
- Whether lower equipment utilization, repair costs and T&D margin pressure persist as major projects conclude.
- How much first-half operating cash flow reflects timing versus underlying collection and billing trends.
- Whether contract-estimate gains recur, and the sensitivity of reported profits to percentage-of-completion estimates.
- Backlog conversion, segment mix, customer receivable concentration and the profitability of new awards.
- Developments in the Florida appeal and Ashland Superfund litigation, along with surety, insurance and multi-employer pension exposures.