MYR Group Inc. (MYRG) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the MYR Group Inc., Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Steven Carr. You may begin.

Thank you, and good morning, everyone. I’d like to welcome you to the MYR Group conference call to discuss the Company’s second quarter results for 2016, which were reported yesterday. Joining us on today’s call are Bill Koertner, President and Chief Executive Officer; Betty Johnson, Senior Vice President, Chief Financial Officer and Treasurer; and Rick Swartz, Senior Vice President and Chief Operating Officer. If you did not receive yesterday’s press release, please contact Dresner Corporate Services at 312-726-3600, and we will send you a copy or go to www.myrgroup.com, where a copy is available under the Investor Relations tab. Also, a replay of today’s call will be available until Wednesday, August 10, 2016 at 11:59 PM Eastern Time by dialing 855-859-2056 or 404-537-3406 and entering conference ID 31169633. Before we begin, I want to remind you this discussion may contain forward-looking statements. Any such statements are based upon information available to MYR management as of this date and MYR assumes no obligation to update any such forward-looking statements. These forward-looking statements include risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company’s Quarterly Report on Form 10-Q for the second quarter of 2016 and in yesterday’s press release. Certain non-GAAP financial information will be discussed on the call today. A reconciliation of this non-GAAP information to the most comparable GAAP measure is set forth in yesterday’s press release. With that said, let me turn the call over to Bill Koertner.

Thanks, Steve. Good morning, everyone. Welcome to our second quarter 2016 conference call to discuss financial and operational results. I will begin by providing a brief summary of the results and then turn the call over to Betty Johnson, our CFO for a more detailed financial review. Following Betty’s discussion, Rick Swartz, our Chief Operating Officer will provide an overall industry outlook and discuss some of MYR’s plans going forward. I will then conclude with a few closing remarks and open up the call up for your comments and questions. The second quarter of 2016 showed improvement over the first quarter of 2016. Although our revenues were down compared to the second quarter of 2015 our backlog increased and margins improved due mainly to improve project execution. Our organic growth markets contributed to our results for the quarter and we made steady progress but integrating the two acquisitions made last year. At the end of the quarter we entered into an amended and restated five-year credit agreement which expands our borrowing capacity to $250 million. The new credit agreement provides added resources and flexibility to execute our three-pronged strategy of prudent organic growth, strategic acquisitions and capital returns to shareholders. We expect this expanded borrowing capacity will allow us to continue to grow our T&D and C&I business to expand into new markets and to contribute to enhanced shareholder value. As many of you know subsequent to the second quarter we completed our authorized $142.5 million share repurchase program resulting in total share repurchases of over 6 million shares. The Board continuously reviews all means of balancing our investment in growth opportunities with returning capital to shareholders. On July 28, the Board extended the share repurchase program through August 15, 2017 and authorized an additional $20 million for repurchases of our shares. We experienced healthy bidding activity throughout the second quarter in both our T&D and C&I markets while we are still faced with a highly competitive bidding climate our backlog increased by $40.2 million or 9.3% from the prior quarter to $475 million which is our highest level since December 31, 2012. We continue to review our cost structure and make adjustments when appropriate to improve our competitive position. Our bid estimates are based on our current cost structure plus reasonable markup given the inherent risks of the work. We try to avoid chasing revenue by basing our bids on guesstimates were various competitors might bid. We believe this disciplined approach to bidding and risk management are key to creating long-term lasting shareholder value. Our 125-year legacy of outstanding project performance, solid operational and financial results, strong relationships with customers and employees, buyers and stockholders along with a strong balance sheet are attributes that will provide MYR a firm foundation as we continue to adapt and thrive in an ever changing market. As always we encourage and value the input of our stockholders. Your participation and in support of MYR’s long-term strategies to maximize shareholder value are essential for our continued success. Now, Betty will provide details on our financial results for the second quarter.

