Kristine Walczak - Senior Vice President, Dresner William Koertner - President and Chief Executive Officer Betty Johnson - Senior Vice President, Chief Financial Officer and Treasurer Rick Swartz - Senior Vice President and Chief Operating Officer.
William Newby - D. A. Davidson & Co. Noelle Dilts - Stifel, Nicolaus & Company, Inc. Andrew Wittman - Robert W. Baird & Co. Tahira Afzal - KeyBanc Capital Markets Inc William Bremer - Maxim Group LLC Stefan Neely - Avondale Partners Noelle Dilts - Stifel Nicolaus & Company Inc.
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the MYR Group First 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 follow at that time.
[Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Ms. Kristine Walczak of Dresner. Ma’am, please begin..
Thank you, and good morning, everyone. I’d like to welcome you to the MYR Group conference call to discuss the company’s first quarter results of 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, May 11, at 11:59.
Eastern Time by dialing 855-859-2056 or 404-537-3406 and entering conference ID 86460832. 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 involve 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, company’s Quarterly Report on Form 10-Q for the first 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, Kristine. Good morning, everyone. Welcome to our first quarter 2016 conference call to discuss financial and operational results. I will begin by providing a brief summary of the first quarter results 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 some closing remarks and open up the call for your comments and questions.
The first quarter was a challenging start of the year for MYR, while revenues improved nearly 4% year-over-year, our operating income was down for the period as compared to the first quarter of 2015.
This was due in large part to the fact that our first quarter last year included some favorable contract margin pickups from the closeout of several large jobs, which we have not experienced this year.
Additionally, operating income for the quarter was negatively impacted by certain jobs that underperform for a variety of reasons and the continued high level of competition facing us in many markets.
Our operating income was also impacted by higher SG&A costs associated with expansion into new geographic markets, both organically and through acquisitions. We continue to believe that our investments in these growth initiatives will enhance future performance and build greater long-term shareholder value.
Throughout the first quarter, we focused on initiatives to support our three-prong strategy of prudent organic growth, acquisitions, and returning capital to shareholders, all supported by MYR’s strong balance sheet.
As we announced on our last conference call, the Board approved new financing strategies to support the company’s equipment needs, including alternative financing arrangements for a portion of our future equipment needs.
We purchased over 1 million shares of our stock under our repurchase program in the first quarter, reflecting our belief that at current levels, our stock represents an attractive investment opportunity.
Since the inception of our share repurchase program in 2014 through March 31, 2016, we have returned $69.4 million to shareholders through our repurchase program. Thus far this has been accomplished without triggering any borrowings under our revolver and our balance sheet remain strong to support our three-prong strategy of capital allocation.
In March, we entered into a settlement with Engine Capital to expand the size of our Board of Directors and appointed John Schauerman as Director and agreed to a point Arnaud Ajdler following the 2006 Annual Shareholder Meeting, due to a conflict with Mr.
Walter’s other schedules, Engine Capital exercised its right under the settlement agreement to nominate Brad Favreau as a replacement candidate. Our Board reviewed Brad’s qualifications and background and subsequently appointed him to the Board on April 28, following the 2016 Annual Shareholders Meeting.
We are confident that the addition of these new board members will positively impact MYR, as we identify and execute opportunities to enhance the value of our company. Bidding activity remains strong in the quarter in both our T&D and C&I markets, however, competition remains stiff.
We are hopeful that as the overall economy recovers, it will improve the competitive pricing climate in our markets over time, which should foster higher top line revenue growth and profitability for MYR Group. MYR has a long history of delivering superior operational and financial performance in strong and weak competitive markets.
We enjoy excellent relationships with our customers and employees, supply partners, investors, and other stakeholders. Our reputation with all of these stakeholders is critical to our ability to capitalize in future opportunities. As always we encourage and value the input of our stockholders.
Your participation in and 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 first quarter of 2016..
Thank you, Bill, and good morning, everybody. As Bill stated earlier, top line growth in revenues was not enough to overcome startup costs in some of our organic and acquisition growth markets and margin pressures from increased competition.
