MYR Group Inc (MYRG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MYR Group Inc. second quarter 2011 earnings 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 is being recorded. I would like to introduce your host for today's conference, Mr. Philip Kranz of Dresner. Mr. Krantz, 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 earnings results for 2011 which were reported yesterday. Joining us on today's call are Bill Koertner, President and Chief Executive Officer, and Marco Martinez, Vice President and Chief Financial Officer. If you did not receive yesterday's press release, please contact Dresner at 312-726-3600 and we will send you a copy, or you can go to the Company's website at www.MYRgroup.com where a copy is available under the Investor Relations tab. Also, a replay of today's call will be available until Tuesday, August 16, 2011 at 11.59 PM Eastern time by dialing 800-642-1687 or 706-645-9291 and entering conference ID 2474486.

Before we begin, I want to remind you that 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 which 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 quarterly report on Form 10-Q for the second quarter of 2011 and in yesterday's press release. With that said, let me turn the call over to Bill Koertner.

Good morning, everyone. Welcome to our second quarter 2011 conference call to discuss financial and operational results. I will provide a brief summary of the second quarter and first half results before turning the call over to Marco Martinez, our CFO for a more detailed financial review. Following Marco's discussion, I will provide some additional information on our outlook for the industry.

As we anticipated, the first half of 2011 was a transition period for us as we completed some existing large projects, and at the same time began ramping up some new multi-year large transmission projects. As you may have noted, we have added significantly to our backlog from last year, with new contract awards for large-scale transmission projects, with the latest being the Cross Texas Transmission Project with LS Power announced in April. Total backlog at June 30, 2011 increased to $716.9 million, from $199.6 million at June 30, 2010. Most of this growth was related to several large transmission projects that were awarded late in 2010, and in the first half of 2011. The rest of our T&D and C&I backlog remains steady.

You will note, that I did not mention in this backlog discussion that MYR was selected as one of 3 contractors to perform construction services associated with the CREZ projects assigned to Electric Transmission Texas or ETT, by the Public Service Commission of Texas. Master Agreements were executed with the 3 contractors in late June for this work, and discussions are taking place regarding specific scoping and pricing, as these projects move closer to the start of construction. ETT will construct 450 miles of transmission lines, the second largest share of CREZ projects throughout the state of Texas, and the work is to be completed by 2013. This is not included in our backlog figures as of June 30, 2011, because we do not yet have a contract for a specific scope of work.

Diluted earnings per share were $0.18 for the second quarter 2011, which represent a 12.5% increase over the second quarter of 2010. Our revenues increased $45 million or 32.1% in the second quarter of 2011, compared to the same period in 2010. We experienced revenue growth on both sides of our transmission and distribution business, as well as in our commercial and industrial business.

The increase in our transmission revenues was driven by several large and many small transmission projects. Our distribution revenues also increased compared to the same quarter last year. This was a result of increased spending by a few utility customers, as well as several small industrial distribution projects. Most of these industrial distribution projects were substantially completed in the second quarter.

Revenues for our C&I segment for the 3 months ended June 30, 2011 were $45.6 million, compared to $32.5 million for the 3 months ended June 30, 2010, an increase of $13.1 million or 40.4%. This increase was primarily due to 1 large project that had significant revenue related to subcontractor work and material procurement in the quarter. Our gross profit increased to $19.5 million in the second quarter from $16.7 million in the same quarter last year, which represents an increase of 16.9%. This equates to a gross profit margin of 10.5% for the quarter, compared to 11.9% in the same quarter last year.

The unfavorable comparison on margin percentage on a year-over-year basis was a result of various factors. First, we had one project in our C&I business that suffered from poor labor productivity, higher material costs, and other cost inefficiencies, versus what we'd assumed in our bid estimate. This project is now substantially completed. Contract margins in the rest of our C&I business remain under pressure, due to the weak economy which also played a role in hurting our overall margin percentage.

We are generally satisfied with our T&D operating margins this year, however, we believe those margins would've been better if our utilization have been higher on our transmission equipment. As discussed on previous calls, we added significant transmission fleet resources in the last couple of years, in preparation for the expected wave of new large scale transmission project awards. However, most of those projects haven't started, or are just now getting started.

Typically, there are 4 general phases of construction with a new transmission project, clearing the right-of-way and building access roads, installing foundations, framing, and setting the structures, and finally, wire stringing. Once a project is fully ramped up, we will have our crews and our subcontractor crews performing all phases of construction on the various sections of the right-of-way at the same time. Until that ramp-up is complete, and all phases of construction reaches full stride, our wire equipment will be underutilized.

With the anticipated influx of transmission work coming, we believe it is essential to arrange for specialty transmission equipment and tooling before the start of construction. Some of this equipment is in scarce supply, and manufacturing lead times for new equipment can be 6 months to a year. Also, we continue to believe our strategy of purchasing this specialty equipment versus leasing should benefit our margins, and improve our competitiveness over the long-term.

Recovery in our utility distribution and C&I business remains weak. As a result, we are still experiencing margin pressure in these markets, with more contractors competing for fewer available projects, in order to keep their labor and equipment resources busy Therefore, we expect our overall gross margins in the next few quarters for our T&D distribution work and our C&I segment to remain under pressure, until utilities start experiencing load growth on their systems, or are granted rate relief from their Public Service Commissions, and until commercial and industrial construction picks up.

In the T&D segment, where our revenues grew by nearly 30% during the 2011 second quarter compared to the 2010 second quarter, we provide a full range of services across the country. Along with major large transmission projects, we execute hundreds of small project work orders during the year, consisting of transmission, substation, and distribution projects. We also continue to market our renewable business, which includes underground collection facilities and solar panel installation, as well as transmission and substation construction for integration of this generation into the grid.