Thank you, Bill, and good morning everyone. As Bill stated earlier, project execution and the contributions made by organic and acquisition growth initiative improved our results as compared to the last quarter. Our revenues, gross profit, gross margins, net income, EPS and backlog all improved over the last quarter. Our second quarter 2016 revenues were $261.9 million, which represented a $14.6 million or 5.3% decrease compared to the same period of 2015. The decrease was primarily due to a decline in revenue from large multi-year transmission projects, which was partially offset by an increase in our organic and acquisitive growth Compared to 2015 second quarter T&D revenues decreased $22 million or 11% to $178.6 million. C&I revenues reached a record high at $83.3 million an increase of $7.4 million or 9.7% for the same period last year. The breakdown of T&D for the second quarter of 2016 is $134.3 million of transmission and $44.3 million for distribution. Our overall gross profit in the second quarter of 2016 was $31.4 million compared to $31.7 million in the second quarter of 2015. The decrease in gross profit was primarily due to lower revenues partially offset by higher margins. Our gross margin was 12% in the second quarter of 2016 compared to 11.5% the same period last year. The increase in gross margin was primarily due to the improved performance on several projects, which were partially offset by some significant write-downs due to a pending project claim, pending change orders and inclement weather experienced on certain projects. Changes in our estimates of gross profit on certain projects resulted in a gross margin increases of 10 basis points in the second quarter of 2016 compared to an increase of 100 basis points for the second quarter of 2015. Second quarter 2016 SG&A expenses were $22.5 million compared to $18.9 million in the second quarter of 2015. The $3.6 million increase included approximately $2.3 million of costs associated with our organic and acquisitive expansion into new markets and higher payroll costs to support operations. SG&A as a percentage of revenues represents 8.6% for the second quarter of 2016 up from 6.9% for the same quarter of 2015. Second quarter 2016 EBITDA was $18.9 million compared to $22.3 million in the second quarter of 2015. Our provision for income tax decreased to $3.3 million in the second quarter of 2016 compared to $4.7 million in the same quarter of 2015. Our effective tax rate for the second quarter of 2016 was 37.8% compared to 37% in the second quarter of 2015. The increase in effective tax rate was primarily caused by the year-to-date impact of lower domestic activity deduction and changes in the mix of businesses between states. Second quarter 2016 net income was $5.5 million, or $0.31 per diluted share, compared to $8.1 million, or $0.38 per diluted share in the second quarter of 2015. Shifting now to our first half 2016 results. Revenues decreased $5 million or 1% to $515.6 million compared to $520.6 million in the first half of 2015. The decrease was primarily due to lower T&D revenues mostly offset by higher C&I revenue in organic and acquisitive growth. Our overall gross profit in the first half of 2016 was $58.7 million compared to $61.1 million in the first half of 2015 due to lower revenue and gross margins. Gross margin decreased to 11.4% versus the 11.7% in the first half of 2015 primarily due to lower bid margins caused by increased competition in many of our markets and an increase in shorter duration projects, which results in lower labor productivity and higher overall mobilization and demobilization costs. Additionally, as I mentioned earlier, we experienced some significant write-downs due to a pending project claim and change orders, inclement weather, lower productivity experienced on certain jobs. These declines were partially offset by favorable close outs and improved performance on several projects. Changes in estimates of gross profit on certain jobs resulted in a 70 basis point decrease in gross margin in the first half of 2016 compared to 110 basis point increase in the first half of 2015. First half 2016 SG&A expenses were $46.4 million compared to $37.5 million in the first half of 2015. The $8.9 million increase was primarily due to $5.3 million of costs associated with our expansion into new geographic markets and $1 million associated with activist investor activities. We also experienced higher payroll costs to support operations and higher medical costs, which were partially offset by lower profit sharing and stock compensation costs during the first half of 2016. SG&A as a percentage of revenues was 9% for the first half of 2016 up from 7.2% in the first half of 2015. Net income for the first half of 2016 was $7.5 million compared to net income of $15.2 million in the first half of 2015. Diluted earnings per share were $0.40 for the first half of 2016 compared to $0.72 for the first half of 2015. EBITDA declined to $32.2 million for the first half of 2016 compared to $42.9 million for the first half of 2015. Total backlog at June 30, 2016 was $475 million consisting of $304.6 million in the T&D segment and $170.4 million in the C&I segment. It represents an increase of $40.2 million or 9.3% from last quarter. Our backlog has increased in 8% of the past 10 quarters and was at our highest level since December 31, 2012 was C&I backlog at a record high. T&D backlog at June 30, 2016 increased $11 million or $3.8 of C&I backlog increased $29.2 million or 20.7% from March 31, 2016. Turning to the balance sheet at June 30, 2016 we had approximately $3.4 million in cash and cash equivalents, $24.6 million of outstanding funded debt and capital leases and $205.7 million in availability under our credit facility. Shareholders equity was $245.7 million at June 30, 2016, $94.8 million lower than the $340.5 at June, 2015, primarily due to the $119.5 million of share repurchases in the last 12 months. As it relates to our share repurchase program in the second quarter 2016, we purchased approximately 2.8 million shares of our common stock for $67.6 million. As of June 30, 2016, we had $5.5 million of availability under the program. As of July 12, we had exhausted the remaining availability under the share repurchase program under which repurchased over 6 million shares of our common stock for $142.5 million at an average share price of $23.64 per share. On July 28, our Board of Directors approved an additional $20.0 million of capacity for the share repurchase program and extended the program through August 15, 2017. These additional funds are to be used to repurchase shares of our common stock albeit at a less aggressive pace than pursued during the first half of 2016. I’ll now turn the call over to Rick, who will provide an overall industry outlook and our view on MYR’s opportunity.

