MYR Group Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; quarterly figures below are for the three months ended December 31. MYR provides specialty electrical construction services through Transmission and Distribution (T&D) and Commercial and Industrial (C&I) segments in the United States and Canada.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $1,142.5 million | $1,061.7 million |
| Gross profit / margin | $134.7 million / 11.8% | $122.3 million / 11.5% |
| Operating income / margin | $38.8 million / 3.4% | $44.8 million / 4.2% |
| Net income / net margin | $21.4 million / 1.9% | $27.3 million / 2.6% |
| Diluted EPS | $1.23 | $1.30 |
| Operating cash flow | $54.5 million | $43.0 million |
| Capital expenditures | $25.4 million | $46.6 million |
| Cash at year-end | $23.8 million | $39.8 million |
| Long-term debt at year-end | $59.1 million | None |
| Working capital | $129.3 million | $123.6 million |
Fourth-quarter 2016 revenue was $343.7 million, gross profit $41.9 million, net income $7.8 million and diluted EPS $0.48. In fourth-quarter 2015, these were $271.2 million, $32.6 million, $5.9 million and $0.29, respectively.
Year-end backlog was $688.8 million, up from $450.9 million; management cautions that backlog is not a stand-alone predictor of future revenue or profit. 2016 EBITDA, a company-defined non-GAAP measure, was $78.8 million versus $83.0 million.
Changes and drivers
- Annual revenue rose 7.6%, reflecting organic and acquisition growth, partly offset by declines in some geographic markets. T&D revenue increased 3.0% to $819.0 million; C&I revenue increased 21.3% to $323.5 million.
- Gross margin improved to 11.8% from 11.5%, with better job performance and favorable project close-outs partly offset by weather, lower productivity, and costs on pending claims and change orders.
- Net income fell to $21.4 million from $27.3 million. SG&A rose $17.2 million to $96.4 million, including costs supporting growth, higher personnel and incentive costs, and $1.0 million related to activist-investor activity. The effective tax rate rose to 44.1% from 38.4%.
- Segment operating margins weakened: T&D was 7.7% versus 7.9%; C&I was 4.3% versus 5.1%. Corporate expense increased.
- Operating cash flow improved, but cash declined as the Company used $101.5 million for share repurchases and funded acquisitions and investment. It acquired Western Pacific Enterprises (WPE) for approximately $12.1 million in October 2016.
Liquidity, debt and capital allocation
In June 2016, MYR entered a five-year, $250 million revolving credit facility, with an option to seek up to $100 million of additional commitments. At year-end, $59.1 million was drawn and management reported $167.2 million of borrowing availability. The facility is secured and includes a maximum leverage ratio of 3.0 and minimum interest coverage ratio of 3.0. Outstanding letters of credit were $23.7 million. The Company repurchased approximately $101.5 million of shares during 2016; $20.0 million remained authorized at year-end. It has not paid cash dividends and does not expect to do so presently.
Outlook, risks and notable items
- Management anticipated continued bidding in small and medium T&D work in 2017 and significant large-transmission bidding in 2017–2018, while noting awards and construction timing are difficult to predict. It expected C&I bidding opportunities to improve in 2017. No numerical earnings or revenue guidance was provided.
- Management cited grid aging, reliability investment, renewable-energy connections, economic recovery and outsourcing needs as potential demand drivers. Competition, project timing, regulatory approvals and right-of-way permits could constrain results.
- New-market initiatives were progressing more slowly than expected in some areas, leaving uncovered fixed costs. Management said it expected lower repurchases than in 2015 and 2016.
- Contract revenue and profit rely on percentage-of-completion estimates. 2016 project estimate revisions reduced gross margin by 0.2 percentage points, operating income by $2.6 million, net income by $1.4 million and diluted EPS by $0.08. Pending claims and change orders may affect later results.
- Key risks include fixed-price cost overruns, labor availability and safety, weather and seasonality, customer concentration (top ten customers generated 46.4% of revenue), credit and collection risk, bonding capacity, union pension obligations, and variable interest rates. The Company reported ordinary-course litigation and historic asbestos claims, but did not expect material adverse outcomes; it stated that the likelihood of a material adverse outcome from asbestos claims was remote.
- CEO Richard S. Swartz, Jr. became CEO on January 1, 2017; William A. Koertner became executive chairman. Auditors issued unqualified opinions on the financial statements and internal control; the WPE acquisition was excluded from the 2016 internal-control assessment.
Investor verification points
- Track whether backlog converts to profitable work, especially the Cross Texas Transmission project and WPE-related work.
- Review the resolution and recoverability of pending claims/change orders and the effect of future contract-cost estimate changes.
- Monitor growth-market execution, segment margins, SG&A and whether acquisition benefits exceed integration and operating costs.
- Check cash conversion, receivables and contract assets, share-repurchase pace, debt usage and compliance with credit-facility covenants.
- Assess changes in union pension funding obligations, bonding capacity, safety performance, and exposure to customer and project concentration.