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MYR GROUP INC.
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Quarter Report: 2011 September (Form 10-Q)
MYR GROUP INC. - Quarter Report: 2011 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR |
o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-08325
MYR GROUP INC.
(Exact name of registrant as specified in its charter)
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| Delaware |
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36-3158643 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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Three Continental Towers
1701 Golf Road, Suite 3-1012
Rolling Meadows, IL
(Address of principal executive offices) |
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60008-4210
(Zip Code) |
(847) 290-1891
(Registrant's telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the
"Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Accelerated filer ý |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller
reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o No ý
As of October 28, 2011 there were 20,401,734 outstanding shares of the registrant's $0.01 par value common stock.
WEB SITE ACCESS TO COMPANY'S REPORTS
MYR Group Inc.'s internet Web site address is www.myrgroup.com. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Exchange Act will be available free of charge through our Web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the
Securities and Exchange Commission ("SEC").
Table of Contents
INDEX
Throughout
this report, references to "MYR Group," the "Company," "we," "us" and "our" refer to MYR Group Inc. and its consolidated subsidiaries, except as otherwise indicated or
as the context otherwise requires.
i
Table of Contents
MYR GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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September 30,
2011 |
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December 31,
2010 |
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(unaudited)
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
17,547 |
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$ |
62,623 |
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Accounts receivable, net of allowances of $1,001 and $947, respectively |
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137,003 |
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107,172 |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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50,246 |
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29,299 |
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Construction materials inventory |
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2,754 |
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— |
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Deferred income tax assets |
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10,569 |
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10,544 |
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Receivable for insurance claims in excess of deductibles |
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9,136 |
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8,422 |
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Refundable income taxes |
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2,136 |
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2,144 |
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Other current assets |
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1,561 |
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3,719 |
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Total current assets |
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230,952 |
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223,923 |
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Property and equipment, net of accumulated depreciation of $59,335 and $46,878, respectively |
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115,088 |
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96,591 |
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Goodwill |
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46,599 |
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46,599 |
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Intangible assets, net of accumulated amortization of $2,139 and $1,888, respectively |
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10,953 |
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11,204 |
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Other assets |
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1,368 |
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1,831 |
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Total assets |
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$ |
404,960 |
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$ |
380,148 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Short-term borrowings |
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$ |
10,000 |
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$ |
— |
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Current maturities of long-term debt |
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10,000 |
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— |
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Accounts payable |
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60,907 |
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41,309 |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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38,939 |
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45,505 |
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Accrued self insurance |
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37,843 |
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34,044 |
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Other current liabilities |
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20,006 |
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17,974 |
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Total current liabilities |
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177,695 |
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138,832 |
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Long-term debt, net of current maturities |
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— |
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30,000 |
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Deferred income tax liabilities |
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17,420 |
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17,971 |
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Other liabilities |
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591 |
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636 |
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Total liabilities |
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195,706 |
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187,439 |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock—$0.01 par value per share; 4,000,000 authorized shares; none issued and outstanding at September 30, 2011 and December 31,
2010 |
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— |
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— |
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Common stock—$0.01 par value per share; 100,000,000 authorized shares; 20,405,044 and 20,007,081 shares issued and 20,401,734 and 20,007,081
outstanding at September 30, 2011 and December 31, 2010, respectively |
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204 |
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200 |
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Additional paid-in capital |
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149,332 |
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145,149 |
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Retained earnings |
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59,798 |
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47,360 |
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Treasury stock—3,310 and 0 shares, respectively |
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(80 |
) |
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— |
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Total stockholders' equity |
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209,254 |
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192,709 |
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Total liabilities and stockholders' equity |
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$ |
404,960 |
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$ |
380,148 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
Table of Contents
MYR GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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Three months ended
September 30, |
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Nine months ended
September 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Contract revenues |
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$ |
210,489 |
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$ |
152,767 |
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$ |
546,093 |
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$ |
441,941 |
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Contract costs |
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190,676 |
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135,731 |
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485,152 |
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393,023 |
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Gross profit |
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19,813 |
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17,036 |
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60,941 |
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48,918 |
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Selling, general and administrative expenses |
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13,523 |
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11,023 |
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41,174 |
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32,635 |
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Amortization of intangible assets |
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84 |
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84 |
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251 |
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251 |
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Gain on sale of property and equipment |
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(428 |
) |
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(278 |
) |
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(728 |
) |
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(724 |
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Income from operations |
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6,634 |
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6,207 |
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20,244 |
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16,756 |
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Other income (expense) |
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Interest income |
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5 |
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14 |
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48 |
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37 |
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Interest expense |
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(93 |
) |
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(398 |
) |
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(463 |
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(809 |
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Other, net |
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(21 |
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(31 |
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(53 |
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(114 |
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Income before provision for income taxes |
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6,525 |
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5,792 |
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19,776 |
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15,870 |
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Income tax expense |
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2,304 |
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1,891 |
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7,338 |
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5,836 |
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Net income |
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$ |
4,221 |
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$ |
3,901 |
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$ |
12,438 |
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$ |
10,034 |
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Income per common share: |
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—Basic |
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$ |
0.21 |
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$ |
0.20 |
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$ |
0.62 |
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$ |
0.51 |
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—Diluted |
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$ |
0.20 |
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$ |
0.19 |
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$ |
0.59 |
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$ |
0.48 |
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Weighted average number of common shares and potential common shares outstanding: |
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—Basic |
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20,265 |
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19,915 |
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20,102 |
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19,868 |
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—Diluted |
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21,041 |
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20,776 |
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20,985 |
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20,766 |
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The
accompanying notes are an integral part of these consolidated financial statements.
2
Table of Contents
MYR GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Three months ended
September 30, |
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Nine months ended
September 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net income |
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$ |
4,221 |
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$ |
3,901 |
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$ |
12,438 |
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$ |
10,034 |
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Adjustments to reconcile net income to net cash flows provided by (used in) operating activities— |
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Depreciation and amortization of property and equipment |
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4,980 |
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3,969 |
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13,794 |
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11,718 |
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Amortization of intangible assets |
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84 |
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84 |
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251 |
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251 |
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Stock-based compensation expense |
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146 |
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394 |
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1,100 |
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1,210 |
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Excess tax benefit from stock-based awards |
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(1,228 |
) |
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(1 |
) |
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(1,672 |
) |
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(149 |
) |
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Deferred income taxes |
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(622 |
) |
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(812 |
) |
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(576 |
) |
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(812 |
) |
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Gain on sale of property and equipment |
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(428 |
) |
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(278 |
) |
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(728 |
) |
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(724 |
) |
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Other non-cash items |
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17 |
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22 |
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78 |
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64 |
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Changes in operating assets and liabilities |
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Accounts receivable, net |
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(37,261 |
) |
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(5,700 |
) |
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(29,831 |
) |
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2,822 |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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4,233 |
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(8,258 |
) |
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(20,947 |
) |
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(7,330 |
) |
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Construction materials inventory |
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(2,754 |
) |
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— |
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(2,754 |
) |
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— |
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| |
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Receivable for insurance claims in excess of deductibles |
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35 |
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49 |
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(714 |
) |
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(264 |
) |
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Other assets |
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2,656 |
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1,341 |
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4,223 |
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3,246 |
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Accounts payable |
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4,972 |
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1,272 |
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21,389 |
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(4,213 |
) |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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(3,014 |
) |
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2,636 |
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(6,566 |
) |
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749 |
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Accrued self insurance |
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2,797 |
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(237 |
) |
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3,799 |
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|
734 |
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Other liabilities |
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2,195 |
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|
504 |
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1,987 |
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(5,047 |
) |
| |
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Net cash flows provided by (used in) operating activities |
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(18,971 |
) |
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(1,114 |
) |
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(4,729 |
) |
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12,289 |
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Cash flows from investing activities: |
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Proceeds from sale of property and equipment |
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508 |
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|
280 |
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|
808 |
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|
751 |
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Purchases of property and equipment |
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(11,338 |
) |
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(4,950 |
) |
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(34,162 |
) |
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(12,082 |
) |
| |
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| |
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Net cash flows used in investing activities |
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(10,830 |
) |
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(4,670 |
) |
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(33,354 |
) |
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(11,331 |
) |
| |
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Cash flows from financing activities: |
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Proceeds from borrowings |
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10,000 |
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|
— |
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|
10,000 |
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— |
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Payments on term loan |
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— |
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— |
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(20,000 |
) |
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— |
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| |
Payments of capital lease obligations |
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— |
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(6 |
) |
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— |
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(38 |
) |
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Employee stock option transactions |
|
|
711 |
|
|
30 |
|
|
1,370 |
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|
536 |
|
| |
Excess tax benefit from stock-based awards |
|
|
1,228 |
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|
1 |
|
|
1,672 |
|
|
149 |
|
| |
Purchase of treasury stock |
|
|
— |
|
|
— |
|
|
(80 |
) |
|
— |
|
| |
Other financing activities |
|
|
— |
|
|
— |
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|
45 |
|
|
— |
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| |
|
|
|
|
|
|
|
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| |
|
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Net cash flows provided by (used in) financing activities |
|
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11,939 |
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|
25 |
|
|
(6,993 |
) |
|
647 |
|
| |
|
|
|
|
|
|
|
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Net increase (decrease) in cash and cash equivalents |
|
|
(17,862 |
) |
|
(5,759 |
) |
|
(45,076 |
) |
|
1,605 |
|
Cash and cash equivalents: |
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|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
35,409 |
|
|
44,940 |
|
|
62,623 |
|
|
37,576 |
|
| |
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
17,547 |
|
$ |
39,181 |
|
$ |
17,547 |
|
$ |
39,181 |
|
| |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Business, Basis of Presentation
Organization
MYR Group Inc. (the "Company") consists of the following wholly owned subsidiaries: The L. E. Myers Co., a Delaware
corporation; Hawkeye Construction, Inc., an Oregon corporation; Harlan Electric Company, a Michigan corporation; Sturgeon Electric Company, Inc., a Michigan corporation; MYR Transmission
Services, Inc., a Delaware corporation; ComTel Technology Inc., a Colorado corporation; MYRpower, Inc., a Delaware corporation and Great Southwestern Construction, Inc., a
Colorado corporation.