Thanks, Betty, and good morning, everyone. We experience steady bidding activity throughout the second quarter for all of our operations groups in both the U.S. and Canada. We both T&D and C&I markets remain competitive we believe that we are entering into an improved phase of project opportunity as we begin the second half of 2016 and we look forward to 2017. A number of large projects are now progressed to the permitting stage and the overall miles of these large transmission jobs that are close to breaking ground has increased since 2015. Growth expectations indicate this trend is likely to continue throughout 2018 and beyond. Although the past few quarters have been challenging, the main drivers that point to continued investment for our utility clients remain intact. Ensuring great reliability, integrating renewable and natural gas resources to replace coal generation and replacing aging infrastructure all continue to spur investment into our nation’s transmission system. On the regulatory front we continue to monitor developments related to the Clean Power Plan or CPP and FERC Order 1000. The CPP is currently making its way through the judicial system. In the second quarter the Brattle Group issued a report on the need to properly plan transmission in order to address the challenges of a rapidly evolving energy mix in the U.S. As well as the challenges and opportunities related to CPP enforcement in their estimation effective transmission planning that addresses current and future environmental regulation such as the CPP can help reduce the total transmission and generation costs for compliance by an estimated $30 billion to $70 billion by 2030. The Group also cites a recent study conducted by the Eastern Interconnection States’ Planning Council, the National Association of Regulatory Utility Commissioners and the Department of Energy that states in order to support future generation investment the U.S. will need to invest $50 billion to a $110 billion for Interregional Transmission over the next 30 years. Regarding FERC Order 1000 we believe that some progress was made in the second quarter when the Federal Energy Regulatory Commission held a conference to discuss issues related to the competitive transmission process and how it can better coordinate planning and cost allocation. Although a robust debate surrounding FERC Order 1000 will continue the conference was viewed as a positive step towards allowing more competitive transmission projects to come to market. In spite of ongoing uncertainty with regulatory issues spending projections by utilities remain historically high. In the second quarter the Edison Electric Institute increased its December 2015 projections of capital expenditures by investor owned utilities for the remainder of 2016 and 2017. EEI’s new projections show estimated total capital expenditures to be $117 billion in 2016 a $105 billion in 2017 and $94.2 billion in 2018. The projections for 2016 and 2017 are up 16.4% and 9% respectively from previous projections made in September of 2015. This report includes EEI’s first release of its projections for 2018. Of these projections 26% include distribution related investments and 18% include transmission investments driven by grid modernization and system expansion initiative. Also in the second quarter several utilities announced their plans for additional investment in transmission, distribution and generation projects. Duke Energy announced in early May that will invest between $25 billion to $30 billion on new transmission grid, generation and pipeline infrastructure over the next five years. As part of this announcement Duke reaffirmed its planned seven year $1.4 billion investment to upgrade the grid system in Indiana. Pennsylvania Power & Light also announced plans to invest an additional $16 billion over the next five years to improve system reliability and advance a cleaner energy mix. In addition [Exelon] announced that it will spend upwards of $23 billion across its utility over the next three years. MYR Group will maintain the strong geographical presence in all of these service territories. On our targeted growth client’s one of targeted growth clients in California, Southern California Edison announced that it will invest $4.1 billion in 2016 and $4.2 billion in 2017 as part of its capital spending plan, which will include transmission and distribution replacement projects. These projects are projected to annually replace on average 24,000 distribution poles, 4,000 transmission poles, 500 miles of underground cable and 225 substation circuit breakers. These announcements in addition to projections by the Edison Electric Institute reinforce our belief that the overall trend of steady investment by utilities throughout the U.S. is likely to continue into the foreseeable future. We expect to receive our fair share of these projects awards. In addition to the positive spending news from the utilities recent industry headline suggests that we may see several large transmission projects come to market in the next few years. These projects take years to navigate through the regulatory, permitting and planning process. We believe that the need to transplant more renewable energy resources from less populated areas of the country to more populated areas will only reinforce the need for these large projects to be fully developed and constructed. In the second quarter the Bureau of Land Management or BLM issued a final environmental impact statement for the 400 to 540 mile, 500kV Gateway South project. This project being developed by Berkshire Hathaway’s PacifiCorp division will travel from Southeastern Wyoming to Central Utah and will help deliver new generation to growing populated areas of the country. Also in the Western U.S. the BLM recently issued its record of decision to the Southline project. This project will span 360 miles from Southern New Mexico to Arizona. These projects along with other large projects such as the TransWest Express and the Boardman to Hemingway project all may come to fruition within the next five years. In addition to these projects in the West American Electric Power and Oncor recently announced the Far West Texas project a joint development in Texas that we believe will provide MYR opportunity in one of our growth markets. This project will consist of 219 miles of new 345kV Transmission and MYR is well-positioned for this work through our ongoing operations in this region. Shifting to the distribution market, drivers for increased distribution spending remain intact, such as reliability mandate, grid modernization initiatives, growth in housing developments in certain parts of the country and rooftop solar generation. We are also seeing increases in utility crew augmentations providing greater outsourcing opportunities for contractors like MYR as utility spending increases. Activity in our C&I divisions remain strong and we have continued to see improved bidding opportunities in two of our markets, Arizona and Nevada. In Colorado, we are pursuing opportunities in health care, aerospace, water treatment, and pharmaceutical manufacturing. The technical nature of this work demands a contractor like MYR, which possesses a high degree of skill and experience in this area. We have expanded operations in Colorado Springs which has increased our opportunity in Southern Colorado in which we have entered into two pre-construction agreements on two notable hospital expansions. Other active markets in the West include Transit, Communications, and Energy Management Systems for commercial and industrial facilities. Throughout the Northwest, there are new developments and initiatives in various market segments including data centers, airport expansions, water treatment facility, and hospital facility. In the Northeast, we are seeing private institution and educational facility opportunities as modernization initiatives are taking hold. Finally, power plant projects maybe moving forward as the ISO New England take steps to decrease the carbon footprint and increase renewable energy power sources. This should provide continued growth opportunities for MYR C&I division going forward. In conclusion, we remain confident that future will provide opportunities for both our T&D and C&I divisions and opportunities for organic growth and acquisitions. As we focus efforts in support of our three pronged strategy and continue to refine our skills, systems and processes. We believe with the fruits of our labor will positively impact our revenues, earnings, and stockholder returns. Thanks everyone for your time today. I’ll now turn the call back to Bill.

