MYR Group Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. MYR Group provides electrical infrastructure construction and maintenance services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments in the United States and Canada.
Financial results and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $944.0 million | $902.7 million |
| Gross profit / margin | $132.4 million / 14.0% | $124.9 million / 13.8% |
| Operating income / margin | $58.4 million / 6.2% | $55.6 million / 6.2% |
| Net income / diluted EPS | $36.5 million / $1.69 | $34.8 million / $1.61 |
| EBITDA | $92.0 million | $84.8 million |
| Cash from operations | $55.0 million | $95.1 million |
| Capital expenditures | $39.0 million | $42.7 million |
| Cash and working capital at year-end | $77.6 million / $141.9 million | $76.5 million / $119.6 million |
| Long-term debt at year-end | None | None |
Operating cash flow fell by $40.1 million year over year, principally reflecting changes in contract-related balances and accounts payable. The company spent $16.4 million on share repurchases and reported $155.7 million of borrowing availability under its $175 million revolving facility, with $19.3 million in letters of credit outstanding. It was in compliance with credit covenants. The company has not paid cash dividends and expects to retain funds for its business.
Material changes and segment performance
- Revenue rose 4.6%; net income increased 5.1%. Gross margin improved modestly, while operating margin was unchanged.
- T&D revenue declined 3.2% to $699.6 million as several large transmission projects neared completion. Segment operating income fell to $75.4 million from $81.4 million, and operating margin declined to 10.8% from 11.3%, partly because of lower equipment utilization and higher repair costs.
- C&I revenue grew 35.5% to $244.4 million, supported by broader activity and improved market conditions. Segment operating income rose 58.7% to $16.5 million; margin increased to 6.8% from 5.8%.
- Backlog increased to $433.6 million at year-end from $326.1 million. Management cautions that backlog may be cancelled, may not be profitable, and is not a standalone indicator of future revenue.
- Top ten customers represented 46.5% of revenue, down from 57.8% in 2013; no single customer exceeded 10% of annual revenue in 2014.
Fourth-quarter 2014 revenue was $251.0 million, gross profit $42.1 million, and net income $14.1 million, versus $254.6 million, $33.8 million, and $10.0 million, respectively, in fourth-quarter 2013. Diluted EPS was $0.66 versus $0.46. The filing attributes higher fourth-quarter gross profit in part to claim settlements and change orders.
Outlook, risks, and unusual items
- Management expected 2015 capital expenditures to be similar to 2014’s $39.0 million. It anticipated continued C&I improvement and bidding activity in small- and medium-sized T&D projects, and saw potential for large transmission awards in 2015–2016. Management noted that award and construction timing is uncertain; substantial work on large projects awarded in 2015 might not begin until 2016. No specific revenue or earnings guidance was provided.
- Revisions to estimated costs on several large transmission projects contributed approximately $18.4 million of additional operating income, $11.6 million of additional net income, and $0.54 of diluted EPS in 2014. Management cautioned that comparable benefits are unlikely to recur to a similar extent.
- A $2.3 million legal reserve recorded in 2013 was reversed in 2014 after a Florida appeals court overturned the underlying judgment and ordered a new trial. The appeal decision was issued February 27, 2015, before the report was filed; the company said compensatory damages, if any, were expected to be covered by insurance.
- A Wisconsin Superfund-site lawsuit alleges at least $140 million in damages against multiple defendants, including a MYR subsidiary. The subsidiary’s potential share cannot currently be assessed; insurance is expected to reimburse some defense costs and possibly some liability.
- Key risks include project cost overruns and estimate revisions under percentage-of-completion accounting, competitive pricing, project delays and cancellations, customer concentration and collection risk, labor availability and union pension obligations, safety and insurance exposure, bonding capacity, and cyclical or weather-affected demand. Several multi-employer pension plans were reported as critical or endangered; the company said it was not aware of significant current liabilities, but future obligations are uncertain.
- The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- How much 2015 earnings and margins depend on project estimate revisions, claim settlements, and change orders, and whether those benefits recur.
- Execution, profitability, and timing of the $433.6 million backlog, particularly large transmission awards and projects nearing completion.
- Whether cash generation improves after the sharp year-over-year decline in operating cash flow.
- Potential exposure from the Ashland Superfund litigation, multi-employer pension plans, insurance claims, and required bonds and letters of credit.
- Progress in C&I expansion and whether T&D equipment utilization and segment margins recover.