MYR Group Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 4, 2020. MYR Group provides specialty electrical construction and maintenance services in the United States and western Canada through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $2,071.2 | $1,531.2 | +35.3% |
| Gross profit / margin | $214.2 / 10.3% | $167.1 / 10.9% | +28.2% profit; margin down 0.6 points |
| Operating income / margin | $57.2 / 2.8% | $50.3 / 3.3% | +13.6% income; margin down 0.5 points |
| Net income attributable to MYR Group | $37.7 | $31.1 | +21.2% |
| Diluted EPS | $2.26 | $1.87 | +20.9% |
| Operating cash flow | $64.9 | $84.8 | Down $19.9 |
| Capital expenditures | $57.8 | $50.7 | Up $7.1 |
| Cash and working capital at year-end | $12.4 / $242.4 | $7.5 / $191.8 | Working capital increased |
| Total debt at year-end | $165.8 | $89.8 | Up $76.0 |
Revenue growth reflected higher volumes in both segments and the acquisitions of Huen (completed in 2018) and CSI (completed July 2019). Net income increased, while consolidated gross and operating margins declined. The effective tax rate was 28.2%, compared with 27.3% in 2018. Interest expense increased to $6.2 million from $3.7 million, primarily due to acquisition and working-capital borrowing.
Cash used in investing activities was $133.5 million, including $79.7 million for CSI and $57.8 million of capital expenditures; financing activities provided $73.4 million. The company reported $260.6 million of unused revolver availability at year-end. Its $375 million, five-year credit facility had $103.8 million drawn and $10.6 million of letters of credit outstanding. MYR was in compliance with its financial covenants. Revolver borrowings are variable-rate; management estimated that a sustained 1-point rate increase would reduce annual pretax income and cash flow by approximately $1.0 million.
Segments, backlog, and material changes
- T&D: Revenue was $1,134.4 million, up 27.0%; segment operating income was $73.6 million, up 28.5%, with margin edging up to 6.5% from 6.4%. Increased small- and medium-sized transmission and distribution work drove growth.
- C&I: Revenue was $936.7 million, up 46.8%, including acquisition contributions; segment operating income declined 10.6% to $30.5 million and margin fell to 3.3% from 5.3%. Project estimate changes, overtime and material delays, labor inefficiencies, higher acquired-intangible amortization, and the prior-year favorable claim settlement weighed on results.
- Backlog: Estimated backlog was $1,499.2 million at year-end, versus $1,146.6 million a year earlier. Remaining performance obligations were $1,409.0 million; $306.5 million was estimated not to be recognized within 12 months. Management expects most remaining performance obligations to be recognized within 24 months. Backlog is not a stand-alone forecast and may be affected by cancellations, scope changes, and the company’s calculation method.
- Fourth quarter: Revenue was $571.1 million versus $446.3 million in Q4 2018; net income attributable to MYR Group was $12.8 million versus $10.7 million. Diluted EPS was $0.76 versus $0.64.
Outlook, risks, and unusual items
Management was optimistic about 2020 activity in both markets, citing grid age and reliability needs, renewable-energy connections, distribution investment, and improving C&I bidding opportunities. It expected continued long-term transmission growth but emphasized that large-project awards and construction timing are variable; significant construction on large projects awarded in 2020 might not begin until 2021. No specific revenue or earnings guidance was provided.
- Gross margin was affected by inclement weather, material delays, and project labor inefficiencies. Changes in estimates reduced 2019 operating income by $11.7 million, net income attributable to MYR Group by $7.5 million, and diluted EPS by $0.45. The company was negotiating reimbursement for certain project costs.
- Revenue recognition relies on cost-to-cost estimates of contract progress and completion costs; unfavorable revisions can reduce or reverse previously recognized earnings. At year-end, $35.9 million of revenue tied to significant change orders or claims was included in contract assets; ultimate collection could differ materially from the estimate.
- In July 2019, MYR acquired substantially all CSI assets for approximately $80.7 million, funded with credit-facility borrowings. CSI contributed $137.7 million of 2019 revenue and a $1.5 million pretax loss, net of margin-guarantee adjustments and intangible amortization. Future CSI margin-guarantee adjustments, if any, were expected through 2020.
- Other key exposures include competitive bidding and fixed-price cost overruns, customer termination rights and payment/collection risk, labor availability and union obligations, weather and seasonality, safety and insurance claims, bonding capacity, joint-venture performance, and variable-rate debt. Approximately 90% of craft employees were union members. Outstanding performance and payment bonds had an original face amount of $902.0 million, with estimated remaining completion costs of $399.2 million.
- Management said ordinary-course litigation was not expected to have a material adverse effect, while noting outcomes could change with future facts. Management and the auditor concluded internal control over financial reporting was effective; the assessment excluded CSI, acquired during 2019.
Important facts for investors to verify
- Whether margins and project profitability recover, particularly in C&I, and whether open reimbursement claims and change orders are collected.
- How acquired CSI and Huen operations perform, including remaining margin guarantees, contingent payments, and integration costs.
- Whether backlog converts to revenue and cash as expected, considering cancellation rights and the distinction between backlog and remaining performance obligations.
- Debt, interest expense, revolver availability, covenant headroom, and the cash demands of capital spending and future acquisitions.
- Growth in accounts receivable and contract assets, insurance reserves, bonding exposure, and any developments in legal, pension, safety, or other contingencies.