We believe that our bidding activity for major transmission projects should continue to be strong over the next few years, albeit at a slower rate for the remainder of this year, from what it was during the last half of 2010 and early 2011. We remain optimistic regarding our long-term opportunities in these markets, as we believe the overall market for large projects and related upgrades will remain robust.

We remain confident about our long-term investment in our distribution and small project markets, as we continue to believe that the outsourcing of services as opposed to the utility's hiring new employees to self-perform the work will increasingly become attractive to utilities over the long-term. We also believe outside contractors will comprise a larger percentage of the overall T&D workforce in the future, due to the contractor's flexibility to ramp up and ramp down their workforce, and other cost advantages.

Our C&I revenues grew 40.4% in the second quarter, mostly due to one large project, yet were down slightly on a 6 month basis. The majority of our C&I work continues to be performed in Colorado and Arizona, where most of our work is in the large, commercial and industrial government sectors of these 2 regional markets. Our backlog for C&I was approximately 6% lower at June 30, 2011 compared to June 30, 2010, which is consistent with my earlier comment about the slow pace of economic recovery.

Overall, our investments in people and equipment resources the last several years has positioned us to increase our backlog capacity, as we continue to bid on near and longer term projects.

Now, Marco will provide details on the second quarter 2011 financial results. And then I will be back to provide some additional insight on current market conditions, and our perspective for the future of MYR. After that, there will be an opportunity for you to ask questions. So Marco, please begin.

Thank you, Bill, and good morning, everyone. Yesterday, after the market closed, we announced our 2011 second quarter results. Our revenues for the second quarter of 2011 were $185.3 million, an increase of $45 million or 32.1% as compared to the second quarter of 2010. For the 2011 second quarter, our T&D segment revenues increased $31.9 million to $139.7 million, and our C&I segment revenues increased by $13.1 million or 40.4%, to $45.6 million, as compared to the 2010 second quarter.

The majority of the increase in overall revenues was the result of an increase in revenues from several large T&D projects over $10 million in contract value, coupled with an increase in revenues on many small transmission projects, under $3 million in contract value, and an overall increase in C&I revenues. Within our T&D segment, we recorded revenues of $98.1 million for transmission, and $41.6 million for distribution during the second quarter of 2011.

For the second quarter of 2010, we recorded revenues of $76.3 million for transmission, and $31.4 million for distribution. In the second quarter of 2011, transmission revenues increased $21.8 million or 28.5%, and distribution revenues increased $10.1 million or 32.3%, as compared to the second quarter of 2010. Despite the increase in distribution revenues, we expect the distribution market to remain soft, until we see greater economic recovery. Expanding on Bill's comments earlier, distribution revenues benefited from several industrial projects which are outside of our core utility distribution work, and were substantially completed in the second quarter.

Gross profit in the second quarter of 2011 increased to $19.5 million or 10.5% of revenues, compared to $16.7 million or 11.9% of revenues for the second quarter of 2010. The decrease in gross profit as a percentage of revenues was mainly attributable to an overall decrease in contract margins on a few medium-sized C&I projects between $3 million and $10 million in contract value, for approximately $2 million. This was a result of lower overall margins due to pricing pressures over the past year, as well as the margin adjustment of approximately $0.7 million for cost inefficiencies and higher than expected material costs on one project that is near completion.

In addition, as Bill discussed earlier, gross margins was negatively affected by the under-utilization of certain fleet assets, as they are being prepared and mobilized to our projects. Some of these assets include equipment recently purchased in preparation for the ramp-up of new large transmission projects. We are in the early stages of several of our large transmission projects, which generally require lower utilization of our fleet assets, and more use of subcontractor services for clearing right-of-way, and building access roads and installing foundations. However, we believe that our fleet utilization will begin to increase, once these large transmission projects start the wiring stringing construction phase.

Second quarter SG&A expenses increased 24% to $13.7 million, compared to $11 million in the second quarter of 2010. The higher SG&A costs were primarily due to an increase in group medical insurance costs, an increase in the number of support personnel, and an overall increase in other employee-related compensation and benefit costs in the second quarter of 2011. Our SG&A as a percentage of revenues improved to 7.4% in the second quarter of 2011, as compared to 7.9% in the same quarter last year.

EBITDA, which is a non-GAAP financial measure and is reconciled to the GAAP measures in our press release, increased to $10.6 million in the second quarter of 2011, compared to $9.7 million in the second quarter of 2010. The provision for income taxes was $2.1 million for the 3 months ended June 30, 2011, with an effective tax rate of 36.3 %, compared to $2.2 million for the 3 months ended June 30, 2010, with an effective tax rate of 40%. Second quarter 2011 net income was $3.7 million or $0.18 per diluted share, compared to second quarter 2010 net income of $3.4 million or $0.16 per diluted share.

Now shifting to our first half of 2011 results, our revenues increased $46.4 million or 16.1% to $335.6 million, compared to $289.2 million for the first half of 2010. Despite lower gross margin as a percentage of sales for the second quarter 2011, gross margins as a percentage of sales for the first half of 2011 increased to 12.3%, compared to 11% in the first half of 2010. The stronger gross margin performance in the first half of 2011 was primarily due to an overall increase in contract margins on a few large transmission projects of approximately $5.4 million. This improvement assisted in EBITDA growth of 22.7% for the first half of 2011, as compared to the same period of 2010. Meanwhile, our first half of 2011 net income and diluted earnings per share grew by 34% and 30%, respectively, as compared to the first half of 2010.