Our first quarter 2016 revenues were $253.6 million, which represented a $9.5 million, or 3.9% increase compared to the same period of 2015.
The increase was primarily due to higher C&I revenue, driven primarily by organic and acquisitive expansion into our new market, which was partially offset by a decline in revenue from large multi-year transmission projects. Compared to 2015 first quarter, T&D revenues decreased $6.2 million, or 3.3%, to $183 million.
C&I revenues increased $15.7 million, or 28.6% to $70.7 million. The breakdown of T&D for the first quarter of 2016 is $141.3 million for transmission and $41.7 million for distribution. Our overall gross profit in the first quarter of 2016 was $27.3 million compared to $29.4 million in the first quarter of 2015.
The decrease in our gross profit was primarily due to lower gross margins, partially offset by higher revenues. Our gross margin was 10.8% in the first quarter of 2016 compared to 12% in the same period last year.
The decline in gross margin was primarily due to the impact of favorable closeouts and estimate adjustments, which benefited the first quarter of 2015 by 1.5% of revenue, but caused a decline of 0.6% of revenue in the first quarter of 2016.
We continue to see pressure on bid margins and an increase in shorter duration jobs, which results in lower labor productivity and higher overall mobilization and demobilization costs. Additionally, some of our jobs underperformed due to labor productivity being below previous estimates and severe weather in certain markets.
First quarter 2016 SG&A expenses were $23.9 million compared to $18.6 million in the first quarter of 2015.
The $5.3 million increase was due to $3.3 million of costs associated with our organic and acquisitive expansion into the new markets, higher payroll costs to support operations, $1 million associated with the activist investor activities, and higher medical costs, and that was partially offset by lower bonus profit sharing and stock compensation costs.
SG&A as a percentage of revenues represented 9.4% in the first quarter of 2016, up from 7.6% from the first quarter of 2015. First quarter 2016 EBITDA was $13.3 million compared to $20.5 million in the first quarter of 2015.
Our provision for income tax decreased to $1.2 million in the first quarter of 2016 compared to $4.2 million in the same quarter of last year. Our effective tax rate in the first quarter of 2016 was 38.6% compared to 36.9% in the first quarter of 2015.
The increase in effective tax rate was primarily caused by the impact of our lower domestic activity deduction and changes in the mix of businesses between states. First quarter 2016 net income was $2 million, or $0.10 per diluted share, compared to $7.2 million, or $0.34 per diluted share in the first quarter of 2015.
Total backlog at March 31, 2016 was $434.8 million consisting of $293.5 million in T&D segment and $141.3 million in the C&I segment. Total backlog as of March 31, decreased by $16.1 million from this $450.9 million reported at December 31, 2015, a decrease of 3.6%.
Despite the decline from December 31, backlog at March was higher than eight consecutive quarters preceding December 31, 2015. T&D backlog at March 31, decreased $30 million, or 9.3%, while C&I backlog increased $13.9 million, or 10.9% from December 31, 2015.
Turning to the balance sheet at March 31, we had approximately $26 million in cash and cash equivalents, no outstanding funded debt and $150.7 million in availability under our credit facility.
Stockholders’ equity was $305 million at March 31, 2016, $24.3 million lower than March 31, 2015, primarily due to the $51.9 million of share repurchases in the last 12 months. As it relates to our share repurchase program in the first quarter of 2016, we purchased approximately 1.2 million shares of our common stock for $26.7 million.
We amended the program on February 10, 2016, increasing the capacity by $75 million to $142.5 million in total, updating its provisions to accelerate the pace of repurchases and extending the program through April 30, 2017. As of March 31, 2016, we had $73.1 million of availability under the program.
We have continued repurchasing shares into the second quarter of 2016, repurchasing over 850,000 shares at – for approximately $23.3 million through May 3, 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. Throughout the first quarter, we experienced a steady pace of T&D bidding activity for projects of all sizes in both the U.S. and Canada, as well as the majority of our C&I market.