Business
The Company performs construction services in two business segments: Transmission and Distribution ("T&D"), and Commercial and
Industrial ("C&I"). T&D customers include electric utilities, private developers, cooperatives, municipalities and other transmission owners nationwide. The Company provides a broad range of services,
which includes design, engineering, procurement, construction, upgrade, maintenance and repair services with a particular focus on
construction, maintenance and repair throughout the continental United States. The Company also provides C&I electrical contracting services to facility owners and general contractors in the western
United States.
Interim Consolidated Financial Information
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") for interim financial reporting and pursuant to the rules and regulations of the SEC. Certain information and note disclosures typically
included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with these rules and regulations. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial condition of the Company as of September 30,
2011, and the results of operations, and cash flows for the three and nine months ended September 30, 2011 and 2010. The results of operations for the three and nine months ended
September 30, 2011 are not necessarily indicative of the results for the full year or the results for any future periods. The consolidated balance sheet as of December 31, 2010 has been
derived from the audited financial statements as of that date. These financial statements should be read in conjunction with the audited financial statements and related notes for the year ended
December 31, 2010, included in the Company's annual report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported.
The most significant estimates are related to estimates to complete on contracts, insurance reserves, accounts receivable reserves, the recoverability of goodwill and intangibles, and estimates
surrounding stock-based compensation. Actual results could differ from these estimates.
4
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization, Business, Basis of Presentation (Continued)
Recently Issued Accounting Pronouncements
Typically, changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting
standards updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all ASUs. The Company, based on its assessment, determined
that any recent ASUs not listed below are either not applicable to the Company or have minimal impact on our consolidated financial statements.
In
September 2011, the FASB issued ASU No. 2011-09 to ASC 715, which requires enhanced disclosures in the annual financial statements of employers that participate in
multiemployer plans. Under the new guidance, employers will need to explain the general nature of multiemployer pension plans and their participation in the plans, including how the plans are
different from single-employer plans. In addition, certain disclosures will be required in tabular format for each multiemployer plan that is individually significant to an employer's financial
statements. The new guidance also requires a description of the nature and effect of any significant changes affecting comparability of the employer's total contributions from period to period. The
ASU is effective for fiscal years ending after December 15, 2011. Retrospective application is required. There will be no impact to the Company's financial position, results of operations or
cash flows as the changes relate only to additional disclosures. The Company is currently evaluating the impact of the additional disclosures required.
In
September 2011, the FASB issued ASU No. 2011-08 to ASC 350 which is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits
an entity to first assess qualitative factors to determine whether it is "more-likely-than-not" that the fair value of a reporting unit is less than its carrying
amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. The
"more-likely-than-not" threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment
tests performed for reporting periods beginning after December 15, 2011. The Company does not expect the provisions of ASU 2011-08 to have a material effect on its financial
position, results of operations or cash flows.
In
January 2010, the FASB issued ASU No. 2010-06 to ASC 820 which required new disclosures and clarified existing disclosures about fair value measurement.
Specifically, this update amends ASC 820 to now require: (a) a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and to describe the reasons for the transfers; and (b) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and settlements. In addition, this update clarifies the requirements of the following existing disclosures: (a) for purposes of
reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (b) a
reporting entity should provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements. This update became effective for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which became effective for interim and reporting periods
beginning after December 15, 2010. The adoption of this standard modification did not have an impact on the Company's consolidated financial condition, results of operations or cash flows, and
there were no material impacts to the Company's financial statement disclosures.
5
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Fair Value Measurements
The accounting guidance provided by ASC 820 defines fair value, establishes methods used to measure fair value, and expands disclosure requirements about fair value measurements. The
fair value accounting guidance establishes a three-tier hierarchy of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of
availability in external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its own assumptions.
As
of September 30, 2011, the carrying value of cash and cash equivalents, accounts receivable and payable, short-term borrowings, accrued liabilities, and certain
other financial assets and liabilities approximated fair value due to the short maturities of these instruments.
As
of September 30, 2011 and December 31, 2010, the Company held cash of $17.0 million and $17.3 million, respectively. The Company also held cash equivalents
in money market funds and short-term certificates of deposit that were subject to the disclosure requirements of the fair value accounting guidance. The net carrying value of the Company's
cash equivalents as of September 30, 2011 and December 10, 2010 was $0.5 million and $45.3 million, respectively, which was equal to the fair value based upon
Level 1 inputs.
The
Company uses a discounted cash flow technique that incorporates a market interest rate adjusted for risk profile based upon Level 3 inputs to determine the fair value of its
long-term debt. The carrying amount reported in the consolidated balance sheet at September 30, 2011 for the current portion of long-term debt was $10.0 million.
The Company estimated the fair value of that debt to be $9.9 million at September 30, 2011. The carrying amount reported in the consolidated balance sheet as of December 31, 2010
for long-term debt was $30.0 million, and the Company determined the fair value of that debt to be $29.6 million at December 31, 2010.
3. Supplemental Cash Flows
Supplemental disclosures of cash flow information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
(In thousands)
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
| |
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income taxes |
|
$ |
1,764 |
|
$ |
1,835 |
|
$ |
6,375 |
|
$ |
4,708 |
|
| |
|
Interest expense |
|
|
71 |
|
|
374 |
|
|
381 |
|
|
743 |
|
| |
Noncash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Acquisition of property and equipment for which payment was pending |
|
|
1,556 |
|
|
1,552 |
|
|
1,556 |
|
|
1,552 |
|
| |
|
Acquisition of property and equipment through like-kind exchange of similar assets |
|
|
— |
|
|
— |
|
|
— |
|
|
2,924 |
|
6
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Contracts in Process
The net asset (liability) position for contracts in process consisted of the following:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2011 |
|
December 31,
2010 |
|
| |
Costs incurred on uncompleted contracts |
|
$ |
1,009,087 |
|
$ |
810,463 |
|
| |
Estimated earnings |
|
|
122,015 |
|
|
92,102 |
|
| |
|
|
|
|
|
|
|
|
1,131,102 |
|
|
902,565 |
|
| |
Less: Billings to date |
|
|
1,119,795 |
|
|
918,771 |
|
| |
|
|
|
|
|
|
|
$ |
11,307 |
|
$ |
(16,206 |
) |
| |
|
|
|
|
|
The
net asset (liability) position for contracts in process included in the accompanying consolidated balance sheets was as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2011 |
|
December 31,
2010 |
|
| |
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
$ |
50,246 |
|
$ |
29,299 |
|
| |
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
(38,939 |
) |
|
(45,505 |
) |
| |
|
|
|
|
|
|
|
$ |
11,307 |
|
$ |
(16,206 |
) |
| |
|
|
|
|
|
5. Income Taxes
The difference between the U.S. federal statutory tax rate of 35% and the Company's effective tax rates for the three and nine months ended September 30, 2011 and 2010 was
principally due to state income taxes.
The
Company had approximately $0.7 and $0.6 million of total unrecognized tax benefits as of September 30, 2011 and December 31, 2010, respectively, which were
included in other liabilities in the accompanying consolidated balance sheets. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. It is reasonably possible that
a further change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of an audit or the lapse of
applicable statutes of limitations; however, an estimated range of the impact on the unrecognized benefits cannot be quantified at this time.
The
Company's policy is to recognize interest and penalties related to income tax liabilities as a component of income tax expense in the consolidated statements of operations. The
amount of interest and penalties charged to income tax expense as a result of the unrecognized tax benefits was a benefit of less than $0.1 million and an expense of less than
$0.1 million for the nine-month periods ended September 30, 2011 and 2010, respectively.
The
Company is subject to taxation in various jurisdictions. The Company continues to remain subject to examination by U.S. federal authorities for certain open tax years and has been
informed by the Internal Revenue Service that an examination is being scheduled to cover its amended tax returns for 2007 and 2008, and its 2009 tax return. The Company is also subject to examination
by various state authorities for the years 2006 through 2010.
7
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Commitments and Contingencies
Letters of Credit
At September 30, 2011 the Company had two outstanding irrevocable standby letters of credit, including one for
$15.0 million related to the Company's payment obligation under its insurance programs and another for approximately $2.2 million related to contract performance obligations. At
December 31, 2010, the Company had one outstanding irrevocable standby letter of credit totaling $15.0 million related to the Company's payment obligation under its insurance programs.
Leases
The Company leases real estate, construction equipment and office equipment under operating leases with terms ranging from one to nine
years. As of September 30, 2011, future minimum lease payments for these operating leases were as follows: $1.5 million for the remainder of 2011, $4.6 million for 2012,
$2.1 million for 2013, $0.8 million for 2014, $0.3 million for 2015 and $0.7 million thereafter.