During the first half of 2011, we increased our investment in equipment and tooling in anticipation of the start of several large projects. For the first half of 2011, we used cash of $22.8 million for the purchase of equipment, compared to $7.1 million for the same period of 2010. We expect that our capital expenditures in 2011 will be between $30 million and $40 million, which is higher than our 2010 capital spending, in part to satisfy equipment needs related to commencement of several large projects.

As mentioned on previous calls, our investment strategy has not changed, and is based on our belief that transmission infrastructure spending by utilities will increase over the next several years. We continue to focus our capital spending on ensuring we will have sufficient specialty transmission equipment capacity to grow our business. Our goal remains to be the contractor of choice for large-scale transmission projects, as well as for bread-and-butter small capital and maintenance projects. We continue to defer some of our distribution equipment, capital spending, due to soft distribution market. We plan to fund our investments in additional property and equipment, substantially through internal cash flows and cash on hand.

Total backlog at June 30, 2011 was $716.9 million, consisting of $646.1 million in the T&D segment, and $70.8 million in the C&I segment. T&D backlog at June 30, 2011 increased 420.7%, compared to backlog June 30, 2010. C&I backlog at June 30, 2011 decreased 6.2%, compared to June 30, 2010. The increase in total backlog compared to the second quarter of 2011 to the second quarter of 2010, was primarily related to several large contracts that were awarded in the Company's T&D segment late in 2010, and the first quarter of 2011.

Our backlog does not include projects awarded to the Company unless there is an actual contract or work order to perform a specific scope of work. As Bill mentioned in his commentary, the Master Agreement with ETT for CREZ work is not included in our June 30, 2011 backlog as a result. Also, the CapX2020 project in Minnesota is another project that does not meet our backlog criteria, and thus is not included. Total backlog at June 30, 2011 was $113 million higher, than the $603.9 million reported to the prior quarter ended March 31, 2011.

By segment, we had an increase of $122.4 million or 23.4% in our T&D backlog, and a decrease of $9.4 million or 11.7% in our C&I backlog, compared to the backlog reported as of March 31, 2011. Our backlog can significantly fluctuate, as awarded new work offsets projects being completed. We continue to market and bid new work, in an effort to compensate for backlog being burned as projects are completed.

And while our method of calculating backlog may differ from methods used by other companies, for instance, we count 90 days of backlog from our Master Service Agreements, while some contractors may count one or more years of MSA work and backlog. The timing of contract awards and the duration of large projects can significantly affect MYR's backlog at any point in time, and may not accurately represent the revenues that MYR expects to realize during any period. Therefore, it should not be viewed or relied upon as stand-alone indicator of future results.

Moving to the balance sheet, our stockholders equity increased to $202.9 million at June 30, 2011, from $192.7 million at year-end 2010. At June 30, 2011, we had approximately $35.4 million in cash and cash equivalents, and $10 million in debt. Our debt to capitalization ratio was 4.7%, which we believe is lower than some of our peers. We currently have a $75 million revolving credit line under our credit facility which matures on August 31, 2012. At June 30, 2011, we had a $15 million letter of credit outstanding under the revolving credit line, leaving $60 million available. The combination of cash and cash equivalents and available credit line under our facility provides us with the proximately $95.4 million in total liquidity, which can be used for organic growth or other investment opportunities.

We are focused on maximizing the utilization of our assets, which has resulted in an asset turnover ratio of approximately 1.9 times on a trailing 12 month basis. We believe our asset turnover ratio compares favorably to others in our industry. In summary, we believe our strong balance sheet gives us an advantage over many of our competitors when pursuing new work, when financing the best equipment and tooling available, and when investing in our employees. Now, I'll turn the call back over to Bill for a discussion of operations.

Thanks, Marco. I'd like to expand on my earlier comments about how we see our business developing throughout the rest of the year. While we focus on pre-job planning, which includes recruiting and training the workforce needed to execute our major new transmission jobs, we continue to bid on projects of all sizes, that strategically fit our parameters and core competencies. We also continue to execute on a variety of projects, which include small project and maintenance work for long-term existing clients. Our profitability depends on executing all of our work, large and small, consistent with the productivity assumptions used when we bid the work.

Meanwhile, our current and prospective clients continue to make progress, with regard to obtaining regulatory approvals on large transmission projects in the Midwest, Texas, the Northeast, and the West. This movement should provide us with many opportunities for bidding large projects over the next few years to replace projects that are currently underway. Specifically within the Midwest, states like North Dakota, Nebraska, Kansas, Iowa, and Oklahoma should provide us with several opportunities to bid on transmission projects of all sizes. We see the CREZ market as well -- well as the rest of Texas as a great opportunity for MYR. A small portion of the 2,400 mile CREZ build-out still has not been awarded, and we expect there to be associated upgrades, other work outside of CREZ, should remain steady throughout the state.

The Eastern US should continue yielding opportunities, as significant new transmission lines which are planned over the next few years move forward in the New England area, Connecticut, New York, New Jersey, Pennsylvania, Virginia, West Virginia, and Maryland. There are also a number of major projects in various stages of development throughout the western US involving reliability, and transporting renewable energy from Wyoming and Montana to major load centers in the southwestern US.

That includes the northern part of the [SWIP] 500 KV line, which should add another 250 miles, and make the total line about 500 miles in length. And the Trans-West Express transmission project which includes a 725 mile proposed DC line, delivering renewable energy from Wyoming to electric utilities in Arizona, Nevada, and California. We expect to see ongoing bidding activity with Bonneville Power Administration or BPA, and Western Area Power Administration or WAPA for the next several years, and we continue to be optimistic about being awarded some of these projects. The BPA and WAPA federal set-asides are valued at about $6.5 billion in total.