Thank you for the market update, Rick. We look forward to what we expect will be a more promising second half of 2016 and beyond. We are optimistic about the many exciting opportunities that fly ahead especially as they relate to progress on several large projects that we have been following for the past few years. Steps we are taken to strengthen our position in the marketplace reinforce our belief in the future of MYR Group. To conclude on behalf of Betty, Rick and myself I sincerely thank you for joining us on the call today and for your ongoing confidence in MYR Group. I look forward to updating you on our progress next quarter. Operator, we are now ready to open the call up for comments, questions.

[Operator Instructions] And our first question comes from [indiscernible] from FBR Capital Markets. Your line is now open.

Great. Good morning. Thanks for taking my question. So it obviously sounds like the bidding opportunities are improving across both segments, that’s great to hear, but in the 10-Q it also sounded like you are – you had a lot of bids outstanding on several large projects especially on the T&D side. I was wondering is there any large project awards expected in the second half of this year or if you are still looking more into 2017 and 2018?

We certainly hope that those – some of those pending jobs are released, but again a lot of times due to permitting or other requirements the customers maybe going forward they get delayed, they put them back out for re-bid or refreshing prices. So we hope those bids will be released. We can’t control the timing of it.

All right. Obviously, you still talk about highly competitive markets especially on the T&D side for these larger projects as well. Can you talk about the bid, the margins that are currently in your backlog versus your current margins that are being reported?

We don’t disclose the margins and backlog. The margins new work is comparable to the margins that we’ve been bidding for the last say two years, but we don’t disclose the bid margins in our backlog.

Okay. But you feel that they’re fairly comparable right now.

Fairly comparable to the way we’ve been bidding for the last two years, which obviously is different than bidding four or five years ago.

Right. Just moving to some of the new geographies, it sounds like we’re starting to see some improvement in the new markets, but it still continues to be a little bit slow. But can you just provide a little more information or detail around the improvements that you’re seeing. Is it increase in bidding opportunities or you seeing more award next time more on the T&D side or the C&I side? Just any additional information would be helpful?

So is this in regards to the new markets is your question ma’am.

Yes.

Okay. Well, first as we go into a new market we spend a great deal of time putting together a business case and why we want to go in that market and challenge ourselves as it really makes sense. Is it good investment for shareholders? So we have a pretty rigorous process of building a business case and folks like the three of us on this call we challenge our operations group to support that business case. And then when we enter those markets we’re obviously looking at how are we doing against our business case. And I think generally we’re pleased, some situations we’re doing a little better in terms of moving into new markets than others. But overall we’re pleased with the new markets and the reason we entered and as we thought there was good opportunity for our affiliate to be successful in those markets.

Bill, at what point do you reevaluate those markets, if they do take a lot longer to come to fruition at the profitability as you expect. At what point do you decide to kind of reevaluate?

We have a rigorous monthly process, we close the books each new market as well as existing markets as well as acquisitions. We do a strategic review each month to judge our progress. Now we didn’t enter the market thinking it had to produce right away, we view these as investments, we’re certainly providing staff and challenging that staff to find good profitable work and we are entering into lease agreements for space and you know securing whatever it takes to enter that market. So we look at it monthly, but we’re not going to go into a market and then throw up our hands six months down the road. We’re going to give it more time to come to fruition in that.