Purchase Commitments for Construction Equipment
As of September 30, 2011, the Company had approximately $7.0 million in outstanding purchase obligations for certain
construction equipment with cash outlay requirements anticipated to occur over the next six months.
Employment Agreements
As of December 31, 2009, the Company had recorded a contingent severance payment liability of approximately $1.6 million
related to the employment agreements it entered into with six executive officers in December 2007. The liability represented the amount the named executive officers would have been eligible to receive
under the terms of the employment agreements if they were to voluntarily terminate employment without "good reason" (as defined in the employment agreements.) In March 2010, the Company amended and
restated the employment agreements, and, among other things, removed the provision for severance pay that would have been
payable upon a voluntary termination without good reason. The revised severance pay provisions in the employment agreements are all under the employer's control. As a result, the Company eliminated
the $1.6 million liability related to this provision. The benefit of reversing this liability was included as a reduction to selling, general and administrative expenses in the accompanying
consolidated statement of operations for the nine months ended September 30, 2010.
Surety Bonds
In certain circumstances, the Company is required to provide performance bonds in connection with its future performance on contractual
commitments. The Company has indemnified its sureties for any expenses paid out under these performance bonds. As of September 30, 2011, the total original face value amount of outstanding
performance bonds was approximately $912.3 million of which approximately $506.0 million was not yet complete and unrecognized in revenue.
8
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Commitments and Contingencies (Continued)
Collective bargaining agreements
Many of the Company's subsidiaries' field labor employees are covered by collective bargaining agreements. The agreements require the
subsidiaries to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If a subsidiary withdraws from one or more multi-employer pension plans or
if the plans were to otherwise become underfunded, the subsidiary could be assessed liabilities for additional contributions related to the underfunding of these plans. Although the Company has been
informed that several of the multi-employer pension plans to which our subsidiaries contribute have been labeled with a "critical" status, the Company is not aware of any potential significant
liabilities related to this issue.
Litigation and Other Legal Matters
The Company is from time to time party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of
business. These actions typically seek,
among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With
respect to all such lawsuits, claims and proceedings, the Company records or adjusts reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
The Company does not believe that any of these proceedings, separately or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash
flows.
The
Company is routinely subject to other civil claims, litigation and arbitration, and regulatory investigations arising in the ordinary course of our present business as well as in
respect of our divested businesses. Some of these include claims related to our current services and operations, and asbestos-related claims concerning historic operations of a predecessor affiliate.
The Company believes that it has strong defenses to these claims as well as adequate insurance coverage in the event any asbestos-related claim is not resolved in its favor. These claims have not had
a material impact on the Company to date and the Company believes that the likelihood that a future material adverse outcome will result from these claims is remote. However, if facts and
circumstances change in the future, the Company cannot be certain that an adverse outcome of one or more of these claims would not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
7. Stock-Based Compensation
The Company maintains two award plans under which stock-based compensation has been granted, the 2006 Stock Option Plan (the "2006 Plan") and the 2007 Long-Term Incentive
Plan (the "LTIP"). Upon the adoption of the LTIP, awards were no longer granted under the 2006 Plan. The LTIP provides for grants of (a) incentive stock options qualified as such under U.S.
federal income tax laws, (b) stock options that do not qualify as incentive stock options, (c) stock appreciation rights, (d) restricted stock awards, (e) performance
awards, (f) phantom stock, (g) stock bonuses, (h) dividend equivalents, or (i) any combination of such awards.
Stock Options
During the nine months ended September 30, 2011, the Company granted options to purchase 90,080 shares of the Company's common
stock to various employees, including the Company's named executive officers. The grant date fair value of these options, using the Black-Scholes-Merton option-
9
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Stock-Based Compensation (Continued)
pricing
model, was approximately $11.88 per share. These options vest ratably, on an annual basis, over a three-year period. During the nine months ended September 30, 2011,
employees exercised 332,099 options. Total intrinsic value of options exercised was $6.6 million for the nine months ended September 30, 2011.
Restricted Stock
During the nine months ended September 30, 2011, the Company granted restricted stock awards covering 47,918 shares of common
stock to various employees, including the Company's named executive officers, and 17,367 shares of common stock to eligible members of the Board of Directors. The restricted stock awards granted to
employees vest as follows: 41,230 shares vest ratably, on an annual basis, over a five-year period beginning on March 24, 2012, and 6,688 shares cliff vest on May 12, 2016.
The restricted stock awards granted to the eligible members of the Board of Directors vest ratably, on an annual basis, over a three-year period. The grant date fair value of the
restricted stock was as follows: $24.18 for 58,597 shares and $24.67 for 6,688 shares, which was equal to the closing market price of the Company's common stock on the date of grant. On
March 24, 2011, a total of 11,128 shares of restricted stock from a prior grant vested.
Performance Awards
During the nine months ended September 30, 2011, the Company granted performance stock awards covering 34,179 shares of common
stock, at target level, to certain key management personnel, including the Company's named executive officers. The grant date fair value of the performance stock awards was $24.18, which was equal to
the closing market price of the Company's common stock on the date of grant. The performance stock awards will cliff vest on December 31, 2013, subject to the achievement of certain specified
levels of the Company's average return-on-equity ("ROE") over the performance period.
Stock-Compensation Expense
The Company recognizes stock-based compensation expense on a straight-line basis over the vesting period. Stock-based
compensation cost is adjusted for changes in estimated and actual forfeitures and also for changes in estimated performance shares that will be earned. The Company recognized stock-based compensation
expense of approximately $1.6 million and $1.2 million for the nine months ended September 30, 2011 and 2010, respectively, in selling, general and administrative expenses. As of
September 30, 2011, there was approximately $4.2 million of total unrecognized stock-based compensation cost related to awards granted under the LTIP, net of estimated forfeitures. Total
unrecognized compensation cost will be adjusted for any future changes in estimated and actual forfeitures.
Retainer Share Election Program
Each of the Company's independent directors receives a retainer to be paid annually in cash, unless the director chooses to receive a
portion of the retainer in the form of common stock. In 2011, a total of 1,843 shares of the Company's stock, valued at approximately $45,000, was issued to directors of the Company who elected to
receive stock in lieu of cash. The fair value of the stock issued was
10
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Stock-Based Compensation (Continued)
$24.67
per share, which was equal to the closing market price of the Company's common stock on May 12, 2011, the date of issuance.
8. Segment Information
The information in the following table was derived from internal financial reports used for corporate management purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
(In thousands)
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
| |
Contract revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
T&D |
|
$ |
170,849 |
|
$ |
118,206 |
|
$ |
428,536 |
|
$ |
328,803 |
|
| |
|
C&I |
|
|
39,640 |
|
|
34,561 |
|
|
117,557 |
|
|
113,138 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
210,489 |
|
$ |
152,767 |
|
$ |
546,093 |
|
$ |
441,941 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
T&D |
|
$ |
11,273 |
|
$ |
8,862 |
|
$ |
36,648 |
|
$ |
23,754 |
|
| |
|
C&I |
|
|
1,603 |
|
|
1,610 |
|
|
3,279 |
|
|
5,558 |
|
| |
|
General Corporate |
|
|
(6,242 |
) |
|
(4,265 |
) |
|
(19,683 |
) |
|
(12,556 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
$ |
6,634 |
|
$ |
6,207 |
|
$ |
20,244 |
|
$ |
16,756 |
|
| |
|
|
|
|
|
|
|
|
|
9. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding for the reporting period. Diluted earnings per share is computed
similarly, except that it reflects the potential dilutive impact that would occur if dilutive securities were exercised into common shares.
The
Company has issued restricted stock awards which vest over a service period that ranges from three to five years. These awards contain rights to dividends or dividend equivalents.
Awards containing such rights that are unvested are considered to be participating securities and would be included in the computation of earnings per share pursuant to the two-class
method. Under the two-class method, earnings are allocated between the Company's common stockholders and participating securities. The application of the two-class method
during the three and nine months ended September 30, 2011 and 2010 did not have a material impact on the earnings per share calculation.
11
Table of Contents
MYR GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Earnings Per Share (Continued)
The
weighted average number of common shares used to compute basic and diluted net income per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
Weighted average basic common shares outstanding |
|
|
20,264,543 |
|
|
19,914,526 |
|
|
20,102,446 |
|
|
19,868,070 |
|
Potential common shares arising from stock options and restricted stock |
|
|
776,762 |
|
|
861,417 |
|
|
882,565 |
|
|
897,506 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
21,041,305 |
|
|
20,775,943 |
|
|
20,985,011 |
|
|
20,765,576 |
|
| |
|
|
|
|
|
|
|
|
|
For
the three months ended September 30, 2011 and 2010, potential common shares related to the assumed exercise of 89,660 and 585,616 stock options, respectively, were excluded
from the dilutions calculation because the exercise price of those options was greater than the average market price of the common shares (anti-dilutive). For the nine months ended
September 30, 2011 and 2010, potential common shares related to the assumed exercise of 89,660 and 105,528 stock options, respectively, were excluded from the diluted earnings per share
calculation because the exercise price of those options was greater than the average market price of the common shares. For the three and nine months ended September 30, 2011 and 2010,
potential common shares related to the unvested portion of performance awards of 74,435 and 40,256, respectively, were excluded from the denominator of the diluted earnings per share calculation
because the underlying performance obligation was not met as of the end of those periods.