Also we continue to see opportunities in the renewable energy market in both wind and solar, with renewable standards established in 29 states, plus the District of Colombia and Puerto Rico, and another 8 states with renewable goals. According to the US Energy Information Administration's August 2011 short-term outlook, electricity consumption in our country is forecasted to be up 0.5% from 2010 consumption levels, while growth of 1.1% is expected for 2012. Meanwhile, virtually all forecasters expect increased electricity consumption over the long-term as our economy continues to recover. None of us can predict when exactly that will happen, but when it does there will likely be a significant push to catch up on deferred maintenance and upgrades.

Specifically, as it relates to transmission, the Edison Electric Institute forecasts that investor-owned electric utilities will increase their investment in transmission from approximately $9.7 billion in 2010, to approximately $12.3 billion in 2013. This does not include the additional transmission investment from independent transmission developers and public power entities. As we all heard a few weeks ago, the Federal Energy Regulatory Commission or FERC, voted to approve the Final Order 1000, establishing new requirements for planning of new power lines, and how the cost of those lines will be allocated.

There is on-going analysis about this rules implications to all stakeholders in the industry, and there will likely be vigorous debate over the rule implementation, how it will happen over time. Ultimately, most believe the devil is in the detail, regarding how FERC will act on compliance filings. We are hopeful that the outcome will be a net positive for the long-term development of much-needed transmission in the country, and will also encourage the development of renewable generation.

Now, I would like to shift the focus to our C&I business. As I mentioned earlier, although projects are still being bid, there remains excess capacity within the industry as more contractors are pursuing the available work, which continues to place pressure on market -- on margins. However, our market focus on healthcare, government office building, research centers, smart highway work, data centers, mining, and waste water treatment, have made us somewhat less susceptible to the slow economic recovery at the national level. We remain focused on all of our existing markets, and executing our strategic plan to drive growth, increase profits, and create value for shareholders.

Finally, we continue to monitor and make adjustments in our cost structure, in an effort to ensure MYR remains one of the lowest cost providers in the industry. A low cost structure, coupled with a steady focus on our markets, will position MYR to maximize it's potential as the economy rebounds, and various T&D and C&I projects move forward. Additionally, our focus on safety, high-quality customer service, and on-time execution should ensure that MYR remains a valued partner for utilities and commercial and industrial clients.

That's it for now. We thank you for your interest and support. And now, I'd like to turn the session over for your comments and questions.

Thank you sir.

(Operator Instructions).

One moment, for our first question. And our first question comes from the line of Justin Hauke with Robert W. Baird.

Good morning, guys.

Morning.

So I just had a question, I mean obviously the backlog is at record levels, the orders are great, and there's still is more of that can come in there. I guess I was just trying to get a sense of -- how much of that is fully permitted projects, where other than just the timelines that you are working on, there is nothing else that is required to get those to move into full mobilization?

Certainly, it'd have to go through project by project. Some of the awards to us, for instance the CapX2020 work in Minnesota, which is not now in our backlog. We certainly hope to add significant segments of that work to our backlog soon, but there are still some permits that they are lining up. That is one of the reasons they have not made specific scope awards to us and their other Alliance partner, because they don't want to get too far ahead of themselves until they have all of the permits in hand.

The projects that we are working on in Nevada I think is fully permitted. There is still challenges with the environmental sites and cultural sites that we are working through with them, but in terms of permitting, it is pretty much in place. So you got to go project by project. And the -- I'll use one other example -- the work in Maine, our portion of the Maine work is 17 or 18 individual projects, some of which are fully permitted and ready to go, others there's still permits and other approvals required. So, you need to look at each of our projects that we have announced --and some of them are fully permitted, and some still have permitting to go.

Okay, well, assuming that all of those permits come in -- go as planned, I guess I mean, what is your expectations for when you become -- your equipment is fully utilized, based on the construction schedules you already have in hand?

I think, the end of the third quarter -- the end of the fourth quarter, we will have most of our wire setups busy. As Marco, and I alluded in our comments, we're busy, either ourselves or with our subcontractors clearing right-of-way, building access roads, and putting foundations in. The next step in the process is, is set a lot of structures, and once we get a certain number of structures set, then that's when we would put our wire equipment to work. So I'd say, end of fourth quarter, third quarter, we would expect to have most of our wire equipment working.

And at that point, would the subcontracting mix also be lower, because you would be moving past some of the foundational and right-of-way work you alluded to?

I wouldn't say it would be over, it may be 50%, Don, but when these big projects that are over 100 miles long, at one end of the project, they'll be continuing to clear right-of-way, continuing to build roads and put fences in, and in stalling foundation, while we will be working on another part of the right-of-way. So there will be an overlap, and it obviously depends project by project, when all aspects of construction will be going full bore. And then as the project gets closer to completion, certainly all of that right-of-way clearing and the foundation work is done, while what's left is the wire work.

Great. Thank you very much. I will get back in queue.

Thank you. Our next question comes from Alex Rygiel with FBR Capital Markets.

Thank you, good morning, Bill, and Marco.

Hi, Alex.

Are there any more abnormal storm revenue in the quarter?

No, Alex. Storm revenues were similar to last year, very immaterial in dollar size, typical for us. We have always said, it ranges somewhere between $10 million and $25 million a year, so we are not out of that range.