Okay. And then my final question is nice to see the revenues from Canada versus the first quarter. Can you just talk a little bit maybe Rick talk a little bit about the opportunities that you are seeing specifically in Canada?

We continue to see opportunities on the smaller to mid-size projects. Again it’s right now with the oil and gas segment way it is in Canada we see it’s affected our market it’s highly competitive up there. So as Bill said in his opening comments we look at every job from a cost basis, understand our cost, put a fair markup on it and approach it that way, we don’t go after work as a must have job. There’s jobs we’d like to have that we may take it as slightly lower margin whether that’s in the U.S. or Canada. But we do focus heavily on our cost so we can have the desired outcome in the end.

All right. Great thank you.

Thank you. And our next question comes from William Bremer from Maxim Group. Your line is now open.

Good morning. I wanted to get into the C&I activity there and specifically on the operating margin I saw it was in the Q. I was hoping to get a little more granular in terms of what you’re seeing and possibly given the backlog there where margins which are targeting margins over the long-term?

As far as overall margins as Bill said earlier we continue to see the bid margins in our backlog similar to what we’ve seen. Though there’s an increased demand we haven’t seen the margins I would say significantly increase on bids that we’re putting together right now I would say that remaining steady, which allows our backlog to remain somewhat steady from what we’ve seen in the past. Again, a lot of activity in most areas, a lot of our organic growth areas have to do with the C&I where we follow those clients or we chose to develop a new market out there. Overall, I’m pleased with what I see. But we have had – this last quarter we did have one pending claim that affected our financials and we’re doing everything we can to document that. That was something that was beyond our control and happened on early on – early during the construction phase of the project with the general contractor and some of the other subs and it continue through. So we feel we have a good document, well documented and going after change orders and associated claims is something we’re pursuing and we hope to see the results in the next few quarters.

Can you sort of give us an idea of the magnitude of that one-time charge?

We don’t specifically give that out because we’re under claims and some other situation, so we don’t really give the magnitude of that, but it was what I consider a substantial amount.

All right. So you expect that the margins would gravitate back to your historical standards over the next couple quarters?

That’s my goal.

Okay, great. Thank you, Rick. That’s all I have.

Thanks.

Thank you. And our next question comes from Tahira Afzal from KeyBanc Capital Markets. Your line is now open.

Thank you. And Rick first of all that was the great and sort of [indiscernible] job on the electric T&D market. So thank you for that.

Thank you.

If I see where your T&D backlog growth is bouncing along and it seems to be has stabilized and it seems to be building a bit of momentum. As you look forward Bill and Rick, do you guys see potentially based on the backlog you have and conversations you are having T&D topline in the mid single-digits as potentially possible into the next year?

Tahira, if we land one of these larger pending jobs, obviously that would be a great boost to our backlog and we are targeting some of those. We can’t predict the outcome of those awards. We also are having a fair number of alliance opportunities that we’re pursuing and as you know we account for alliances differently than many of our competitors where land and alliance were only counting three months of revenue for that alliance that may be conservative compared to how others account for, but those alliance agreements are very, very important to our Company and probably growing an accordance.

Got it, okay. And then as you go out and I know this question was essentially already asked Bill, but as you go out and try to win these opportunities, larger opportunities I know you are one of the disciplined bidders out there. How is the competitive market, couple of the years ago? Do you feel that your disciplined bidding has potentially lowered your win rate or do you see the same sort of win rate in this environment?

It varies by area. It really does. There are some areas that still have an abundance of work and we are able to maintain margins that were similar to a few years ago. There is others that have tightened up greatly Texas market, a few of other markets, as we’ve described in the past continue to be very competitive. So we evaluate each one, again we look at it from a cost standpoint when we put our estimates and a fair margin and markup after that.

Okay. And Rick, you touched a lot on and it seems you have done a lot of research in the California market. I know it’s also one of the markets you’ve been trying to grow over the many years through investments. Do you see yourselves being a more sizable player in that market going forward?

I do. As we look at that and we put together, as Bill said our business plan and everything else. I was committed to this market and went into it over a year ago. We spent a few years researching it, doing client development working on that side of it. I do see that we’re starting to receive a few smaller projects that have the potential to springboard us into something else. So again I see that as promising market.

Okay. And last question and I guess this is more for Bill and Betty. I mean if you look at – the comments you made Bill that the second half was promising, should we assume that the earnings power we saw in the second quarter, it’s kind of sustainable going forward based on what’s you are seeing?

We certainly expect the earnings power to be sustainable going into the second half whether it will get better or not, as you know we don’t project revenues or earnings going forward, but we do expect the strong market in the second half in both segments.

Okay. Great. And congratulations on the good job in T&D this time. Thank you, guys.

Thanks, Tahira.

Thank you. And our next question comes from Bobby Burleson from Canaccord. Your line is now open.

Yes, good morning.

Good morning.

Good morning, Bobby.

