MYR Group Inc. — 2018 Form 10-K
Business and reporting period. Specialty electrical contractor serving electric utility infrastructure and commercial and industrial markets in the U.S. and western Canada. The fiscal year ended December 31, 2018; comparisons below are primarily with 2017. The filing also reports fourth-quarter results.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1.531 billion | $1.403 billion |
| Gross profit / margin | $167.1 million / 10.9% | $125.0 million / 8.9% |
| Operating income / margin | $50.3 million / 3.3% | $29.6 million / 2.1% |
| Net income attributable to MYR Group | $31.1 million | $21.2 million |
| Diluted EPS | $1.87 | $1.28 |
| Operating cash flow | $84.8 million | $(9.2) million |
| Capital expenditures | $50.7 million | $30.8 million |
| Year-end cash | $7.5 million | $5.3 million |
| Total debt | $89.8 million | $79.0 million |
| Working capital | $191.8 million | $191.2 million |
| Backlog | $1.147 billion | $679.1 million |
Revenue rose 9.1% year over year. C&I revenue increased 21.8% to $638.1 million, largely reflecting the Huen acquisition and organic growth; T&D revenue increased 1.6% to $893.1 million. T&D and C&I operating income was $57.2 million and $34.1 million, respectively. Fourth-quarter revenue was $446.3 million, net income attributable to MYR Group was $10.7 million, and diluted EPS was $0.64.
Management attributed the higher gross margin primarily to better efficiency, fleet utilization and organic expansion, as well as the prior-year impact of write-downs on three projects. Higher SG&A, acquisition-related costs, bonuses and employee costs partly offset the improvement. Operating cash flow improved by $94.0 million, helped by favorable working-capital movements and higher earnings. Investing cash use increased to $93.2 million, including $47.1 million for Huen and $50.7 million of capital expenditures.
Material changes and notable items
- Acquired substantially all assets of the Huen Companies on July 2, 2018, expanding C&I operations in Illinois, New Jersey and New York. Huen contributed approximately $69.0 million of 2018 revenue. Purchase consideration was subject to net-asset adjustments; the company recorded $11.2 million of estimated adjustments and $3.9 million of contingent consideration expense related to contract margin guarantees.
- Adopted ASC 606 using the modified retrospective method. Adoption increased opening retained earnings by $0.7 million, net of tax, and increased 2018 revenue by $0.2 million; prior-year income-statement results were not restated.
- Changes in project estimates reduced 2018 gross margin by 0.7 percentage points and operating income by $10.5 million. Management cited low productivity on several projects, including startup costs and weather effects. Separately, Huen-related contract estimate changes contributed $3.9 million of gross-margin benefit, with an offsetting amount recognized in other expense.
- The effective tax rate was 27.3%, versus 14.1% in 2017. The prior-year rate benefited from the Tax Act’s deferred-tax remeasurement; 2018 was also affected by losses in certain Canadian operations that the company could not use.
- Backlog rose substantially, but management cautions it is not a standalone measure of expected revenue. Remaining performance obligations were $1.063 billion, of which $187.4 million was estimated not to be recognized within 12 months.
Liquidity, debt and commitments
At year-end, MYR had $58.3 million outstanding under its $250 million revolving facility, $31.5 million of equipment notes, and $21.2 million of letters of credit. The company reported $170.5 million of borrowing availability and compliance with credit-facility covenants. Equipment notes bear fixed rates of approximately 3.97%–4.23%; revolving borrowings carry variable rates. Management said cash, facility availability and operating cash flow were expected to cover operating needs, debt service, capital expenditures and potential acquisitions, while noting that large projects or acquisitions could require additional capital.
Other commitments include $17.4 million of operating lease obligations, $2.7 million of capital lease obligations, and $15.0 million of equipment purchase obligations. Surety bonds had an aggregate original face amount of $614.9 million, with estimated remaining project costs of $324.7 million. The company also had a $20 million share-repurchase authorization, with no purchases under the new program during 2018. It has not paid cash dividends and did not expect to do so.
Outlook, risks and contingencies
Management expressed optimism about utility infrastructure investment and C&I activity, citing the aging electric grid, reliability and congestion needs, renewable-energy connections, distribution investment and improving construction indicators. It expected continued strong small- and medium-sized transmission bidding, incremental distribution opportunities and improved C&I bidding in 2019. Large-project awards and construction timing remain uncertain; significant construction on large transmission projects awarded in 2019 might not begin until 2020. No specific revenue or earnings guidance was provided.
- Results are exposed to economic and customer spending cycles, competitive bidding, seasonality and severe weather. Fixed-price and unit-price contracts create cost-overrun and margin risk; project estimates, claims and change orders can materially affect recognized revenue and profit.
- Labor availability, safety incidents, union and multi-employer pension obligations, subcontractor performance, permitting and right-of-way delays, and equipment availability may constrain execution or increase costs.
- Customer concentration remains relevant: the top ten customers generated 32.9% of 2018 revenue, down from 40.4%; no single customer exceeded 10% in 2018. Many MSAs do not guarantee work volumes and may be terminated on 30–90 days’ notice.
- Variable-rate debt exposes the company to interest-rate risk; a sustained 1 percentage-point increase on revolving debt outstanding at year-end was estimated to reduce annual pretax income and cash flow by approximately $0.6 million.
- Legal claims, including ordinary-course disputes and legacy asbestos-related claims, were not expected by management to have a material adverse effect; the company noted outcomes could change if facts and circumstances change. Insurance reserves, environmental liabilities and bond or indemnity obligations are additional contingencies.
Important facts for investors to verify
- Whether improved margins and operating cash flow are sustainable, particularly given the $10.5 million adverse impact from 2018 project estimate changes.
- How Huen performs, including final purchase-price adjustments, contingent margin guarantees and integration costs.
- Conversion, timing and profitability of the $1.147 billion backlog and $1.063 billion of remaining performance obligations.
- Working-capital and contract-asset collection trends: contract assets were $160.3 million and accounts receivable were $288.4 million at year-end.
- Debt, borrowing availability, covenant headroom, variable-rate exposure and capacity for equipment investment or further acquisitions.
- Project execution, safety, labor, insurance and multi-employer pension exposures, along with the status of legal and environmental contingencies.