Great. And Bill, do you have any greater clarity on the CapX2020 project to at least bracket what the revenue contribution to MYR could be over the next couple of years?

I really don't. As you know, it is around 700 miles, I think you could probably find what other 345 lines cost, but we-- I'm not going to speculate what the total potential is. I do think it's going to be split between ourselves, and another Alliance partner. The other partner, I think has already started on the Bernidji line, which is the smallest of the group, and it's a 230 line. I am sure the utilities that make up the CapX2020 consortium will be judging our performance, and our competitors performance and that will be determined how much of the work is assigned to each of us. But in terms of dollar value, we have been asked by the utilities there, not to start speculating on that, because of that could potentially interfere with some of their regulatory approvals that they are trying to get.

And, recognizing and appreciating the fact that you are -- equipment utilization is a little low today, obviously because you are buying in advance of work activity. Is your labor productivity also at the same stage?

The labor productivity, we have been I think pretty pleased, with how we have been able to integrate some new crews into our operations, so our labor productivity is consistent with past patterns. I'd say -- would also say that whenever you are ramping up a new job, the productivity is not as strong until you get maybe 10% or 20% into the job. And there is a learning curve that the employees are getting to know one another, they are getting to know our equipment, they are getting to know our expectations on work practices, what our clients expectations are. So, invariably the productivity gets better and better, as you progress into the job. Then at some point, that will level out throughout the remainder of the job. So every new job, both the ones we are working on today, and the ones we have completed in the past, that productivity improves as you move down the learning curve.

That's great. Thank you very much. Nice quarter.

Thank you, Alex.

Thank you. Our next question comes from Tahira Afzal with Keybanc.

Good morning, gentlemen.

Good morning.

Good morning, Tahira.

I guess my first question is, you had a nice closeout in essence in the fourth quarter of 2010. And you sort of maintained that sort of momentum into the first quarter, where the gross margins were concerned. When do we start to hit milestones or points of completion in your point of view? Or even utilization, where we can start seeing those 14% margins, as I mean execution goes well and everything plays as -- over time?

Well, Tahira, in the last quarter or two of 2010 and the first quarter of 2011, we indicated we were able to close out a couple of large jobs with better margins than what we had thought initially. Those jobs have now wrapped up. We are beginning to ramp up several other large jobs, that are multi-year jobs. Whenever we start a new job, we initially start booking margins based on our margin implicit in our estimate. And we don't adjust that, unless it is something really negative, where we would have to recognize a loss on the job. But if there is -- if we are performing better than our estimate, we are going to work our way into that job quite a ways, maybe 50% into the job, before we would be looking to up the margin, if in fact the productivity would justify it.

Got it, okay. And I know you folks have done an admirable job of -- strategically ramping up on your equipment just before you have seen a huge [hit of bid]. You have been -- as you look forward how do you see your cash allocation? Do you see, sort of the reason to ramp up on CapEx in equipment on the transmission side? Or are you now contemplating, well, maybe to look at areas outside of transmission, and see what your opportunities are there as well?

Well, we'd certainly look at other possibilities. The range goes all the way from a share repurchase program to considering an acquisition, to putting more money in capital, to vertically integrating the Company further. So, as we sit down with our senior management team and the Board, all of those things are always on the table, and are being kicked around. Certainly, we have had quite a focus on getting our big transmission equipment to the point where we can handle the work that has been awarded to us. So that has kind of dominated our thinking. And we are well-positioned to handle everything that has been awarded to us, but all the other possibilities are always on the table.

Got it. Thank you, Bill, and I will hop back in the queue.

Thank you. And our next question comes from Adam Thalhimer, with BB&T Capital Markets.

Good morning, Bill. Good morning, Marco.

Hi, Adam.

Obviously, the concern out there from everybody is the economy. I am just curious, the last time we went there, during an economic dip there were some large transmission projects that were economically sensitive like PASS. As you look out, Bill -- you said continued strong bidding activity for the next few years, what does a recession do to that forecast?

Certainly, this industry is not immune from that. I am very pleased that a couple of our large project awards are based upon project financing. That would be true of the work in Nevada, and it would be true of the CTT award down in Texas, both of those deals have closed on their project financing. That's probably the type of financing that is most at risk, if you have real pullback in the market, and a tightening of credit. So we are pleased to those deals that have got the project financing in place. Project financing on renewable projects continues to be a struggle for the developers. We continue to put together a lot of estimates on jobs, on wind farms, and solar work. And a very small fraction of those get out the other end, where they have their purchase power agreement in place, and have their project financing in place.

So I will put that, kind of the project finance deals in one bucket. And then the other bucket would be the traditional utility balance sheet financed deals. I think, that group of customers is a lot more resilient, than a group that needs 100% project financing. But there too, a utility, if their stock gets totally hammered, and is selling at depressed levels, may be at or below book value, their appetite will potentially be affected too. But, we have not seen that. Utilities have had access to both debt and equity. They certainly like the transmission investment in particular, because of the incentive regulation both, on allowed return and getting equipment rate base. So that -- the underpinnings of that remain strong. But no part of our business is immune from an economic severe recession.

Okay, thanks for that. My second question was on the CapEx, you guys went through a multi-year equipment buy. I think it was from 2007 to 2010, CapEx is up again in 2011. Did you just not buy enough in 2007 through 2010? And maybe the reason being you didn't -- know how successful you would be winning awards?