12
Table of Contents
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the accompanying consolidated financial statements
as of September 30, 2011 and December 31, 2010, and for the three and nine months ended September 30, 2011 and 2010, and with our annual report on Form 10-K for
the year ended December 31, 2010 (the "2010 Annual Report"). In addition to historical information, this discussion contains forward-looking statements. Such statements are based on our current
expectations and assumptions about future events, which are inherently subject to significant risks and uncertainties. See "Cautionary Statement Concerning Forward-Looking Statements and Information."
We disclaim, and do not undertake, any obligation to update any of these forward-looking statements, except as required by applicable law or regulation.
Overview and Outlook
We are a leading specialty contractor serving the electrical infrastructure market in the United States. We are one of the largest
national contractors servicing the T&D sector of the United States electric utility industry. Our T&D customers include electric utilities, private developers, cooperatives, municipalities and other
transmission owners. We provide a broad range of services, which includes design, engineering, procurement, construction, upgrade, maintenance and repair services with a particular focus on
construction, maintenance and repair throughout the continental United States. We also provide C&I electrical contracting services to facility owners and general contractors in the western United
States.
Our
results have been driven primarily by successful bids for, and execution of, large projects, our ability to capitalize on increased infrastructure spending in our markets and the
breadth of our customer base. We believe our centralized fleet and skilled workforce will provide us with competitive advantages in the event that planned increased spending in the transmission
infrastructure market results in an increase in demand for a limited supply of specialized equipment and labor. We expect to grow our business organically. We may also grow our business through
selectively considered strategic acquisitions that may improve our competitive position within our existing markets, expand our geographic footprint or strengthen our fleet.
The
distribution business, in our T&D segment, and our C&I segment continue to operate in challenging business environments as many of our customers are being impacted by adverse
economic conditions. We believe that some of our customers continue to operate with reduced or delayed capital spending programs, and, as a result, competition has increased for the projects available
for us to bid. In addition, we believe that the number of competitors in our industry has increased as some engineering, construction and general contractors, who historically have not competed with
us, are now bidding on projects in our industry. We believe that we have a number of competitive advantages, including our skilled workforce, extensive centralized fleet, proven safety performance and
reputation for timely completion of quality work that allow us to compete favorably in our markets.
We
have additional capacity and continue to bid new projects, both in our T&D and C&I segments. Bidding activity, which was very strong for large transmission projects in the second half
of 2010 and early in 2011 has returned to a less intense pace. We anticipate that the distribution and C&I businesses will remain soft into 2012.
We
expect our aggregate capital expenditures to reach approximately $40 million in 2011, much of which is for specialized fleet equipment and tooling to support the large
transmission projects that we have been or may be awarded.
We
were awarded several large transmission projects within the last year and have recognized revenue from some of those projects in the third quarter. We also have large transmission
projects that
13
Table of Contents
are
in the early stages of construction and we expect that a high percentage of the revenue on those projects will be recognized subsequent to 2011. Construction typically lags the award date and
could be delayed by regulatory approvals, permitting, environmental issues, right-of-way acquisition, financing, engineering, material procurement and other factors. The
majority of our revenue is recognized on a percentage-of-completion method of accounting, which is commonly used in the industry for fixed price contracts. The
percentage-of-completion accounting method we use results in recognizing contract revenues and earnings ratably over the contract term in proportion to our incurrence of
contract costs. The earnings or losses recognized on individual contracts are based on estimates of contract revenues, costs and profitability. Contract losses are recognized in full when determined,
and contract profit estimates are adjusted based on ongoing reviews of contract profitability. Changes in job performance, job conditions, weather, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are recognized in the period in which the revisions are determined. We record adjustments to estimated costs of contracts when
we believe the change in estimate is probable and the amounts can be reasonably estimated. These adjustments could result in either increases or decreases in profit margins. The margins we record in
the current period may not be indicative of margins in future periods.
Our
gross margin, which is gross profit expressed as a percentage of revenues, can vary significantly between periods. Many factors, some of which are beyond our control, impact our
gross margins. These factors include: the mix of revenue derived from the industries we serve, the mix of business conducted in different parts of the country, the mix in service and maintenance work
compared to new construction work, the amount of work that we subcontract, seasonal patterns primarily related to weather conditions, changes in fleet utilization, pricing pressures due to
competition, efficient work performance, fluctuations in commodity prices of materials, delays in the timing of projects and other factors. We expect our overall gross margins in the next few quarters
in the C&I segment and in our distribution business to continue to be pressured until the economic conditions in those markets improve. In addition, our awarded large transmission projects are in
various stages of construction. For those in the early stages of construction, revenue and gross profit recognition will likely start slow and accelerate over time as project construction progresses.
We
had consolidated revenues, for the nine months ended September 30, 2011, of $546.1 million, of which 78.5% was attributable to our T&D customers and 21.5% was
attributable to our C&I customers. For the nine months ended September 30, 2011, our net income and EBITDA (1) were $12.4 million and $34.2 million, respectively, compared
to $10.0 million and $28.6 million, respectively, for the nine months ended September 30, 2010.
- (1)
- EBITDA,
a performance measure used by management, is defined as net income plus: interest income and expense, provision for income taxes and depreciation
and amortization, as shown in the following table. EBITDA, a non-GAAP financial measure, does not purport to be an alternative to net income as a measure of operating performance or to net
cash flows provided by operating activities as a measure of liquidity. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly-titled
measures of other companies. We use, and we believe investors benefit from the presentation of, EBITDA in evaluating our operating performance because it provides us and our investors with an
additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that
EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance and cash flow because EBITDA is widely used by investors to measure a
company's operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting
methods and book value of assets, capital structure and the method by which assets were acquired.
Using
EBITDA as a performance measure has material limitations as compared to net income, or other financial measures as defined under U.S. GAAP as it excludes certain recurring items which may
be meaningful to investors. EBITDA excludes interest expense or interest income; however, as we have borrowed money in order to finance transactions and operations, or invested available cash to
generate interest income, interest expense and interest income are elements of our cost structure and can affect our ability to generate revenue and returns for our stockholders. Further, EBITDA
excludes depreciation and amortization; however, as we use capital and intangible assets to generate revenues, depreciation and
14
Table of Contents
amortization
are a necessary element of our costs and ability to generate revenue. Finally, EBITDA excludes income taxes; however, as we are organized as a corporation, the payment of taxes is a
necessary element of our operations. As a result of these exclusions from EBITDA, any measure that excludes interest expense, interest income, depreciation and amortization and income taxes has
material limitations as compared to net income. When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA to net income in each period, so as to
allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after tax basis. Using both EBITDA and net income
to evaluate the business allows management and investors to (a) assess our relative performance against our competitors, and (b) monitor our capacity to generate returns for our
stockholders.
The
following table provides a reconciliation of net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months ended
September 30, |
|
Nine months ended
September 30, |
|
| |
(In thousands)
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
| |
Reconciliation of Net Income to EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net Income |
|
$ |
4,221 |
|
$ |
3,901 |
|
$ |
12,438 |
|
$ |
10,034 |
|
| |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest expense, net |
|
|
88 |
|
|
384 |
|
|
415 |
|
|
772 |
|
| |
|
Provision for income taxes |
|
|
2,304 |
|
|
1,891 |
|
|
7,338 |
|
|
5,836 |
|
| |
|
Depreciation & amortization |
|
|
5,064 |
|
|
4,053 |
|
|
14,045 |
|
|
11,969 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
EBITDA |
|
$ |
11,677 |
|
$ |
10,229 |
|
$ |
34,236 |
|
$ |
28,611 |
|
| |
|
|
|
|
|
|
|
|
|
|
We
also use EBITDA as a liquidity measure. We believe that EBITDA is important in analyzing our liquidity because it is a key component of certain material covenants contained within our syndicated
credit facility (the "Credit Agreement"). Non-compliance with these financial covenants under the Credit Agreement—our interest coverage ratio and our leverage
ratio—could result in our lenders requiring us to immediately repay all amounts borrowed. If
we anticipated a potential covenant violation, we would seek relief from our lenders, likely causing us to incur additional cost, and such relief might not be available, or if available, might not be
on terms as favorable as those in the Credit Agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under the Credit Agreement from engaging in certain
activities, such as incurring additional indebtedness, making certain payments, and acquiring or disposing of assets. Based on the information above, management believes that the presentation of
EBITDA as a liquidity measure would be useful to investors and relevant to their assessment of our capacity to service, or incur, debt.