Hi. I’m just curious you guys talked decent [amount] about your execution as part of the positive driver here in the prepared comments. And I’m wondering if there are some specifics on where execution improved or kind of metrics around how that actually helps drive the organic growth?

We never get into the details of where we’ve had improvement by project by project, again we have a team together of managers that move project to project, we share best practices across all our organizations so everybody can learn from both the positive and not have the negative reoccur. We spent a great amount of time as an organization trying to push that forward and hopefully springboard that into a good operating results, but as far as area by area or project by project we don’t involve that.

Okay. And you mentioned that Edison Electric Institute CapEx outlook increasing 16% for 2016 and 9% for 2017? Can you give us a sense of the historic kind of correlation between what they see and kind of when you see in your business? So there is a more positive outlook they have that something that directly translates into what you guys are able to kind of bid on and close?

I think over the last few years in general I would say they’ve showed increased spending. It’s something that they continue to reforecast every year and that’s available to people like ourselves, people on this call also, it’s something that we use as one gauge. It’s not the only gauge; lot of our time is spent in our customers offices whether it’s the – operating groups, there are marketing group there, Bill and Betty in those meetings trying to find out what our customers are spending. So we use that as one gauge, but not the only gauge we operate by.

They have market greater spend, but there are definitely more competitors out there then they were five, six years ago – putting pressure on margins for us and others that the real bone in T&D pending in 2011 through 2014 period brought a lot of competitors, so the overall spend is greater by utility. But there’s also more competitors chasing that work.

Great. Regarding to backlog that’s your highest level since I think December 2012 you said, if we continue to see this backlog growth can we get into a kind of more 2011 environment in terms of maybe what it might look like for margins from a competitive standpoint or is there a sort of a permanent shift that’s happened in the competitive dynamic that even with backlog growing to higher and higher levels precludes an improvements or less I guess of completion?

I’ll start and then I let Bill add to it. As far as backlog goes we’re always trying to build our backlog, but again a focus on cost and margin are receiving the workout, it would be easy to chase revenue. I could build our backlog quickly, if I just ignored the cost component of it. So again, focus of our organization is disciplined bidding taking our past experiences and our past track record, our job cost from other jobs in sharing it as we put estimates together. So we base our estimates on knowing the market, knowing what it takes to build it and people out there really haven’t built a better mousetrap on some of this work. We’ve got some of the best equipment tools and people in the industry. So when we are substantially under bid. I don’t need to look spent on a great amount of time looking at that in most areas. I just have to move to the next one. So again I can’t control the market as far as how competitors bid. Bill.

I want to say we expect to get back to the bidding margins that existed in 2010 and 2013 period that was really strong bid margins. We’re not seeing that today if the market bunch of these big jobs come out and flood the market all in the same timeframe, there is that possibility, but I don’t think that would be something we would be prediciting. Our focus is on improving our productivity. We can make our labor 2% or 3% more productive. That has a huge leverage chain effect on our business. So as we look at our cost structure, we’re always challenging or how can we lower our cost increase labor productivity to be more competitive to one win more work and two bring more profits to the bottom line.

Okay great. And your bid pipeline and maybe in your backlog. Are you seeing a trend in the types of projects that might allow you to drive more efficiency in your labor other words you know longer-term projects or something that’s little bit more predictable. That could enhance that labor efficiency.

No. We’re more dependent upon shorter duration smaller projects there haven’t been a lot of big project awards to anyone. So we are having to be more efficient, but working on smaller projects buy and large.

Okay. Thank you.

Thank you. And our next question comes from Andrew Wittman from Robert Baird. Your line is now open.

Great. So Betty were the claims in the change orders that you cited in both segments and can you give us maybe the aggregate amount if you’re not lending those to the singular ones that was referred to earlier?

Yes. We don’t disclose those specific dollar amounts, but the claims and change orders would be cross the two different segments. We talk, refer to pending claim and that’s specifically in our C&I but change orders across both segments.

The claim is over a $1 million but I don’t want to get into precise amount of it. And as Betty said the claim is in the C&I business unit, but we have pending change orders in both segments and they vary in size, some of those would also be over $1 million. So it’s important that we aggressively pursue getting the money that was entitled to us from these change orders and claims.

Sure. Certainly. In the 10-Q notes and I think couple of quarters now - but that there’s a bias towards more material procurement in some contracting costs. Which segment is that and what is the margin implication of that and how long do you think that’ll be the factor before that’s annualized or otherwise meliorated by having a more full scope construction content for you guys?

Andy as you know from prior calls we don’t markup material in subcontractor costs as much as we would or own company labor and the equipment. But in terms of whether there’s been a trend in that direction. I don’t really think there’s been a noticeable trend in terms of the mix of straight labor and equipment contracts versus EPC. There are certainly quarters or periods of time where that’s a factor, but it’s hard to say that there’s a trend developing.

