MYR Group Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 7, 2018. This is an annual report, not a standalone fourth-quarter filing. MYR Group provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments in the U.S. and western Canada.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1.403 billion | $1.142 billion |
| Gross profit / margin | $125.0 million / 8.9% | $134.7 million / 11.8% |
| Operating income / margin | $29.6 million / 2.1% | $38.8 million / 3.4% |
| Net income | $21.2 million | $21.4 million |
| Diluted EPS | $1.28 | $1.23 |
| Operating cash flow | $(9.2) million | $54.5 million |
| Capital expenditures | $30.8 million | $25.4 million |
| EBITDA (non-GAAP) | $65.8 million | $78.8 million |
At year-end, cash was $5.3 million, working capital was $191.2 million, and long-term debt was $79.0 million, versus $23.8 million, $146.7 million and $59.1 million, respectively, a year earlier. The company reported $150.1 million of borrowing availability under its $250 million revolving credit facility and was in compliance with its covenants. It also had $20.9 million of letters of credit outstanding. Variable-rate borrowings expose the company to rate risk; management estimated a sustained 1% rate increase would reduce annual pretax income and cash flow by about $0.8 million.
Year-end backlog was $679.1 million, down from $688.8 million. Management cautions that backlog is not a stand-alone indicator of expected revenue because awards, work releases, cancellations and contract mix affect realization.
Material changes versus FY2016
- Revenue rose 22.8%, driven by higher C&I customer spending, the late-2016 WPE acquisition, large transmission projects and increased distribution work. C&I revenue grew 62.0% to $523.9 million; T&D revenue rose 7.4% to $879.4 million.
- Profitability weakened: gross margin fell to 8.9% and operating income declined 23.7%. T&D operating income fell 37.5% to $39.6 million, while C&I operating income increased 79.9% to $25.0 million.
- Management cited $9.2 million of project write-downs: $4.8 million on two Midwest projects affected by weather and access/productivity costs, and $4.4 million on a Canadian T&D project affected by delays and schedule extensions. Changes in project estimates reduced operating income by $10.4 million overall.
- Operating cash flow swung from $54.5 million provided to $9.2 million used, mainly reflecting working-capital timing, higher receivables and lower accrued liabilities. Cash declined by $18.5 million during 2017.
Outlook, risks and unusual items
- Management expected continued bidding activity in 2018 for small and medium transmission/distribution work and improved C&I opportunities. It saw multiple large transmission projects as potential bids in 2018–2019, while warning that award and construction timing is uncertain and substantial construction on large awards could begin in 2019. No numerical revenue or earnings guidance is provided.
- Management cited grid aging, utility reliability investment, renewable integration, economic recovery and post-hurricane system strengthening as potential demand drivers. Competition and volatile project awards may affect utilization and margins.
- The Tax Act produced a provisional $7.8 million net tax benefit in 2017, including a deferred-tax remeasurement; management said its analysis was incomplete and could be adjusted. The benefit represented $0.48 per basic share and $0.47 per diluted share. FY2017’s 14.1% effective tax rate compares with 44.1% in 2016.
- Other material exposures include fixed-price contract cost overruns, change-order and claim recoverability, percentage-of-completion estimates, weather and project delays, customer concentration (top 10 customers were 40.4% of revenue; one customer was 10.7%), skilled-labor availability, union and multi-employer pension obligations, safety and insurance claims, bonding capacity, and customer termination rights. About 91% of craft employees were union-represented.
- Outstanding surety bonds had an original face amount of approximately $497.0 million, with estimated remaining completion costs of $144.5 million. Management did not expect ordinary-course litigation, including legacy asbestos-related claims, to have a material adverse effect; outcomes remain uncertain.
- The company reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued unqualified opinions on the 2017 financial statements and internal controls.
Important facts for investors to verify
- Whether the project write-downs and estimate-related losses are contained, and whether pending Canadian project claims and change orders are recovered.
- Whether working capital converts to cash and operating cash flow returns to positive levels, given the sharp 2017 reversal and low year-end cash balance.
- Whether margins improve as the revenue mix shifts, especially in T&D, and whether C&I growth translates into sustained operating profit.
- How the provisional Tax Act accounting changes after final analysis and tax filings.
- Backlog conversion, large-project award timing, customer concentration, labor availability, bonding capacity and compliance with credit-facility covenants.