Project activity remains fluid across all of our T&D and C&I markets and our crews have been busy with startup and mobilization activities related to projects awarded in early 2016, such as the MVP 16 EPC project for MidAmerican and Illinois and the new million square foot Denver Veterans Medical Center.
With our bidding and construction activities off to a solid start in 2016, we are encouraged by the industry trends, which indicates steady activity, as well as an increase in the number of large projects coming to market throughout this year and beyond.
This follows a lower number of large projects award – awarded in 2015, which was primarily the result of the delay or postponement of several large transmission projects originally slated to begin construction in 2015.
Although, we may remain in the midst of a wait-and-see environment throughout 2016 due to unknowns on the regulatory and political front, there appears to be plenty of construction and planning activity taking place that looks positive for the overall transmission market over the long-term.
On March 16, Transmission Hub provided its quarterly update and noted, they are tracking $137 billion of electric transmission projects in the U.S. and Canada that are planned and under construction, representing approximately 39,000 miles of new and/or rebuilds of transmission.
This data reinforces our belief that historical investment trends will continue over the next several years by traditional investor-owned utility. This data does not include projects anticipated from nontraditional transmission developers with merchant type projects in the planning phases, both in the U.S. and Canada.
The drivers for infrastructure investments in the T&D markets remain intact, such as the need to replace aging infrastructure, the continued integration of new generation sources, such as natural gas, wind and solar, as well as the protection against physical and fiber threat.
We continue – continuously monitor changes on the regulatory front that may impact transmission investment in the U.S. Regulatory events, such as the stay of the Clean Power Plan by the U.S.
Supreme Court earlier this year, the renewal of the production tax credit and investment tax credit – credits by Congress and the implementation and evolution of FERC Order 1000 are all developments that we will continue to monitor closely.
The potential impact of the Clean Power Plan implementation on future transmission investment is still being evaluated by our industry. Although, the political and legal arguments for or against the CPP will be heard in the coming months by the judicial system, recent news from transmission planners is encouraging.
Planners from independent system operators and transmission developers are beginning to examine how the CPP will impact the need for additional transmission to integrate new forms of clean generation sources.
My source and mid-March report indicated that its long-term planning forecast will need to address additional transmission to import renewable resources as a result of the impact the CPP may have on their system in the coming years.
In addition, we expect that the 2015 congressional approval of the five-year production tax credit and investment tax credit will stimulate new investment in wind and solar generation over the coming years, as we have recently seen increased planning and bidding activity.
These renewable resources are generally located in more remote areas of the country and will require new transmitting – transmission infrastructure to deliver power to population centers.
On the FERC 1000 front, Chairman, Norman Bay announced that his staff will hold a technical conference in mid-2016, to address issues related to the order and decide FERC’s positions on how it can better coordinate planning and cost allocation for projects. We see this as a positive event to help move more competitive projects to market.
Although, these regulatory events are evolving and have yet to be fully absorbed by our industry, we believe that the overall theme of a change in generation mix by utilities, an increase in wind and solar development, and improved planning and competition under FERC 1000 will result in the need for additional low electrical transmission to be built throughout the U.S.
and Canada. The trend of historical investments in transmission by utilities also continued in the first quarter, as evidenced by several recent announcements. One of our largest clients ITC Holding announced in the first quarter that it will be acquired by Fortis, a Canadian-based utility.
They also stated, they will be increasing their capital expenditures by $200 million through 2018 to $2.1 billion. ITC also announced that they will be moving forward on their Lake Erie interconnector project, which will connect the Ontario independent electric system operator with the PJM Interconnection region in the U.S.
Dominion Virginia Power, another large client of MYR announced in the first quarter of 2016 that they plan to invest nearly $2 billion per year through 2020 on capital projects in Virginia and Northeastern North Carolina.
This is a region, where we have traditionally maintained a strong operational presence and have a history of successful project execution.
Edison International, the parent company of Southern California Edison recently announced plans to invest in upgrades to its electrical distribution and transmission system to better integrate renewable resources over the next several years.
The company said, it would increase its transmission expenditures from $613 million in 2015 to forecast the $704 million in 2016, and $1.2 billion in 2017. We will continue to closely track progress of these developments through our recently established operations in Southern California.