The
following table provides a reconciliation of EBITDA to net cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three months ended
September 30, |
|
Nine months ended
September 30, |
|
| |
(In thousands)
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
| |
Reconciliation of EBITDA to Net Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Provided By (Used In) Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
EBITDA |
|
$ |
11,677 |
|
$ |
10,229 |
|
$ |
34,236 |
|
$ |
28,611 |
|
| |
Add/(subtract): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest expense, net |
|
|
(88 |
) |
|
(384 |
) |
|
(415 |
) |
|
(772 |
) |
| |
|
Provision for income taxes |
|
|
(2,304 |
) |
|
(1,891 |
) |
|
(7,338 |
) |
|
(5,836 |
) |
| |
|
Depreciation & amortization |
|
|
(5,064 |
) |
|
(4,053 |
) |
|
(14,045 |
) |
|
(11,969 |
) |
| |
|
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities |
|
|
2,949 |
|
|
3,378 |
|
|
12,247 |
|
|
11,558 |
|
| |
|
Changes in operating assets and liabilities |
|
|
(26,141 |
) |
|
(8,393 |
) |
|
(29,414 |
) |
|
(9,303 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
Net cash flows provided by (used in) operating activities |
|
$ |
(18,971 |
) |
$ |
(1,114 |
) |
$ |
(4,729 |
) |
$ |
12,289 |
|
| |
|
|
|
|
|
|
|
|
|
|
Backlog
We refer to our estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun,
less the revenue we have recognized under such contracts, as "backlog." Our definition of backlog may differ from that used by other companies. We calculate backlog differently for different types of
contracts. For our fixed-price contracts, we include the full remaining portion of the contract in our calculation of backlog. A client's intention to award the Company work is not included in backlog
unless there is an actual award to perform a specific scope of work at specific terms and pricing. For our unit-price, time-and-equipment,
time-and-materials and cost-plus contracts, our projected revenue for a three-month period is included in the calculation of
15
Table of Contents
backlog,
regardless of the duration of the contract, which typically exceeds such three-month period. These types of contracts are generally awarded as part of master service agreements ("MSAs") that
typically have a one- to three-year duration from execution. Given the duration of our contracts and MSAs and our method of calculating backlog, our backlog at any point in
time may not accurately represent the revenue that we expect to realize during any period and our backlog as of the end of a fiscal year may not be indicative of the revenue we expect to generate in
the following fiscal year and should not be viewed or relied upon as a stand-alone indicator.
Revenue
on construction contracts is recorded based upon the percentage-of-completion accounting method determined by the ratio of costs incurred to date on the
contracts (excluding uninstalled direct materials) to management's estimates of total contract costs. There can be no assurance as to the accuracy of our customers' requirements or of our estimates of
existing and future needs under MSAs, or of the values of our cost or time-dependent contracts and, therefore, our current backlog may not be realized as part of our future revenues.
Subject
to the foregoing discussions, the following table summarizes the amount of our backlog that we believe to be firm as of the dates shown and the amount of our current backlog that
we reasonably estimate will not be recognized within the next twelve months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog at September 30, 2011 |
|
|
|
(In thousands)
|
|
Total |
|
Amount estimated to
not be recognized
within 12 months of
September 30, 2011 |
|
Total Backlog at
September 30, 2010 |
|
T&D |
|
$ |
657,366 |
|
$ |
221,589 |
|
$ |
115,580 |
|
C&I |
|
|
64,012 |
|
|
14,148 |
|
|
79,506 |
|
| |
|
|
|
|
|
|
|
| |
Total |
|
$ |
721,378 |
|
$ |
235,737 |
|
$ |
195,086 |
|
| |
|
|
|
|
|
|
|
Changes
in backlog from period to period are primarily the result of fluctuations in the timing and revenue recognition of contracts. The increase in backlog from the third quarter of
2010 was primarily related to several large contracts that were awarded within our T&D segment within the last year. As publicly announced, prior to the end of the second quarter of 2011, we were one
of the contractors selected to perform work on the CAPX2020 project, and we executed a master agreement with Electric Transmission Texas (ETT) for Competitive Renewable Energy Zone (CREZ) work.
However, these projects were not included in backlog as of June 30, 2011 or September 30, 2011 because our scope of work had not been defined or agreed upon, and therefore those
contracts did not meet our backlog criteria.
Project Bonding Requirements
Approximately 36.3% and 34.0% of our business by revenue for the nine-month periods ended September 30, 2011 and
2010, respectively, required surety bonds or other means of financial assurance to secure contractual performance. These bonds are typically issued at the face value of the contract awarded. If we
fail to perform or pay our subcontractors or vendors, the customer may demand that the surety provide services or make payments under the bond. In such a case, we would likely be required to reimburse
the surety for any expenses or outlays it incurs. To date, we have not been required to make any reimbursements to our surety for claims against the surety bonds. As of September 30, 2011, we
had approximately $ 912.3 million in original face amount of surety bonds outstanding, with a remaining $506.0 million in bonded backlog to be recognized as revenue, which represented
approximately 70.1% of our backlog.
16
Table of Contents
Consolidated Results of Operations
The following table sets forth selected consolidated statements of operations data and such data as a percentage of revenues for the
period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, |
|
Nine months ended
September 30, |
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
(Dollars in thousands)
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Contract revenues |
|
$ |
210,489 |
|
|
100.0 |
% |
$ |
152,767 |
|
|
100.0 |
% |
$ |
546,093 |
|
|
100.0 |
% |
$ |
441,941 |
|
|
100.0 |
% |
Contract costs |
|
|
190,676 |
|
|
90.6 |
|
|
135,731 |
|
|
88.8 |
|
|
485,152 |
|
|
88.8 |
|
|
393,023 |
|
|
88.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross profit |
|
|
19,813 |
|
|
9.4 |
|
|
17,036 |
|
|
11.2 |
|
|
60,941 |
|
|
11.2 |
|
|
48,918 |
|
|
11.1 |
|
Selling, general and administrative expenses |
|
|
13,523 |
|
|
6.4 |
|
|
11,023 |
|
|
7.2 |
|
|
41,174 |
|
|
7.5 |
|
|
32,635 |
|
|
7.4 |
|
Amortization of intangible assets |
|
|
84 |
|
|
— |
|
|
84 |
|
|
0.1 |
|
|
251 |
|
|
0.1 |
|
|
251 |
|
|
0.1 |
|
Gain on sale of property and equipment |
|
|
(428 |
) |
|
(0.2 |
) |
|
(278 |
) |
|
(0.2 |
) |
|
(728 |
) |
|
(0.1 |
) |
|
(724 |
) |
|
(0.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income from operations |
|
|
6,634 |
|
|
3.2 |
|
|
6,207 |
|
|
4.1 |
|
|
20,244 |
|
|
3.7 |
|
|
16,756 |
|
|
3.8 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income |
|
|
5 |
|
|
— |
|
|
14 |
|
|
— |
|
|
48 |
|
|
— |
|
|
37 |
|
|
— |
|
| |
Interest expense |
|
|
(93 |
) |
|
(0.1 |
) |
|
(398 |
) |
|
(0.3 |
) |
|
(463 |
) |
|
(0.1 |
) |
|
(809 |
) |
|
(0.2 |
) |
| |
Other, net |
|
|
(21 |
) |
|
— |
|
|
(31 |
) |
|
— |
|
|
(53 |
) |
|
— |
|
|
(114 |
) |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income before provision for income taxes |
|
|
6,525 |
|
|
3.1 |
|
|
5,792 |
|
|
3.8 |
|
|
19,776 |
|
|
3.6 |
|
|
15,870 |
|
|
3.6 |
|
Income tax expense |
|
|
2,304 |
|
|
1.1 |
|
|
1,891 |
|
|
1.2 |
|
|
7,338 |
|
|
1.3 |
|
|
5,836 |
|
|
1.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,221 |
|
|
2.0 |
% |
$ |
3,901 |
|
|
2.6 |
% |
$ |
12,438 |
|
|
2.3 |
% |
$ |
10,034 |
|
|
2.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Revenues. Revenues increased $57.7 million, or 37.8%, to $210.5 million for the three months ended September 30, 2011
from
$152.8 million for the three months ended September 30, 2010. Revenues from T&D projects increased $52.6 million while revenues from C&I projects increased $5.1 million.
The majority of the increase in revenues was the result of an increase in revenues from several large transmission projects (over $10.0 million in contract value), coupled with a small increase
in revenue from distribution projects and an overall increase in C&I project revenues. Storm work in the distribution market contributed approximately $12.7 million to revenues in the three
months ended September 30, 2011, compared to $3.4 million for the three months ended September 30, 2010.
Gross profit. Gross profit increased $2.8 million, or 16.3%, to $19.8 million for the three months ended September 30,
2011 from
$17.0 million for the three months ended September 30, 2010. The increase in gross profit was primarily due to higher contract volume, which was partially offset by an increase in
insurance expense over the prior-year period of approximately $2.3 million. The increased insurance expense was largely attributable to an increase in insurance reserves related to
the development of a few claims from prior years. Gross profit as a percentage of revenues (gross margin) decreased to 9.4% for the three months ended September 30, 2011 from 11.2% for the
three months ended September 30, 2010. The insurance expense adjustment reduced gross margin by 1.1%. Gross margin was also negatively affected by the under-utilization of certain fleet assets
at the beginning of the quarter, as we were in the early stages of several of our large transmission projects, which generally require lower utilization of our fleet assets and more use of
subcontractor services.
Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $2.5 million, or
22.7%, to
$13.5 million for the three months ended September 30, 2011 from $11.0 million for the three months ended September 30, 2010. The increase was primarily due to expenses
related to the increased number of support personnel and increases in group medical
17
Table of Contents
insurance
expense and other employee-related compensation and benefit expenses in the third quarter of 2011. As a percentage of revenues, these expenses decreased to 6.4% for the three months ended
September 30, 2011 from 7.2% for the three months ended September 30, 2010.
Gain on sale of property and equipment. Gains from the sale of property and equipment increased to $0.4 million for the three
months ended
September 30, 2011 from $0.3 million for the three months ended September 30, 2010. Gains from the sale of property and equipment are the result of routine sales of property and
equipment that are no longer useful or valuable to our ongoing operations.