Right. Certainly, the number of awards that we picked up in the second half of 2010, and in the first quarter in particular of 2011, we needed additional equipment and tooling to support that. So, we -- when we were sitting here maybe a year ago, we felt really good about the outlook, thought we were going to win a number of these big awards, but we weren't so confident that we wanted to go out and spend a lot of money on capital, until we had a little more clarity as to whether or not in fact, we were going to be successful. So, fortunately, we have the time to prepare. And I believe right now we are very well-positioned on the equipment and tooling front to handle everything on our plate.

Hi, Adam just a little bit more on that. Over the last several years, we spent a lot of monies on transmission equipment build up for these large projects. This year it has kind of kicked up a little bit more, because as Bill mentioned, there is additional support equipment, not necessarily the specialty equipment on that transmission work, but more the support equipment, to get equipment to the projects.

And then last one, how should I be thinking about CapEx for 2012, is there a chance it comes down?

For 2012, and compared to the $30 million to $40 million range, I wouldn't be expecting $40 million in 2012. I would think we might have -- at the lower end of that range, but it is very dependent upon what work is in front of us. And one of the good things of having all of this equipment, is you have it and you are able to put it to use. But, as these projects finish up in late 2012 and 2013, and 2014, we will need to find a home for that equipment, make sure we have utilization, not just for a few years, where we bought it thinking we are going to be able to use this equipment for at least five, or ten years.

Okay. Thank you.

Thank you. Our next question comes from Jeff Beach with Stifel Nicolaus.

Good morning, Bill and Marco.

Good morning.

I have a couple of questions. First of all it would really helpful if you would review, I think there is one major project that you closed out on this quarter, I think, Dominion. But then to talk about these large projects you are ramping up, roughly where the status of a couple of them are, such as the one Nevada, the central Maine? You talked about hitting pretty high levels of wires stringing by the fourth quarter. But can you work through some of the projects, and where you are on the status of that? There is only five or six, so -- could you talk about it?

Yes, let me start with the Nevada work. We have not started any wire work there. We are just getting -- starting setting the structures. We have the roads, a good start on building the roads. That particular project has anchors that need to be installed, that you attach a guy wire to, to help support the tower. And we have put a lot of anchors in, and we've put a lot of foundations in, so we're really -- here in the next week or so going to substantially ramp up the structure setting. And then probably a couple of weeks after that, we will start the wire work.

The main job, as I indicated earlier on the call, I think there are 17 or 18 individual projects there. We have actually already completed a couple of them. They are smaller projects. We are starting, I believe three of those projects, that we will be working on, for the next few months. Those projects are ramping up all aspects, from foundations to clearing to a lot of the environmental work, to the wire work. So, that job is ramping up nicely. We have had some issues getting material, and getting final engineering, but our client is now providing us that information and that material. So we are pretty optimistic, that once that ramp-up is completed here in a month or so, that we will be able to maintain that steady pace for several years on the main work.

The Dominion job, that work, we have put in I think about 10% of the foundations. We are hauling -- or receiving a lot of steel. In a week or two, we will be hauling steel out on the right-of-way, and obviously you need to get the steel out there, then assembled, and then you can set the towers, and then you can start the wire work. And there will be all of those activities in the third and fourth quarter. So it is kind of where that one stands.

We do have some good size projects in the Great Plains state that we are working on. Those projects are in varying forms of construction, but progressing nicely. One of them, the wire work has already started. And we have strung quite a bit of wire, so I think we are pretty much on plan with that -- with those jobs. The work in Texas has not started. The work in Minnesota has not started, but we are busy with the large projects, and keeping up with all of our bread and butter stuff that we work on every year.

Thank you. That was helpful. The next question, it surprised me a little when you talked about being at a high utilization in your wires stringing in the fourth quarter. And I am looking out, and I know you haven't finalized yet, but if you finalize and go into CapX2020 or two major CREZ wins, and ramping up on other -- are you basically not worried about having enough wires stringing in the first half of -- capability in the first half of 2012 to perform all that work?

Jeff, you know me, I am always worried about everything. (Laughter). But I do feel -- really good about where we are today, in terms of our wires stringing equipment. We have actually -- still feel we have some additional capacity here in the near-term. And by near-term, I mean in the fourth quarter, and first and second quarter of next year, to actually take on additional large project work. So, we have some cushion there, with the wire equipment that we have in place and on order. So I'm always concerned, and always planning, and having the -- my management team look at their equipment needs, and to schedule those. But I feel pretty good about where we are positioned today.

And, last question, could you tell us how many bids you have outstanding right now on large transmission projects? And whether you expect to be bidding on additional projects before the end of this year?

Sure. Right now, we've got a couple of good size projects bids that are pending. In terms of other work that -- other major work that would be bid for the remainder of the year, there are a couple of opportunities out there that we are looking at and potentially targeting. I don't know if that is helpful, I certainly can't speculate, I think, any further on that, Jeff.

No, that is helpful. Thank you.

Thank you. Our next question comes from William Bremer with Maxim Group.

Good morning, gentlemen.

Hi, Will.

Can you give us a little color on the current pricing environment, for what you are bidding on right now?

The pricing environment on large projects is pretty good. I would not say -- I have seen a lot of evidence where it has tightened up and gotten a lot better, but I think it has firmed up. The margins available on small project work and certainly, distribution work still is very depressed and very competitive. Lots of family-owned businesses, looking to find a home for their people and equipment. So and that would be true on the distribution work, on our T&D segment, and be true entirely on our C&I work, that pricing is still very soft. But, the big projects -- I think that's firmed up. I anticipate it will get even better, but I can't point to specific examples where I can prove that that's happening.

Okay. And then, Bill, you mentioned a little bit about project financing. And we are starting to see some issues, on the renewable side, given the current state of the economy. Can you give us a little more in terms of project financing? How much of your backlog right now could potentially be at risk there?