Shifting to distribution, the growth trend that we’ve experienced throughout 2015 remain steady in the first quarter, as we continue to perform work through a number of long-term alliance agreements.
As we consider future organic growth and expansion opportunities, we look forward to additional prospects for distribution work in both our established and new markets over the long-term. Looking at our C&I business, bidding and project activity remains strong in the majority of our regions.
Throughout the West, our Arizona and Nevada markets, both experienced significant bidding opportunities in the first quarter of 2016. Although these markets have been slower to recover, new initiatives in high-tech, education and hospitality facility should provide continued opportunity in these markets going forward.
In Colorado, we see opportunities in aerospace, as companies have announced major awards for satellite development and manufacturing, and there also plans for two major pharmaceutical campuses. The technical nature of this work will demand a contractor like MYR who possesses a high degree of skill and experience in this area.
Healthcare opportunities also remain strong due to advancements and increased complexity involved with the latest technology and equipment. This has always been a core competency for us and we expect to capture several opportunity in this space due to our extensive skill levels and resume of successful healthcare project completion.
Throughout the Northeast, private institution and educational facility opportunities are prevalent.
Many universities and educational institutions are refreshing and modernizing facility, and we are experiencing growth in campus housing, educational building, support services, and sporting facility projects, not just throughout the Northeast, but in all of our C&I regions.
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. In conclusion, despite a slower than expected 2015 and a climate of uncertainty that may remain throughout 2016, our efforts to grow the business continue to deliver positive returns.
We have plenty of reasons to believe that 2016 and beyond will provide MYR with viable opportunities related to new projects, organic growth, and acquisition.
As we align ourselves with our overarching strategy, we will also – we also maintain a steadfast focus on refining our internal skills and processes with the expectation of providing profitable returns, successful project delivery, safe work performance, quality craftsmanship, and client satisfaction. Thanks everyone for your time today.
I’ll now turn the call back to Bill, who’ll provide some closing comments..
Rick, thank you for the market update. In closing, our results for the first quarter of 2016 are evidence that we’re still emerging from last year’s highly competitive market. We believe the actions we are making – taking today should strengthen our position in the marketplace and provide attractive long-term returns for shareholders.
Our goals remain the same. We want to be the contractor of choice for our customers, the employer of choice for the workforce, and the partner of choice for developers and suppliers.
We look forward to what we expect will be a more promising balance of the year, as we expand organically and through acquisitions, refine our capabilities for improvements of the nations electrical structure – infrastructure and maintain our reputation for financial strength and liquidity.
These are all efforts to increase shareholder value and maintain long-term profitable growth 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 for comments and questions..
[Operator Instructions] Our first question or comment comes from the line of Bill Newby from D. A. Davidson. Your line is open..
Good morning, guys. Bill on for John Rogers today..
Good morning, Bill..
I was hoping just to get some more color on the problem projects you guys are having in the quarter? I guess, how much work do you guys have left? And are confident that those kind of return – they’re performing at your expectations?.
Rick, do you want to handle it?.
Yes, on the T&D side, we had a primarily one project and it was related to weather impacts earlier in the year and also we had sort of few weather impacts on projects down in the Texas area, where they received a large amount of rain over a short period and extended time.
So those were primarily the issues, the one project I was – the first one I was talking about, that one was is primarily done. So I think we’ve recognized everything on that project. We still do have the work in Texas continuing..
And the project had a – the productivity issues? is that still going on?.
Yes, that was on our C&I side and that project is a campus type project with multiple buildings on it. This was done, I guess, this impact us on a couple to that project. I think, we’re far enough along, where we’ve realized what we see to-date, don’t see a big impact going forward, but that project does continue through later this year..
Okay, thanks. That helps.
And I guess regarding the weather, but the fires went on up in Alberta, have you guys had any impacts there, or do you see any risk for impact, as we move forward?.
We currently don’t have any work in Alberta, so that should not impact us at all..
Okay. Thanks, guys. That’s all I got..