Interest expense. Interest expense decreased to less than $0.1 million for the three months ended September 30, 2011 from
$0.4 million for the three months ended September 30, 2010. The reduction in the balance of our term loan resulted in a decrease of $0.1 million in interest expense and net
adjustments to the amounts payable to the Internal Revenue Service ("IRS") for interest computed under its look-back method for completed long-term contracts resulted in a
decrease of $0.2 million.
Provision for income taxes. The provision for income taxes was $2.3 million for the three months ended September 30, 2011,
with an
effective tax rate of 35.3%, compared to a provision of $1.9 million for the three months ended September 30, 2010, with an effective tax rate of 32.6%. The increase in our overall
effective tax rate for the three months ended September 30, 2011 was primarily due to discrete tax adjustments recorded during the 2010 period for the recognition of approximately
$0.3 million in increased state tax benefits and certain federal tax credits.
Net income. Net income for the three months ended September 30, 2011 increased to $4.2 million from $3.9 million for the
three
months ended September 30, 2010, for the reasons stated above.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment in thousands of dollars, segment
net sales as percentage of total net sales and segment operating income as a percentage of segment net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2011 |
|
2010 |
|
(Dollars in thousands)
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Contract revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission & Distribution |
|
$ |
170,849 |
|
|
81.2 |
% |
$ |
118,206 |
|
|
77.4 |
% |
Commercial & Industrial |
|
|
39,640 |
|
|
18.8 |
|
|
34,561 |
|
|
22.6 |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
210,489 |
|
|
100.0 |
|
$ |
152,767 |
|
|
100.0 |
|
| |
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission & Distribution |
|
$ |
11,273 |
|
|
6.6 |
|
$ |
8,862 |
|
|
7.5 |
|
Commercial & Industrial |
|
|
1,603 |
|
|
4.0 |
|
|
1,610 |
|
|
4.7 |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
|
12,876 |
|
|
6.1 |
|
|
10,472 |
|
|
6.9 |
|
Corporate |
|
|
(6,242 |
) |
|
(2.9 |
) |
|
(4,265 |
) |
|
(2.8 |
) |
| |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
6,634 |
|
|
3.2 |
% |
$ |
6,207 |
|
|
4.1 |
% |
| |
|
|
|
|
|
|
|
|
|
Transmission & Distribution
Revenues for our T&D segment for the three months ended September 30, 2011 were $170.8 million compared to
$118.2 million for the three months ended September 30, 2010, an increase of $52.6 million, or 44.5%. The increase in revenues was primarily the result of an increase in revenues
from several large transmission projects as well as a small increase in distribution revenues. Storm work
18
Table of Contents
in
the distribution market contributed approximately $12.7 million to revenues in the three months ended September 30, 2011, compared to $3.4 million for the three months ended
September 30, 2010.
Operating
income for our T&D segment for the three months ended September 30, 2011 was $11.3 million compared to $8.9 million for the three months ended
September 30, 2010, an increase of
approximately $2.4 million, or 27.2%. As a percentage of revenues, operating income for our T&D segment decreased to 6.6% for the three months ended September 30, 2011 from 7.5% for the
three months ended September 30, 2010. The decrease in operating income as a percentage of revenues was primarily attributable to an increase of approximately $1.9 million, or 1.1% of
revenue, in insurance expense. The increased insurance expense was largely attributable to an increase in insurance reserves related to the development of a few claims from prior years. In addition,
operating income was negatively affected by the under-utilization of certain fleet assets at the beginning of the quarter, as we were in the early stages of several of our large transmission projects,
which generally require lower utilization of our fleet assets and more use of subcontractor services. Storm work in the distribution market is normally performed at higher margins than our other
distribution work; however, much of the storm work that was performed this quarter was done under MSAs, resulting in margins that were only slightly higher than our typical distribution work.
Commercial & Industrial
Revenues for our C&I segment for the three months ended September 30, 2011 were $39.7 million compared to
$34.6 million for the three months ended September 30, 2010, an increase of $5.1 million, or 14.7%. The increase in revenues was due to increases in revenues on projects of all
sizes.
Operating
income for our C&I segment for the three months ended September 30, 2011 was $1.6 million, which was consistent with the three months ended September 30,
2010. Operating income as a percentage of revenues for our C&I segment decreased to 4.0% for the three months ended September 30, 2011 from 4.7% for the three months ended September 30,
2010. The decrease in operating income as a percentage of revenues was primarily attributable to an allocated increase of approximately $0.4 million in insurance expense.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Revenues. Revenues increased $104.2 million, or 23.6%, to $546.1 million for the nine months ended September 30, 2011
from
$441.9 million for the nine months ended September 30, 2010. Revenues in the T&D segment increased $99.8 million and C&I segment revenues increased $4.4 million. Storm work
in the distribution market contributed approximately $23.7 million in the nine months ended September 30, 2011, compared to $12.8 million for the nine months ended
September 30, 2010.
Gross profit. Gross profit increased $12.0 million, or 24.6%, to $60.9 million for the nine months ended September 30,
2011 from
$48.9 million for the nine months ended September 30, 2010. The increase was due to the increase in sales volume. Gross margin increased to 11.2% for the nine months ended
September 30, 2011 from 11.1% for the nine months ended September 30, 2010. Gross margin increased due to increases in contract margins on transmission projects of approximately
$4.0 million as a result of increased productivity levels, cost efficiencies, added work and effective contract management. The large transmission projects, which generated above-normal margins
in the nine-month period ended September 30, 2011, were substantially completed in the second quarter. The increases in gross margin were largely offset by a decrease in gross
margin on C&I projects, increased insurance expense in the third quarter and the under-utilization of certain fleet assets.
Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $8.5 million, or
26.2%, to
$41.2 million for the nine months ended September 30, 2011 from $32.6 million for the nine months ended September 30, 2010. The increase was primarily due to
19
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expenses
related to the increased number of support personnel and increases in group medical insurance expense and other employee-related compensation and benefit costs in the first nine months of
2011, coupled with the first quarter 2010 one-time elimination of a $1.6 million severance liability as a result of amending the employment agreements of our six executive officers,
which had the effect of decreasing selling, general and administrative expenses recognized in that period. As a percentage of revenues, these expenses increased to 7.5% for the nine months ended
September 30, 2011 from 7.4% for the nine months ended September 30, 2010.
Gain on sale of property and equipment. Gains from the sale of property and equipment remained consistent at $0.7 million for the
nine months
ended September 30, 2011 compared with the nine months ended September 30, 2010. Gains from the sale of property and equipment are the result of routine sales of property and equipment
that are no longer useful or valuable to our ongoing operations.
Interest expense. Interest expense decreased to $0.5 million for the nine months ended September 30, 2011 from
$0.8 million for
the nine months ended September 30, 2010 primarily due to the reduction in the balance of our term loan and also due net adjustments to the amounts payable to the IRS for interest computed
under the its look-back method for completed long-term contracts.
Provision for income taxes. The provision for income taxes was $7.3 million for the nine months ended September 30, 2011, with
an
effective tax rate of 37.1%, compared to a provision of $5.8 million for the nine months ended September 30, 2010, with an effective tax rate of 36.8%. The increase in our overall
effective tax rate for the nine months ended September 30, 2011 was primarily due to discrete tax adjustments recorded during the 2010 period for the recognition of approximately
$0.3 million in increased state tax benefits and certain federal tax credits upon the completion of our 2009 income tax return, which was offset somewhat by a reduction in income taxes of
$0.1 million in 2011 from amending prior year returns to include the Research and Development tax credit.
Net income. Net income for the nine months ended September 30, 2011 increased to $12.4 million from $10.0 million for
the nine
months ended September 30, 2010, for the reasons stated above.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment in thousands of dollars, segment
net sales as percentage of total net sales and segment operating income as a percentage of segment net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2011 |
|
2010 |
|
(Dollars in thousands)
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Contract revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission & Distribution |
|
$ |
428,536 |
|
|
78.5 |
% |
$ |
328,803 |
|
|
74.4 |
% |
Commercial & Industrial |
|
|
117,557 |
|
|
21.5 |
|
|
113,138 |
|
|
25.6 |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
546,093 |
|
|
100.0 |
|
$ |
441,941 |
|
|
100.0 |
|
| |
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission & Distribution |
|
$ |
36,648 |
|
|
8.6 |
|
$ |
23,754 |
|
|
7.2 |
|
Commercial & Industrial |
|
|
3,279 |
|
|
2.8 |
|
|
5,558 |
|
|
4.9 |
|
| |
|
|
|
|
|
|
|
|
|
Total |
|
|
39,927 |
|
|
7.3 |
|
|
29,312 |
|
|
6.6 |
|
Corporate |
|
|
(19,683 |
) |
|
(3.6 |
) |
|
(12,556 |
) |
|
(2.8 |
) |
| |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
20,244 |
|
|
3.7 |
% |
$ |
16,756 |
|
|
3.8 |
% |
| |
|
|
|
|
|
|
|
|
|
20
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Transmission & Distribution
Revenues for our T&D segment for the nine months ended September 30, 2011 were $428.5 million compared to
$328.8 million for the nine months ended September 30, 2010, an increase of $99.8 million, or 30.3%. The increase in revenues was mostly the result of an increase in revenues from
several large and many small transmission projects. Storm work in the distribution market contributed approximately $23.7 million in the nine months ended September 30, 2011, compared to
$12.8 million for the nine months ended September 30, 2010.