Very little of our backlog would be at risk for lack of project financing. We have bid a lot of renewable jobs that have not materialized yet, so they are not in our backlog. And for the most part they are not in anybody's backlog, because they have not been awarded. That -- those renewable jobs, ultimately, you need something more than just tax benefits. You really -- you need a purchase power agreement with the utility, to help support the economics. And so long as natural gas prices are where they are, there is very little fundamental support. So that is why a lot of these projects are struggling, getting financing. And if it is a mandate that a customer or a state has to install a certain amount of renewable generation, irrespective of the economics, certainly, those projects go forward. But until natural gas prices go up substantially, the projects that are largely based upon just economics, are going to really struggle getting financing.

And then just a little housekeeping question for yourself, Marco. Given the SG&A ramp that we've had this quarter, in terms of dollars, not really percentage. Should that be the new baseline going forward?

Definitely, there has been an increase, when you compare to last year, William. So I would anticipate SG&A to continue at that base level, but we did have some increases in medical costs for the quarter that hopefully won't continue. But you can look at the first quarter and second quarter as a baseline.

Okay. And then my final question is on the underlying tax rate, which will you be using going forward here?

You could use roughly 38.9% is -- you should be using.

Okay, great. Thank you gentlemen.

Thank you. Our next question comes from Liam Burke with Janney Capital Markets

Thank you. Good morning, Bill. Good morning, Marco.

Good morning.

Bill, you talked about utilization rates improving as you ramp up for the big projects, and the bidding on the larger projects are better. Offsetting that you are looking at pricing pressure in C&I and distribution. As we finish 2011 going to 2012, do you anticipate any other cost headwinds in the business?

No, obviously lots can happen between now and the end of the year, but I am not anticipating the C&I market, going to get any more competitive than it is. I don't see further deterioration in the distribution business. As I'm sure you have noted, we showed a nice increase revenue-wise in our distribution business. And I'd like to say that we have reached that point, where the utilities have deferred their distribution spending as long as they can defer it. If I just look at one quarter, I can be pretty optimistic, but as we bid distribution, new alliances on the individual projects, we still see that market being very competitive.

Great. Thank you.

Thank you. Our next question comes from Craig Irwin with Wedbush Securities.

Thank you, gentlemen. Good morning, and congratulations on the strong revenue quarter.

Thanks.

One thing --most of my questions have been asked. But the one thing I wanted to dig into, was the execution and overall financial performance of the C&I side, $2 million and $700,000 give or take of -- execution that you called out in your press release, if that had actually been consistent with your original expectations? I'm guessing that we would have had a much stronger earnings quarter. Can you comment a little bit about what those jobs were, and why they were below margin, or required the negative true up at the end? And whether or not you have any similar jobs in backlog? And then just I guess a follow-up question around that is, how your gross margin and backlog for the C&I side compares to execution over the course of the last year?

I think there are several questions inherent in your comment.

Yes.

But let me address the question on the job that we had a write-down on, that we specifically called out in our release. I think the reason we moved into a regional market that was in another part of the state from one where we had a lot of employees. We -- the labor pool that we were drawing from, from this particular sub-regional market was not as productive as what we had relied on in our core market there. We should have recognized that. We should have put a discount on that productivity if you will, as we went into this market. We didn't do that. We thought we could overcome it. We thought we could bring in as many people as we wanted, from our core market.

We were restrained from doing that, because of some collective bargaining agreements. Certainly, there are lots of laid-off inside wire men. And the contractor would love to have total portability to bring in whoever we wanted and wherever we wanted to bring them in, but that is not the way it works in our world. So we were able to bring some people in, but not enough to achieve the productivity we needed. And we did not -- we were never able to get the productivity from that job that we wanted.

Understood. So, then the margins in backlog -- can you comment whether or not, the C&I jobs in backlog are similar in character to the one that disappointed you in the quarter? Or whether these are more consistent with historic execution?

When you look at backlog, I think we have always commented that the C&I group and the distribution group has been pressured with more competition out there, everybody bidding for the same amount of work. And so, as you take on new work, the margins, they are not going to be what they were historically. So you can assume that the margins you are capturing on new work, are going to be lower than what they were last year. I can't talk specifics about what that margin is, but you could assume that they are going to be lower.

Okay, then just a follow-up there, this is a segment that actually surprised me to the upside, several quarters over the last couple of years.

And that is possible, given that a lot of those -- the jobs that we had taken on previous, maybe may have been longer in duration with higher margins, better execution on them. And they kind of ramped up, and now you're moving into a new phase of the backlog, where you are doing new jobs with different margins associated with it.

I think as, in this business there's quite a lag. For instance in the fourth quarter of 2008, when the financial community is was on its knees, and really struggling, that was probably the best quarter in our Company's history. And we were booking jobs throughout 2008, and the end of 2008 at better margins than what we were, let's say booking them at in 2010. So, you have a certain lag from the environment in which you are bidding, and winning or losing work, until that actually gets executed. So -- what we are working on today, we are completing jobs that were bid -- in large part in 2010, which was a continuation of the soft market.

We are not satisfied with the performance of our C&I business. We think it is a good solid business for our Company. We think we need to improve it. We have action plans that we are trying to improve it, but clearly it needs to carry more weight than what it has carried in the first half of this year.