Thank you. Our next question or comment comes from the line of Noelle Dilts from Stifel. Your line is open..
Yes, hi, thanks. Good morning. My question ties into the last question to some extent. You guys did call out the 60 basis point impacts on weather and productivity in the quarter.
But I don’t know, if that captured the drag that you saw from the startup costs? I’m really just trying to get a sense of how much of this margin impact was temporary versus how much kind of continues? So can you maybe give us a sense of that sort of costs drag and how that 60 basis point impact was split between T&D and C&I?.
I’m going to start off on that, Noelle, and then I have Rick amplify. We have a number of offices that we’ve established, one on the T&D side and multiple offices on the C&I side. We hired key management people in those markets to build the operation that includes small staff and positions like estimating and so forth.
So when we hire those individuals, obviously, we don’t have any work from the beginning. So it’s up to that group with our support to find profitable work to cover those kind of overhead costs. Some of those costs would eventually find their way to contract cost to the extent, we secure work.
So some of the new markets we’re in, we’re getting close to fully covering our overhead costs other markets that we’re in, we still have ways to go. We remain very confident that, we picked these markets for a reason and feel we’ve got the right teams to develop a good profitable book of business in those markets, but it doesn’t happen overnight.
So we’re working hard at it, and think it will pay big dividends for the company down the road.
So, Rick, I don’t know if you have anything more you wanted to add on that?.
We, take a very strategic approach as we start up these businesses and we go into when we either – as we said on previous calls, we either follow clients, or it’s a market where we truly believe it’s long-term for us to hand over. So that takes an investment upfront.
We’re going to do everything we can this year to make sure that that doesn’t continue to drag down on us and we have enough work secured in those areas to cover the overhead associated with it and build it for the long-term..
And, if I may just add one thing, all you asked about the 0.6% impact of changing margins. Just to be clear that the startup business units are not any impact from those are not included in that 0.6%..
Okay, thanks. Then just speaking to second your transition business, you’ve been vocal about the fact you’ve seen competition increase.
Have you seen any improvement just in terms of the supplies on the supply side in terms of construction capacity of some of your – I’ve heard some of your competitors particularly international competitors have taken step back from the markets, so can you comment on that? And then could you speak to existing significant differences in terms of the competitive landscape on a regional basis?.
Go ahead, Rick..
On the international ones, yes, we’ve seen some people seem to take a step back and primarily the Spanish firms are as aggressive as they seem to be in the past. But I have not seen our local competitors saying, no to any work out there. We do see a lot of projects on the bidding front.
So that’s a positive sign for us and we’ve got some great relationships with clients that we think will benefit us long-term. But it still remains a competitive environment..
Okay. And then last question for me, Engine seem pretty vocal about their desire to go through price discovery on the company.
Can you just talk about how you’re thinking about that process at this point?.
Sure. Well, as we’ve said on earlier calls, our Board is very focused on its responsibility to shareholders and filling their fiduciary duties. When we have Board meetings, we talk about strategies, including possible price discovery process. I think is the term the Engine Capital people use.
We think our current strategy is a sound one to build long-term shareholder value as opposed to putting it for sale sign up for a quick sale. So but we do look at all the options.
The Boards are very conscious of its responsibility and we’re constantly looking at our long-range plans and making sure that we’re doing what makes the most sense for shareholders. So I think investors can draw some comfort from the fact that the Board seriously looks at all options..
Okay. Thanks, Bill..
Thank you. Our next question or comment comes from the line of Andrew Wittman from Robert W. Baird. Your line is open..
Hi, good morning..
Good morning, Andy..
Good morning..
I understand that the office startup costs were factor. It sounded like maybe into Rick’s comments that you get going on newer jobs.
And I was just wondering, if projects that we’re starting, so in other words, project startup costs were factor in the margins for the quarter?.
As far as overall, in fact, startup costs really didn’t affect us. It’s primarily, as Bill said earlier, the – as you start these new offices and you put in that development cost of capturing work in those market, that’s really where we’ve seen it from hiring those estimators, the project managers, the business leaders to develop those markets..