Revenues
from transmission projects represented 71.3% and 66.3% of T&D segment revenue for the nine months ended September 30, 2011 and 2010, respectively. Additionally, for the
nine months ended September 30, 2011, measured by revenue in our T&D segment, we provided 43.7% of our T&D services under fixed-price contracts, as compared to 27.4% for the nine months ended
September 30, 2010.
Operating
income for our T&D segment for the nine months ended September 30, 2011 was $36.6 million compared to $23.8 million for the nine months ended
September 30, 2010, an increase of approximately $12.8 million, or 54.3%. The increase was primarily due to higher volume and higher margins, and was partially offset by underutilization
of our fleet assets and the increased insurance expense in the third quarter. As a percentage of revenues, operating income for our T&D segment increased to 8.6% for the nine months ended
September 30, 2011 from 7.2% for the nine months ended September 30, 2010. The increase in operating income, as a percentage of revenues, was mostly attributable to an overall increase
in transmission margins of approximately $4.0 million which was largely due to a few large transmission contracts which generated above-normal margins and were substantially completed in the
second quarter. In addition, margins on small and medium-sized transmission projects improved in the nine months ended September 30, 2011 compared to the nine months ended September 30,
2010. Storm work in the distribution market is normally performed at higher margins than our other distribution work; however, much of the storm work that was performed in the first nine months of
2011 was done under MSAs, resulting in margins that were only slightly higher than our typical distribution work.
Commercial & Industrial
Revenues for our C&I segment for the nine months ended September 30, 2011 were $117.6 million compared to
$113.1 million for the nine months ended September 30, 2010, an increase of $4.4 million or 3.9%. The increase in revenues was mainly due to an increase in revenues from small and
medium-sized projects, offset by fewer large projects under construction in the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. The C&I
segment continues to see strong competition for the limited large projects available in the market.
For
the nine months ended September 30, 2011, measured by revenue in our C&I segment, we provided 58.2% of our services under fixed-price contracts, as compared to 27.9% for the
nine months ended September 30, 2010.
Operating
income for our C&I segment for the nine months ended September 30, 2011 was $3.3 million compared to $5.6 million for the nine months ended
September 30, 2010, a decrease of $2.3 million, or 41.0%. As a percentage of revenues, operating income for our C&I segment decreased to 2.8% for the nine months ended
September 30, 2011 from 4.9% for the nine months ended September 30, 2010. The decrease in operating income as a percentage of revenues in the C&I segment was mainly attributable to
decreased margins on small and medium-sized projects of approximately $3.7 million, which were partially offset by increased margins on a few large projects of approximately
$1.7 million. This decrease was mostly the result of lower overall margins due to pricing pressures over the past year, as well as margin adjustments due to cost inefficiencies and higher
material costs. In
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addition,
the decrease in operating income as a percentage of revenue was also attributable to the allocated increase in insurance expense in the third quarter of $0.4 million.
Liquidity and Capital Resources
As of September 30, 2011, we had positive working capital of $53.3 million, which includes cash and cash equivalents of
$17.5 million and current debt of $20.0 million, consisting of a $10.0 million term loan and $10.0 million in borrowings under our $75.0 million revolving credit
line. We also had approximately $17.2 million in letters of credit outstanding under the revolving credit line, leaving $47.8 million in borrowing availability. During the nine months
ended September 30, 2011, consolidated operating activities of our business used $4.7 million of cash, compared to providing $12.3 million for the nine months ended
September 30, 2010, due to significantly increased transmission work and increased distribution storm work, which require substantial working capital. Cash flow from operations is primarily
influenced by demand for our services, operating margins and working capital changes. We had construction materials inventory of $2.8 million at September 30, 2011, which consisted of
project materials which will be used in construction in the next few months. We used net cash in investing activities of $33.4 million, substantially all of which was used for capital
expenditures in our T&D segment. We used net cash for financing activities of $7.0 million, primarily for $20.0 million in prepayments in the first quarter on our term loan, which were
partially offset by $10.0 million in borrowings on our revolving credit line in the third quarter and $3.0 million net cash received from the exercise of stock options and the related
tax benefits.
The
changes in various working capital accounts (such as: accounts receivable, including retention; costs and estimated earnings in excess of billings on uncompleted contracts; accounts
payable; and billings in excess of costs and estimated earnings on uncompleted contracts) are due to normal timing fluctuations in our operating activities. In particular, the gross amount of accounts
receivable, costs and estimated earnings in excess of billings on uncompleted contracts, accounts payable and billings in excess of costs and estimated earnings on uncompleted contracts used cash of
$36.0 million during the nine months ended September 30, 2011, compared to using cash of $8.0 million in the nine months ended September 30, 2010, largely due to the
increased transmission activity and distribution storm work in the last few months of the third quarter. We typically experience higher working capital needs in the early stages of projects, when cash
is being used on personnel, equipment, supplies and other project costs
prior to cash flow being received from the customer. As the project progresses, the working capital needs typically stabilize or decrease as cash flow from customers begins to meet or exceed cash
outlaid for operating expenses.
We
anticipate that our cash and cash equivalents on hand, our $47.8 million borrowing availability under the Credit Agreement as of September 30, 2011, and our future cash
flow from operations will provide sufficient cash to enable us to meet our future operating needs, debt service requirements, and planned capital expenditures. We expect that our aggregate capital
expenditures in 2011 will be approximately $40 million, which are higher than our 2010 capital spending, in part to satisfy equipment needs related to the commencement of several large
projects. Although we believe that we have adequate cash and availability under our credit facility to meet these needs, our involvement in large-scale initiatives to rebuild the United States
electric power grid may require additional working capital, depending upon the size and duration of the project and the financial terms of the underlying agreement.
Debt Instruments
On August 31, 2007, we entered into an agreement for a $125.0 million senior secured credit facility which provides for a
$75.0 million revolving credit line (which may be increased or decreased in accordance with the terms of the related credit agreement) and a $50.0 million term loan facility. At our
option, borrowings under the Credit Agreement bear interest at either (1) the greater of a prime
22
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rate
or the federal funds rate plus a spread based upon our leverage ratio or (2) an adjusted London Interbank Offered Rate ("LIBOR") plus a spread based upon our leverage ratio. There was a
$10.0 million term loan outstanding under the facility, which was classified as current at September 30, 2011 because the Credit Agreement expires in less than twelve months. There was
$10.0 million outstanding under our revolving credit line as of September 30, 2011. The term loan was accruing interest at 1.125% (which was equal to an adjusted one-month
LIBOR plus a spread of 1.0%) as of September 30, 2011. The amount outstanding under the revolving credit line was accruing interest at 3.25% as of September 30, 2011, and was converted
to the lower adjusted LIBOR rate effective October 4, 2011. As of September 30, 2011, we had approximately $17.2 million outstanding in two letters of credit, which reduced our
borrowing capacity under the revolving credit line. We had $47.8 million available under the Credit Agreement as of September 30, 2011. The Credit Agreement expires on August 31,
2012. We intend to refinance this debt prior to its maturity with newly issued debt.
The
terms of the Credit Agreement require, among other things, that we adhere to a maximum leverage ratio and maintain a minimum EBITDA-based interest coverage ratio, both of which are
defined under the Credit Agreement and determined on a rolling four consecutive quarter basis. The EBITDA-based interest coverage ratio covenant requires us to have a ratio of EBITDA to interest
expense of not less than 3.0 to 1.0. We are also required to have a leverage ratio of no more than 3.0 to 1.0. As of September 30, 2011, our interest coverage ratio was in excess of 68.0 to 1.0
and our leverage ratio was less than 1.0 to 1.0, both within the required covenant levels permitted under the Credit Agreement.
The
Credit Agreement also includes other specific limits or restrictions on additional indebtedness, liens and capital expenditure activity. Our obligations under the Credit Agreement
are secured by a lien on all of our property (including the capital stock of our subsidiaries) other than any property subject to a certificate of title, subject to a lease or similar interest and our
real property and fixtures. As of September 30, 2011, we were in compliance with all applicable debt covenants.
Off-Balance Sheet Transactions
As is common in our industry, we enter into certain off-balance sheet arrangements in the ordinary course of business that
result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include liabilities associated with non-cancelable operating
leases, letter of credit obligations and surety guarantees entered into in the normal course of business. We have not engaged in any off-balance sheet financing arrangements through
special purpose entities.
Leases
We enter into non-cancelable operating leases for some of our facility, vehicle and equipment needs. These leases allow us
to conserve cash by paying a monthly lease rental fee for the use of facilities, vehicles and equipment rather than purchasing them. We may decide to cancel or terminate a lease before the end of its
term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease.
We
typically have purchase options on the equipment underlying our long-term operating leases and many of our short-term rental arrangements. We continue to
exercise some of these purchase options as the need for equipment is on-going and the purchase option price is attractive.
Purchase Commitments for Construction Equipment
As of September 30, 2011, we had approximately $7.0 million in outstanding purchase obligations for certain construction
equipment to be paid with the cash outlay anticipated to occur over the next six months.
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Letters of Credit
Some of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to
beneficiaries under our insurance programs. In addition, from time-to-time certain customers require us to post letters of credit to ensure payment to our subcontractors and
vendors under those contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the
issuer to pay specified amounts to the holder of the letter of credit if the holder claims that we have failed to perform specified actions in accordance with the terms of the letter of credit. If
this were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for
the reimbursement. Currently, we do not believe that it is likely that any claims will be made under any letter of credit.
At
September 30, 2011 the Company had two outstanding irrevocable standby letters of credit for $15.0 million related to the Company's payment obligation under its
insurance programs and approximately $2.2 million related to contract performance obligations.