Great. And if I can change subjects a bit here. So on the transmission side, you have been consistently conservative about making margin comments to investors. And that is something I think everybody appreciates. With the significant bookings over the last few quarters, and the outlook for other jobs that you have basically been awarded already coming in, and potentially more that we don't already have named, over the next couple of quarters, is it fair to assume that you are being competitive on those jobs, but you are focused on profitability? And the real driver of uncertainty on the gross margin side, is more -- the smaller jobs, then the larger jobs over the next couple of quarters? Or would you say, that there is equal uncertainty, as far as the large transmission jobs that you have been awarded, and will likely be awarded, versus the smaller T&D stuff?

I'll be clear, I am always focused on profitability. I was focused on it two years ago, four years ago, so that focus has not changed. We are not bidding the competition on these jobs. We bid our costs, and it is important for our costs to be competitive. And it is important for us to be productive in executing the work, so as we put together an estimate, we can be competitive, but we are not trying to bid the competition.

So we bid things, and sometimes we are way out of the ballpark, because we don't see how we can even make a profit on the job. As I said to someone earlier, we think the margins are -- firmed up on the large transmission jobs, but they still remain soft on the small transmission jobs. They are soft on the distribution work, and certainly, they are soft on the C&I work, but we are always focused on profitability, not just revenue growth.

Great, no, that is definitely understood. So if I can follow up on that point, the utilization levels across the industry are going to go up early significantly over the next couple of quarters. You're talking about basically being at capacity by the end of the third quarter, and the fourth quarter on your stringing capacity. I believe other competitors of yours, both public and private, both the significant increases in utilization. That's going to pull men off the bench. It 's going to use a lot of linemen hours, and that is going to tighten labor markets. Is it fair to assume that, that utilization that you are looking at, and that others are suggesting, will most likely put upward pressure on margins for projects over the next several months, couple quarters?

Great hypothesis. I don't know whether it is going to bear out or not. But one of the things on the labor side. If we had full employment with distribution work, if we had a bunch of hurricanes come through here in the next two or three months, that would have a major impact on the labor market. Kind of the silver lining in the soft economy, is there are a lot of distribution linemen that don't have work. Some of those That's -- it's not that you just can't move people from one to the other, but because parts of the markets that we compete for labor in are soft, that has helped us find good people to do the transmission work. And I am sure that is also true with some of our competitors. But it would be a very different situation, if there was full employment across all aspects of utility T&D work, that is not the case.

Great. Thank you for taking my questions.

Thank you. Our next question comes from Dan Mannes with Avondale.

Good morning.

Good morning, Dan.

I will try to give you two quick ones. First, the SG&A line I don't want to belabor this, but just for a second, given the amount of work you've won, I guess I'm just wondering how leveraged your SG&A costs are, especially given the likely meaningful ramp in revenue we are going to see how much more do we need to see this go up, to manage the amount of business you guys have brought on board?

I think the SG&A -- our overhead can be leveraged up. Certainly, we have added some people in anticipation of setting up all of these jobs that we have picked up, that means safety resources, project managers, cost control accountants. We have added some SG&A that we will need for when the jobs ramp up, but I don't see -- ultimately, our SG&A is leveragable. We should see SG&A as a percentage of total revenue being less, once these projects hit full stride.

So, if I can summarize, while the number may go higher, the percentage of revenue, you do expect to start to come down?

Yes.

Or even more so than maybe it did in the second quarter?

Yes.

And then the last question, you talked about some of the bidding activity, and some of the projects you are looking at, and we appreciate that color. One area you mentioned is Bonneville Power and WAPA. I'm just wondering given some of the cutbacks in government funding, is that an area you've view at risk, or do you think those -- the projects coming out of those, are still early firm now looking forward?

Certainly the Bonneville work, they seem to -- they are not expecting alarm when we visited with them. Their issue is getting permitting and all of that, as opposed to where they are going to get the funding. So in terms of the risk, is the same. It's getting permits, and getting through all of these environmental hoops that our customers have to get through. I think -- I don't have as much visibility on WAPA, that's a little more decentralized -- and WAPA covers a much wider area, so I don't have as much color on that, Dan.

No problem. Thanks.

Thank you. Our next question comes from Zach Larkins with Stephens.

Hi, guys, this is Chris [Gabien] for Zach Larkins at Stephens. Thanks for taking my call. I was hoping that you could talk to us a little bit more about the macro environment, specifically any delays that you might be seeing due to the environment? And also are you anticipating any delays in the future?

We are experiencing some delays on some of the jobs, they are not unanticipated. Every job has these environmental problems, in dealing with the local Department of Transportation, and archaeological issues. So this is not atypical, but we're -- there is no big delays that we have seen, that would be totally uncharacteristic from what these projects always see.

Okay. Now are you able to provide any geographic color to that at all, in terms of delays that you have seen?

We have been slowed down a little bit in Nevada. There is more archaeological sites that have to be identified. And we remediated than I think what our client anticipated. But it is within the range of reasonableness on a project like that. They are making very effective progress on remediating all of those archaeological sites. And there is also a fair number of critters that we need to work around in Nevada. I think we are making good progress, working around all the birds and the turtles, and other animals that we need to deal with.

Okay. That is great. Thanks a lot for your time guys.

Thank you. At this time I'm showing no further questions. I would like to turn the call back over to Mr. Bill Koertner for closing remarks.

I appreciate everybody's attention this morning. Obviously, we all have a lot on our mind, as we follow the debt ceiling and all the things going on in Washington, and now spilling over into the financial markets. I think we are very excited about the opportunities in our markets. We have a strong management team, and employees. You have got the equipment resources and tooling to do this work. We certainly appreciate the our stockholders have shown in us. And with that, I would like to close the call and say, I look forward to visiting with you in the quarter. So, everybody, have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a great day.