Okay. We’ll leave it there. Thanks, guys.

Thanks.

Thank you. And our next question comes from Dan Mannes from Avondale. Your line is now open.

Thanks. Good morning, everyone.

Good morning, Dan.

Good morning, Dan.

A couple of follow-ups here. First, just I want to ask about margins again. There was kind of some intriguing commentary in the way you discussed it. I mean it sounds like the positives were execution and close-outs; the negatives were claims and other things. I guess I’m trying to figure out are some of the negative things that will linger were as the positives were one quarter nature or is this just normal ins and outs that you run through every quarter and maybe I’m over reading into the disclosure.

I would say the claim on the C&I side isn’t something you see every quarter on that side, a lot of the other things that you see are the normal ins and outs that happen every quarter. I wouldn’t say there’s anomalies there, but again as Bill said, we’ve done our work cut out every quarter, every day to collect our change orders and to get what’s coming after us and build long-term relationships along the way.

That makes a lot of sense. On the regional expansion, given the number of markets you’re pushing into. I don’t know if you want to talk about maybe where you’ve seen a little bit more success and where you’ve been able to pick up ground versus maybe where you haven’t or maybe a particular look at California where I’m guessing it’s been a little slower than originally hoped.

I think when – I’m fairly aggressive person when I put together plans and I sell them to Bill. And I’ve got high expectations and expect the execution to go along with that. So we hire the right people that can hopefully do that. And again, we go into areas like California and I was hoping myself that it went a little quicker than it did, but as I said on previous calls, I hope that our organic expansion areas cover their SG&A by year-end as a whole and that’s about as much detail as we’ve get on segment-by-segment our operating unit results.

Understood. One other area where we’re seeing a lot of potential strength is and we’re just seeing a lot of activity is the wind build out over the next couple years. Obviously, you talked about the large transmission projects and ultimately connecting them, but what about the smaller projects, collector systems things like that. Are you seeing an uplift in that activity and is that an area you’re focused on?

Yes. It’s an area as a Company we’ve been focused on. It took a while a few years ago. We have seen it come back. We continue to chase those projects, bid those projects, and even execute a few on the wind side. So it is something that we do as a Company and we do see continued growth in that area.

Got it. And then I just want to close out on cash flow and buyback. Obviously, free cash flow very strong in the quarter, some of that was working capital. So I don’t know if you can cross-reference a little bit. Number one, how much of your buyback activity was maybe accelerated given the strong cash flow in the quarter. And how do we think through buyback activity going forward? Just in light of that and maybe is a little bit of a stronger than average free cash flow quarter?

Well, the cash flow, we put together a pricing grid that we gave to our agent to execute. As we explain this to our Board, got their authorization, it was to achieve certain capital structure wasn’t predicated on free cash flow. So, we had an amount of money. We had pricing grid, gave it to our agent and the agent executed in accordance with that pricing grid. Going forward, as Betty said in her remarks, we have authorized $20 million which obviously the dollar amount is significantly less than the one we were – the program we were closing out. And we also indicated that the pace will not be at the same level as what the prior pace was.

I guess I’m looking at it from the perspective I mean you only drew about $20 million on your revolver. I think you have $250 million before you expand. So, obviously you have a lot of potential dry powder here. You put $20 million up and in the past you have a pretty good track record of [reopening] it. So I guess I’m just trying to think through from my perspective, it doesn’t feel like we’re anywhere near the cap of what you can do from a buyback perspective, but I’m just trying to make – trying to cross-reference that with you.

I don’t think we’re at the limit of a buyback, but remember, we have a three-pronged strategy and we have some great organic growth opportunities that we’re evaluating in addition to those that have already started. And we are continuing to look at some strategic acquisition. So, we haven’t concluded that all of our cash flow is going to go towards buybacks. We have more of a balanced strategy and we don’t want to put all of our eggs in the buybacks unless we can’t find a good organic growth opportunities or good acquisitions.

Got it. That’s helpful. Thank you very much.

Thank you. And our next question comes from Noelle Dilts from Stifel. Your line is now open.

Hi, thanks. If I look at just kind of parsing out the distribution revenues from T&D, it looks like distribution was down pretty significantly in the first half of the year versus strong growth in 2015. Could you just comment on the trends you are seeing in that market and how you’re thinking about it moving forward?

I continue to see it is a strong market for us, again the easiest thing for utilities to change on their O&M budgets as they have budget constraints somewhere else, where they need money somewhere else. It’s easy for them to turn on and off the flow on the distribution side, so we see – able to have that plot and we see our customers utilizing that, so it is something that I do see it as a strong market. But, again, how they spend it – if they have more budget left over, we see that increase, we see a [mascots] were additional crews, if they have a little less budget or budget constraints somewhere they pull back on that side. So again I know it’s a strong market, it comes down to timing.

