MYR Group Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; filed March 3, 2016. MYR Group provides electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments in the U.S. and Canada. This is an annual filing; it also reports fourth-quarter results.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $1,061.7 million | $944.0 million |
| Gross profit / margin | $122.3 million / 11.5% | $132.4 million / 14.0% |
| Operating income / margin | $44.8 million / 4.2% | $58.4 million / 6.2% |
| Net income | $27.3 million | $36.5 million |
| Diluted EPS | $1.30 | $1.69 |
| Operating cash flow | $43.0 million | $55.0 million |
| Capital expenditures | $46.6 million | $39.0 million |
| Cash at year-end | $39.8 million | $77.6 million |
| Working capital | $123.6 million | $141.9 million |
| Long-term debt | None | None |
Revenue grew 12.5%, while net income fell about 25%. T&D revenue was $794.9 million, up 13.6%, and C&I revenue was $266.8 million, up 9.2%. Segment operating margins declined: T&D to 7.9% from 10.8%, and C&I to 5.1% from 6.8%. Backlog increased to $450.9 million from $433.6 million.
Liquidity included $155.7 million available under the revolving credit facility at year-end, net of outstanding letters of credit; the company had no borrowings and was in compliance with its covenants. The $175 million facility was due to expire December 21, 2016. Cash fell by $37.8 million, reflecting operating cash generation offset by capital spending, acquisitions and share repurchases.
Changes, drivers and unusual items
- Revenue growth reflected increased customer spending, geographic expansion and the ESB and HCL acquisitions. ESB was acquired in April and HCL in November 2015.
- Margins weakened with a shift away from large, multi-year transmission work toward shorter-duration projects, increased competition and lower bid margins, labor turnover and productivity issues, rework, severe weather, and expansion costs. FY 2014 margins had benefited from favorable closeouts and claims/change orders on large projects.
- Revisions to estimates on projects added approximately $5.9 million to 2015 operating income, $3.6 million to net income and $0.17 to diluted EPS. Comparable 2014 estimate revisions added $18.4 million to operating income and $0.54 to diluted EPS.
- Operating cash flow declined by $12.0 million year over year. Days sales outstanding rose to 66.7 from 59.8, which management estimated increased working capital needs by approximately $20.3 million, principally due to collection timing, closeouts, change orders and billing processes.
- The company spent $27.6 million on share repurchases in 2015. In February 2016, the board increased the program’s total authorization to $142.5 million and extended it through April 30, 2017.
Outlook, risks and contingencies
Management expected continued bidding activity in small- and medium-sized T&D projects in 2016, with several large multi-year transmission projects expected to be bid in 2016–2017; significant construction on projects awarded in 2016 might not begin until 2017. Management anticipated continued improvement in C&I opportunities and margins in 2016. These are expectations, not quantified earnings or revenue guidance. The company planned lower 2016 capital expenditures and greater use of leasing, while continuing to invest in specialty equipment and personnel.
Key risks include competitive pricing and project cost overruns; contract delays, cancellations and uncertain backlog conversion; dependence on utility and customer spending; labor availability and union-related obligations; weather and seasonality; customer concentration (top ten represented 44.6% of revenue); working-capital and collection needs; bonding and credit-facility renewal; self-insured claims; and multi-employer pension exposure. Percentage-of-completion accounting relies on estimates that can reduce or reverse previously recognized profit. Several pension plans were classified as critical or endangered, though the company reported no known significant liability. Routine litigation was not expected to have a material effect; a Superfund-related matter settled in 2015 for a company contribution of $230,000, funded largely by insurers.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of year-end.
Investor verification priorities
- Assess whether project mix, productivity and bidding competition continue to pressure margins, and whether 2015 estimate revisions recur.
- Track receivable collections, DSO, contract assets and liabilities, and operating cash flow conversion.
- Verify backlog awards, cancellations and conversion to revenue; the filing cautions that backlog is not a standalone forecast.
- Monitor renewal and terms of the credit facility due in December 2016, bonding capacity and planned share repurchases.
- Review integration and performance of ESB and HCL, and potential costs from labor, insurance and multi-employer pension plans.