MYR Group Inc. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. MYR Group Inc. is a leading specialty contractor serving the U.S. electrical infrastructure market through two primary segments: Transmission and Distribution (T&D) and Commercial and Industrial (C&I). The company provides design, engineering, procurement, construction, and maintenance services nationwide.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Contract Revenues | $148.9 million | $132.9 million |
| Gross Profit | $15.2 million | $17.0 million |
| Gross Margin | 10.2% | 12.8% |
| Operating Income | $4.7 million | $5.0 million |
| Net Income | $2.8 million | $2.9 million |
| Diluted EPS | $0.13 | $0.14 |
| EBITDA (Non-GAAP) | $8.7 million | $8.2 million |
| Cash and Equivalents | $37.1 million | $34.1 million (End of Q1 2009) |
| Operating Cash Flow | $0.6 million | ($0.6 million) |
| Long-Term Debt | $30.0 million | $30.0 million |
| Working Capital | $78.7 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 12.0% to $148.9 million, driven by significant revenue increases from a few large projects in both T&D and C&I segments, partially offset by a reduction in smaller projects.
- Margin Compression: Gross profit decreased 10.9% to $15.2 million, with gross margin declining from 12.8% to 10.2%. This was attributed to lower productivity on certain contracts and increased competition, particularly on smaller T&D projects.
- SG&A Reduction: Selling, general, and administrative expenses decreased 11.8% to $10.6 million. This decline was primarily due to the elimination of a $1.6 million severance liability following the amendment of executive employment agreements.
- Backlog Decline: Total backlog decreased from $294.6 million in Q1 2009 to $199.5 million in Q1 2010, largely due to the completion of significant contracts awarded in late 2008 that have not yet been replaced by contracts of similar size.
Outlook, Risks, and Contingencies
Management Commentary: Management expects capital spending in 2010 to be consistent with 2009 levels. The company anticipates that existing cash, the $60.0 million availability under its credit facility, and future operating cash flows will meet future needs. However, large-scale grid rebuild initiatives may require additional working capital.
Risks and Contingencies:
- Credit Facility Covenants: The company maintains a $125.0 million senior secured credit facility. As of March 31, 2010, the interest coverage ratio was >49.0:1 and the leverage ratio was <1.0:1, well within covenant limits.
- Customer Concentration: Two customers accounted for approximately 33.7% of total consolidated revenues in Q1 2010. One customer represented 23.9% of total accounts receivable.
- Surety Bonds: Approximately $456.8 million in performance bonds were outstanding, with an estimated cost to complete of $97.8 million. The company has not been required to reimburse sureties for claims to date.
- Legal Matters: The company is subject to routine litigation and asbestos-related claims from historic operations. Management believes these will not have a material adverse effect.
Investor Verification Checklist
- Verify the sustainability of revenue growth given the significant decline in backlog ($95 million decrease year-over-year).
- Monitor gross margin trends, specifically the impact of productivity levels on smaller contracts versus large projects.
- Assess the impact of customer concentration, noting that two customers provided over one-third of Q1 revenues.
- Review the status of the $1.6 million severance liability reversal and its effect on future SG&A expenses.
- Confirm compliance with debt covenants (interest coverage and leverage ratios) as the company relies on its credit facility for liquidity.