Okay. Great. And then can you just give us an update on your CapEx needs for this year and even into 2017 and how you’re thinking about that from a cash versus capital lease perspective?

I’ll start. We continue to evaluate it every quarter, every month. We look at it, but we are not buying what we don’t need. We look at our existing equipment and existing capital expenditures and we evaluate it monthly, quarterly and we make adjustments as needed.

Exactly and some of those CapEx have been accomplished through leases this year and we continue to look at whether it’s leasing or purchases and it depends, like Rick said it depends on the volume later. We continue to challenge that with the equipment that we have trying to hold back, but later on if we get some of these large transmission projects that there’s different needs will increase those capital expenditures. But you’re right, the level that we’re at today is at a lower level than historically, but we don’t have you – we look to continue that as far as volume is down, but it will pick up again when these large projects come out.

Okay. Thank you.

Thank you. And our next question comes from John Rogers from Davidson. Your line is now open.

Hi, good morning.

Good morning, John.

Good morning.

I just wanted to dig a little bit further in terms of the cash flow and you’ve cited some improved collections in billing procedures, how sustainable is that or I guess how much more is there to pull out of your working capital as a result of that and presumably if the cycle on the T&D side gets going again. Does that cycle start to suck up working capital especially on some of the larger projects?

Yes. When it comes to – you are right, this quarter there was a nice improvement in the working capital. Some of those dollars are relating to just timing and volume, but I will say that we had a very nice improvement just as it relates to overall focus and processes that have been just overall addressed. When we look at it from a day sales outstanding perspective just as far as measurement, we are at a low level in comparison to our history, also actually at our low level even comparisons to our peers. When we look at that, so how much is there as far as improvement. I can’t say that there’s a big of improvement that you can see coming forward, because we’ve made it there, but we always continue to focus on it constantly. And it will also dependent up the mix of our various different clients every situation, every contract that we enter into. It depends on those specific terms that we might agree to upfront that might not allow us to build this timely as another, but constantly review and challenge that. So there’s definitely ebbs and flows with that, but it was a nice improvement with everybody across the Company, participating and improvement we saw this past quarter or so.

John, I’d say one or two quarters doesn’t really make for a trend. We did have a couple of contracts that in the first half of the year that we had and clean up and got collections and there were some complications in the billing and we are successful in turning those billings and under billings into cash. So I hope that’s certainly our goal to maintain where we are and get even better into cash flow management, but that’s highly dependent upon the book of business that we enter into from this point forward.

Okay. So does that suggest on a long-term basis, I’m not asking for specific guidance, but on a long-term basis that cash flow should align with the earnings especially given, Rick your comments on capital spending needs?

Again it depends on the contracts for securing, we challenge those terms and conditions whether it’s payment terms, whether it’s retention, timing of retention whether you can do it partially through a project. We challenge it all, but we have certain customers that as you enter into a contract have different requirements than someone else. So we evaluated on every project and then in the timing awards in which awards we received can all play into that. So I’m not trying to answer your question, it’s just a very difficult thing to project.

Yes, agree.

All right. And on the larger projects, I mean if that market comes back, are they structurally – did they take more working capital to support or do you believe that the market such that it can be stable.

From my standpoint, overall, I believe that can be stable. If we pick up the right contracts, when I look at past ones we’ve had some very favorable tasks on payment. We’ve also had some that we pushed back, but entered into not in a way that I would say adversely affected us, but it did affect our cash flow.

Okay. Well, great job on the process. Thank you.

Thank you.

Thank you. [Operator Instructions] And our next question comes from William Bremer from Maxim Group. Your line is now open.

Yes. Thank you for taking the follow-up. I noticed the higher elevation of SG&A and I realize the latest acquisitions, but I guess the question I have here is are you seeing any inflation in terms of labor of course your platform at this time?

I wouldn’t say we haven’t planned on or discussed, we do a very good job of budgeting and trying to forecast tight markets and put that into our bids, our estimates. And even on the overhead side, we try to look at it area by area across the country and I wouldn’t say we see anything, part of that is our organic growth where you see the increase on the SG&A side. And when you don’t have the revenue to support that from day-one, it does affect the percentage and the dollars.

Yes. Overall dollars.

And Betty corporate expenses, unallocated expenses was there any one-time charges this quarter or is that sort of a decent run rate to use going forward?

No unusual one-time adjustments during the quarter outside of what we’ve point out for the acquisition and organic growth related costs, nothing like last quarter that we pointed out.

Okay. Great. Thank you. End of Q&A

Thank you. I’m showing no further questions at this time.

Okay. Well I would like to thank everyone for participating on today’s call. As always the biggest thanks goes to our staff. We got a great group of employees work really hard on behalf of the shareholders and we certainly are dependent upon them and we are also dependent upon continued support from our shareholder base. So I don’t have anything further, we look forward to talking to you folks next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.