Got it. Okay. And then just on large transmission in projects that are out there, can you talk about how your outlook on that market, in particular, has evolved over the last few months. It kind of feels like there is more coming into the radar screen.
I don’t know if you have that same sense? When do you think some of these large projects will be less and do you expect to have the role on them?.
I’m definitely seeing more on the radar screen. As we’ve said in previous quarters and previous years, I truly wish, I could pick the award dates of those and the permitting issues and some of the other things that seem to continually delay the projects.
But as far as what’s available on the radar screen, visibility wise from, let’s say a year ago, I definitely see it in a positive manner. And back to your question, do we plan on playing a role in it? We definitely plan on playing a role in this. It’s a focus of our company.
It’s been a good business segment for us, and we continue to put the resources necessary to develop and then execute that work..
Yes. So I guess, maybe to get some context in that, can you talk to, I know it’s hard to delineate where a large transmission project is. But of the 550-ish or so probably $1 million of revenue this year.
How much of that you think will be coming from projects that you would consider large? Just we can understand the impact that this has on the margin mix of the T&D segment?.
I really don’t break it out that way, but we’re going to capture by large projects we break it out by area, by district, by business unit, and then we roll that up into our results. So we really don’t do segment-by-segment results..
Okay, I guess maybe final question, obviously it doesn’t feel like the first quarter is indicative of the earnings power of the company, but what’s the challenges that we seen in some of the supply demand imbalance in T&D industry recently. I was just wondering if you’re looking at the cost structure here for fixed assets in other overhead.
If there’s an opportunity is that something you’re looking at contemplating for the year ahead?.
We’re always looking at our cost structure and we’re talking about expansion efforts if we got offices, they’re not yet carrying themselves. We would close the office and shed that overhead costs. So we’re constantly trying to balance that and not keep offices open unless, we think they’re viable and contribute to the long-term profitability.
So that’s an ongoing effort and like we understand it’s essential to be a low-cost producer and you got to really manage your overhead..
So about on the equipment side Bill, is there unused equipment that should be sold, or turned off of lease or?.
We are also looking at our equipment there is some equipment that is sold. Every quarter, we’re sending iron to auctions to dispose of it. I don’t think we have any big surplus that we need to take to the auction house, but we are scaling back some of our purchases, so we can through attrition kind of manage that.
But we will always have auctions and we’re also participating in auctions to buy used equipment to get some of our fleet guys at an auction today and what we need to add equipment that contractors gone out of business and we’re looking at some of that equipment.
So very active on rightsizing our fleet and trying to have a very cost effective fleet, because that’s other than labor fleet is the second biggest cost component of our overall cost structure..
Okay, so I think I’ll leave it there. Thank you..
Thank you. Our next question or comment comes from the line of Tahira Afzal from KeyBanc. Your line is open..
Hi, folks..
Hi, Tahira, how are you?.
Hi, Tahira..
The first question, there is something you mentioned just on the last question was we seen for example the pipeline space it seems bankruptcy and fallout finally.
Are you guys at that point where you feel there will be a shrinking capacity going forward, especially for some of the more specialized transmission work?.
Well, it’s an ebb and flow thing as I indicated, there is one contractor that’s gone out of business here in the last month or two, but there’s going to be another one come in. So to say that there’s been a net-net shrinkage of capacity. I would like to be able to say that, but I don’t think that would be fair.
Every quarter their contractors going out of business, in every quarter there’s some new ones going in and if the equipment becomes depressed and in some cases, the market value or auction value of the equipment is depressed that provides a lower cost of entry for some new players.
So we we’re on top of it and we monitor that all the time and I would like to be able to say that there’s been a net shrinking of electrical contracting capacity, but we’ve not seen that yet..
Got it, Bill when you say you haven’t seen that yet, do you expect that typically from my experience these sectors when they go through even if it’s a transient slow down you do see some consolidation?.
Yes, I – we think there would be if the work – we generalize when you got the large transmission, the 345 and the 500 lines. There’s different equipment, different contractors can handle that. And then as you go to lower voltages, all the way down to the voltages, our C&I Group works with.