Surety Bonds
Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a
financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail
to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any
expenses or outlays it incurs. Under our continuing indemnity and security agreement with the surety, with the consent of our lenders under the Credit Agreement, we have granted security interests in
certain of our assets to collateralize our obligations to the surety. We may be required to post letters of credit or other collateral in favor of the surety or our customers. Posting letters of
credit in favor of the surety or our customers reduces the borrowing availability under the Credit Agreement. To date, we have not been required to make any reimbursements to the surety for
bond-related costs. We believe that it is unlikely that we will have to fund significant claims under our surety arrangements in the foreseeable future. As of September 30, 2011, an
aggregate of approximately $912.3 million in original face amount of bonds issued by the surety were outstanding with a remaining $506.0 million in bonded backlog to be recognized as
revenue, which represented approximately 70.1% of our backlog.
Concentration of Credit Risk
We grant trade credit under normal payment terms, generally without collateral, to our customers, which include electric utilities,
governmental entities, general contractors and builders, owners and managers of commercial and industrial properties located in the United States. Consequently, we are subject to potential credit risk
related to changes in business and economic factors throughout the United States. However, we generally have certain statutory lien rights with respect to services provided. Under certain
circumstances such as foreclosures or negotiated settlements, we may take title to the underlying assets in lieu of cash in settlement of receivables. As of September 30, 2011, one customer
represented approximately 11.3% of total consolidated accounts receivable (excluding the impact of allowance for doubtful accounts). No other customer represented more than 10.0% of our total
consolidated accounts receivable as of September 30, 2011. For the nine months ended September 30, 2011, we had no customers from which revenues individually exceeded 10.0% of our total
consolidated revenues. Management believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.
24
Table of Contents
New Accounting Pronouncements
For a discussion regarding new accounting pronouncements, please refer to Note 1, "Organization, Business, Basis of
Presentation—Recently Issued Accounting Pronouncements" in the accompanying Notes to Consolidated Financial Statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There
can be no assurance that actual results will not differ from those estimates. For further information regarding our critical accounting policies and estimates, please refer to Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" included in our 2010 Annual Report.
Cautionary Statement Concerning Forward-Looking Statements and Information
We are including the following discussion to inform you of some of the risks and uncertainties that can affect our company and to take
advantage of the protections for forward-looking statements that applicable federal securities law affords.
Various
statements contained in this quarterly report on Form 10-Q are forward-looking statements, including those that express a belief, expectation or intention, as
well as those that are not statements of historical fact. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future
production, revenue, income and capital spending. Our forward-looking statements are generally accompanied by words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "objective,"
"outlook," "plan," "project," "possible," "potential," "should" or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this quarterly report on
Form 10-Q speak only as of the date of this quarterly report on Form 10-Q. We disclaim any
obligation to update these statements (unless required by securities laws), and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations
and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive,
regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including those
discussed in Item 1A "Risk Factors" in our 2010 Annual Report, may cause our actual results, performance or achievements to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking statements.
These
risks, contingencies and uncertainties include, but are not limited to, the following:
- •
- our operating results may vary significantly from year to year;
- •
- we are unable to predict the impact of the current economic conditions in the financial markets and the resulting
constraints in obtaining financing on our business and financial results;
- •
- demand for our services is cyclical and vulnerable to industry downturns and regional and national downturns, which may be
amplified by the current economic conditions;
25
Table of Contents
- •
- our industry is highly competitive;
- •
- we may be unsuccessful in generating internal growth;
- •
- many of our contracts may be canceled upon short notice and we may be unsuccessful in replacing our contracts if they are
canceled or as they are completed or expire;
- •
- backlog may not be realized or may not result in profits;
- •
- our business growth could outpace the capability of our internal infrastructure;
- •
- we require subcontractors to assist us in providing certain services and we depend on obtaining and retaining the
necessary subcontractors to complete certain projects;
- •
- we depend on suppliers to procure material for our projects;
- •
- the timing of new contracts or termination of existing contracts may result in unpredictable fluctuations in our cash flow
and financial results;
- •
- legislative actions may fail to result in increased demand for our services;
- •
- our use of percentage-of-completion accounting could result in a reduction or elimination of
previously recognized profits;
- •
- our actual costs may be greater than expected in performing our fixed-price and unit-price contracts;
- •
- our financial results are based upon estimates and assumptions that may differ from actual results;
- •
- we insure against many potential liabilities and our reserves for estimated losses may be less than our actual losses;
- •
- we may incur liabilities or suffer negative financial impacts relating to occupational health and safety matters;
- •
- we may pay our suppliers and subcontractors before receiving payment from our customers for the related services;
- •
- we extend credit to customers for purchases of our services, and in the past we have had, and in the future we may have,
difficulty collecting receivables from customers that experience financial difficulties;
- •
- we derive a significant portion of our revenues from a few customers, and the loss of one or more of these customers could
have a material adverse effect on our consolidated financial condition, results of operations and cash flows;
- •
- a significant portion of our business depends on our ability to provide surety bonds, and we may be unable to compete for
or work on certain projects if we are not able to obtain the necessary surety bonds;
- •
- our bonding requirements may limit our ability to incur indebtedness;
- •
- inability to hire or retain key personnel could disrupt our business;
- •
- work stoppages or other labor issues with our unionized workforce and obligations related to our unionized workforce could
adversely affect our business;
- •
- our business is labor intensive and we may be unable to attract and retain qualified employees;
- •
- inability to perform our obligations under engineering, procurement and construction contracts may adversely affect our
business;
26
Table of Contents
- •
- seasonal and other variations, including severe weather conditions, may cause significant fluctuations in our consolidated
financial condition, results of operations and cash flows;
- •
- we are subject to risks associated with climate change;
- •
- our failure to comply with environmental laws could result in significant liabilities;
- •
- increases in the cost of certain materials and fuel could reduce our operating margins;
- •
- we could incur liquidated damages or other damages if we do not complete our projects in the time allotted under the
applicable contract, or we may be required to perform additional work if our services do not meet certain standards of quality;
- •
- opportunities within the governmental arena could lead to increased governmental regulation applicable to us;
- •
- if we fail to integrate future acquisitions successfully, our consolidated financial condition, results of operations and
cash flows could be adversely affected;
- •
- our business may be affected by difficult work environments;
- •
- unexpected costs or liabilities may arise from lawsuits or indemnity claims related to the services we perform;
- •
- our results of operations could be adversely affected as a result of the impairment of goodwill or intangible assets;
- •
- the market price of our stock may be volatile and our stockholders may not be able to resell their shares of common stock
at or above the purchase price they paid;
- •
- failure to maintain effective internal control over financial reporting could have a material adverse effect on our
business, our operating results and the value of our common stock; and
- •
- provisions in our organizational documents and under Delaware law could delay or prevent a change of control of our
company, which could adversely affect the price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2011, we were not party to any derivative instruments. We did not use any material derivative financial
instruments during the nine months ended September 30, 2011 and 2010, including derivative financial instruments used for trading or speculation on changes in interest rates or commodity prices
of materials used in our business.
Borrowings
under the Credit Agreement are based upon an interest rate that will vary depending upon the prime rate, the federal funds rate and LIBOR. If we borrow additional amounts
under the Credit Agreement, the interest rate on those borrowings will also be variable. If the prime rate, federal funds rate or LIBOR rise, our interest payment obligations will increase and have a
negative effect on our cash flow and financial condition. We currently do not maintain any hedging contracts that would limit our exposure to variable rates of interest. As of September 30,
2011, we had $20 million of borrowings outstanding under the Credit Agreement. An increase or decrease of 0.125% in the interest rate would have the effect of changing our interest expense by
$25,000 per year.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in
the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms
27
Table of Contents
of
the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Management,
together with our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance related to the matters stated in the above paragraph.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the nine months ended September 30, 2011 that
have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal control over financial reporting will detect or prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of
its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
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PART II.—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For further discussion regarding legal proceedings, please refer to Note 6, "Commitments and
Contingencies—Litigation and Other Legal Matters" in the accompanying Notes to Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
As of the date of this filing, there have been no material changes to the risk factors previously discussed in Item 1A to our
2010 Annual Report. An investment in our common stock involves various risks. When considering an investment in our company, you should carefully consider all of the risk factors described in our 2010
Annual Report. These risks and uncertainties are not the only ones facing us and there may be additional matters that are not known to us or that we currently consider immaterial. All of these risks
and uncertainties could adversely affect our business, financial condition or future results and, thus, the value of our common stock and any investment in our company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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Number |
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Description |
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31.1 |
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Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(a)/15d-14(a) † |
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31.2 |
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Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(a)/15d-14(a) † |
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32.1 |
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Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350† |
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32.2 |
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Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350† |
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101.1 |
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The following materials from MYR Group's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the
Consolidated Balance Sheets at September 30, 2011 and December 31, 2010; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010; (iii) the Consolidated Statements of
Cash Flows for the three and nine months ended September 30, 2011 and 2010; (iv) Notes to Consolidated Financial Statements, tagged as blocks of text; and (v) document and entity information. * |
- †
- Filed
herewith.
- *
- Furnished
herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101.1 hereto are deemed
not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18
of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
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MYR GROUP INC.
(Registrant) |
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| November 8, 2011 |
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/s/ MARCO A. MARTINEZ
Vice President, Chief Financial Officer and Treasurer |
31