So it’s hard to generalize, but there are new players coming in and players going out in all of these markets..
Right..
I think the capital that was pumped into the large transition – transmission market. Four or five years ago, there is not as much new capital from private equity trying to invest in regional transmission contractors that I see less of that today than what I would have seen a few years ago..
All right, okay. And Bill, on the C&I side, it seems like, you’re putting in some investments to really expand that business. And it seems that business, the non-res business is relatively be putting out pretty well.
Once you’ve made these investments, is there a chance margins when go back that 7% type of level, or is that not going to be possible?.
We like the C&I market, I’m not going to comment on the margins. Rick, you got any other color you want to offer on this C&I market..
Operating income margins?.
Yes, that’s the segment margins I’m asking about.
I guess what I’m trying to ask is, how the beat are, can you kind of get them back up once the investments have been made?.
Tahira, we do everything we can to get those margins up. We tried to attack, I guess, areas that we see higher margins and long-term profitability in those areas. So we’re not trying to go into an area and start business and that’s going to last a year.
We’re looking at a business that’s going to sustain long-term and we track a team that can manage that work and execute and increase our margins long-term, that’s always our goal. But, again, the overall effect of the market and what affects margins up there and the competition and the amount of work up there fluctuates constantly..
Tahira, I would add, every time we enter a new market or this would also be true considering at on acquisition. We put together a business case and we really challenge the people who promote that new office or promote that acquisition.
And I can assure you, we’re not going into any new markets with the thought that we’re going to make a 3% operating margin. We are looking for markets, businesses that can do better than that. So that definitely is our focus..
Got it. Thank you, Bill. And then I will hop back into the queue..
Thank you. [Operator Instructions] Our next question or comment comes from the line of William Bremer from Maxim Group. Your line is open..
Good morning, Bill, Betty, Rick..
Good morning..
Good morning..
Just want to get a sense more in terms of – we’re seeing these projects on the horizon, in your opinion, do you feel though that they’re getting cutoff more frequently and as you mentioned in this quarter, are you really having real problems with the leverage on some of them.
As you’re booking, the pricing – is the pricing still holding on these and is this something that needs to be done more operationally to really start to enhance those margins going forward?.
From an operational front, on an execution side, we look at everything we can.
We spend along – a lot of our time preplanning projects, putting our people upfront even in the estimating pace, trying to come up with the best way to execute the work, and we continue to enhance that plan all the way through to completion some of the problems we talked about earlier as it related to, it was a weather.
That was a big impact for – one of the transmission projects in a couple of the smaller ones. And then execution on the C&I front, when we’re coordinating with other trades, when we’re working with clients on that side, we try to do as much as we can upfront and eliminate rework.
Sometimes we get into that situation, where we do have rework and at the end of those projects or during those projects, we do lessons learned. We do every aspect of planning we can to ensure that doesn’t happen again on future projects. But every projects are a little bit different, and we look at every productivity enhancement we can make..
And just to add to that, Bill, we’re really working hard at staying disciplined on our bidding, as markets get tight, there’s definitely a tendency of not only estimators cutting margins or advocating their markets be cut, but also advocating reducing contingency and being more aggressive with productivity assumption.
So, as we review bids at all levels within our company, we’re working hard to remain disciplined. And we’re not looking to just buy revenue. We’re looking for revenue that produces the decent return. So at discipline, we’re – I think are doing a good job of keeping..
Okay. Here is one for you just a bluff and it’s happened inside the question.
The corporate unallocated expense line, and give us a sense of how that looks as we progress into 2016?.
When you’re talking about the corporate unallocated, are you – I’d say, our corporate overall unallocate is really consistent..
Okay. All right. So….
Passionately reviewing and challenging it. But you take our first quarter and obviously we called out a couple of things in our SG&A like the activists costs..
Right..
That’s behind us from the first quarter. So that’s very specifically, an example, that would be excluded..
Okay. And one last one for you, Rick. We did have some severe impact of weather in the Texas area.
How much of a headwind are you seeing in that potentially for the second quarter?.
I – I mean, I continue to see whether down there. The impacts are still there. To what degree, it’s hard to tell. I mean, we’re still – it depends, where we are at in the projects, I see it affecting us on some of our work. But hopefully, it drives out and we can not have the effect and make up the difference.
But if we bid any work with the most severe weather impacts possible and we put that into our estimate. There’s – it would be difficult to capture some of those projects. With that said, we try to limit our exposure and defined number of weather days and other issues that may impact us going forward, but sometimes they can’t all be defined..
I understand. Thank you very much..
You bet..
Thank you. Our next question or comment comes from the line of Stefan Neely from Avondale Partners. Your line is open..
Folks, thanks for taking my call. First off, I want to apologize, if my following questions may have already been answered. I was on another call and then flipped over, so I missed some of your commentary. I wanted to start off talking a little bit about SG&A costs. The $3.3 million does seem a little high.
I was wondering, is that something that you see going forward? And also, if you look year-over-year, I think the year-over-year jump in SG&A was $5 million to 6 million. And so there seems to be some extra year-over-year number in there.
Can you talk a little bit about that? And also, in regards to the expansion efforts, when do you kind of think about being the associated revenue ramp?.
I’ll start with – to answer that just to refer some – to some of the comments made earlier, right, so SG&A $5.3 million year-over-year increase, besides for the acquisition gross increase of $3.3 million. There’s – included in that number is $1 million, as it relates to the activists activity and that $1 million is, we consider it to be one-time.
We don’t exclude [Audio Gap] our revenue growth. And SG&A as a percentage of revenue goes back down..
Okay..
As it relates to the covering on the revenue, I have, Rick, address that..
As Bill said earlier, every area we go into to expand geographically, we do a business plan on. We look at it. We follow some clients up there. So we try to have. In certain areas, we’ve got a backlog that we have. But as we hired new people to develop the market and manage that work and build relationships we put that investment in.
So we do have revenue coming in from these areas currently in almost all the areas and, Michael, it’s by year end to be covering our overhead with every area that we’ve expanded into currently..
Okay, perfect – go ahead..
I’m good..
Okay, so that’s really helpful, thank you.
My last question, I suppose it just comes from looking at the T&D kind of Q1 with margins, but what was – it was there some productivity issues there any problems on jobs lingering, or was it kind of just one time with whether or whatnot?.
I’ve covered that earlier and as you said you were on it, there was….
Yes, I apologize..
A couple of projects on the T&D side that were impacted by whether and we kind of covered the different progression those projects were in Midwest and Texas area and then I covered the C&I side, which that’s a campus type project. This was two phases of that project that we had some work issues on some coordination issues and some rework.
So those ones as I said that work goes through the end of the year. On one of the projects, I think we’ve realized that we work to-date that we have and we’re doing everything to ensure that doesn’t happen on that project going forward..
Okay, excellent thanks for taking my redundant questions guys. Have a great day..
No, problem. Thank you..
Our next question or comment is a follow-up from Noelle Dilts from Stifel. Your line is open..
On the VA Hospital jobs, can you remind us the timing of how that can play out?.
That that project goes into the mid-next year, so summer of next year, beginning of summer, we should be substantially complete with that project by then..
Okay, thank you..
Thank you. I’m showing no additional audio questions at this time. I’d like to turn the conference back over to management for any closing remarks..
Bill, can I add my clarification on this quickly..
Yes..
When I was going through financial information talking about our share repurchase program, I just want to make sure I clarify a number that I used. We talked about our share purchases going into the second quarter just giving you an update of the $23.3 million that’s been spent through May 3 in Q2.
I quoted 850,000 shares, but I needed to get a number all the way through May 3 for those shares and that number of shares is 925,000 shares relating to the $23.3 million just to make sure that everyone has a right number. Thank you..
Okay, thanks Betty. I’d like to thank everyone for participating on today’s call as always and also like to congratulate our management team and employees for their hard work and our stockholders for their continued support. I don’t have anything further and we look forward to speaking with you folks again next quarter. Thanks..
Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day..