MasTec, Inc. — 2018 Form 10-K Summary
Business context and reporting period
MasTec is a North American infrastructure construction and services company, operating in Communications, Oil and Gas, Electrical Transmission, Power Generation and Industrial, and Other. This 10-K covers the fiscal year ended December 31, 2018; quarterly figures below identify the fourth quarter where relevant.
Financial and operating results
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $6.909 billion | $6.607 billion |
| Net income | $259.2 million | $348.9 million |
| Net income attributable to MasTec | $259.7 million | $347.2 million |
| Diluted EPS | $3.26 | $4.22 |
| EBITDA, a non-GAAP measure | $660.8 million; 9.6% margin | $620.9 million; 9.4% margin |
| Adjusted EBITDA, a non-GAAP measure | $721.0 million; 10.4% margin | $645.6 million; 9.8% margin |
| Cash from operating activities | $530.0 million | $144.1 million |
- Revenue rose 5%; acquisitions contributed $154 million and organic revenue grew approximately 2%. Costs of revenue, excluding depreciation and amortization, fell to 86.0% of revenue from 87.0%.
- Net income declined despite higher revenue, reflecting the absence of the prior-year $120.1 million non-cash tax benefit from the 2017 Tax Act, a higher 2018 effective tax rate (29.0% versus 6.2%), and a $47.7 million goodwill impairment. Adjusted net income was $300.6 million and adjusted diluted EPS was $3.77, versus $241.9 million and $2.92 in 2017; these are non-GAAP measures.
- Cash from operations increased by $386 million, primarily due to favorable working-capital changes. Capital expenditures were $180 million. Cash and equivalents were $27.4 million at year-end, and working capital was $885 million.
- Total debt was $1.407 billion, versus $1.369 billion in 2017. Revolving credit availability was approximately $555 million; the company reported compliance with debt covenants. Its $400 million of 4.875% senior notes mature in 2023.
- Year-end 18-month backlog was $7.690 billion, up from $7.087 billion a year earlier. Management expected to realize approximately 80% in 2019. Backlog includes estimated work under agreements that often have no minimum purchase commitment and can be canceled.
Material changes versus comparable periods
- Communications revenue increased 5% to $2.557 billion; segment EBITDA rose to $290 million (11.4% margin) from $247 million (10.2%). Growth reflected wireless and fiber work and storm restoration, partly offset by lower install-to-the-home revenue.
- Oil and Gas revenue decreased 6% to $3.289 billion, mainly due to timing and regulatory and hurricane-flooding disruptions to large pipeline projects. Segment EBITDA increased to $452 million (13.7% margin) from $402 million (11.5%), reflecting improved project efficiencies, closeouts and mix.
- Power Generation and Industrial revenue more than doubled to $665 million, driven by renewable project activity and acquisitions; EBITDA increased to $40 million, though its margin declined to 6.1% from 7.5%.
- Electrical Transmission revenue rose 5% to $397 million, but EBITDA decreased to $10 million from $18 million, with lower project efficiencies and less favorable mix.
- Fourth-quarter revenue was $1.918 billion versus $1.603 billion. Net income was $31.8 million versus $160.7 million, and diluted EPS was $0.41 versus $1.95. The comparison reflects the 2018 goodwill impairment and the substantial 2017 tax benefit.
Outlook, commentary, risks and unusual items
- Management cited expected opportunities in 5G and fiber deployment, pipeline capacity and maintenance, grid upgrades, and renewable and other power projects. This is qualitative outlook, not a quantified earnings forecast.
- Management estimated 2019 capital expenditures of $100–$110 million, net of asset disposals of $75–$85 million, plus $150–$160 million of equipment purchases through leases or other financing. It expected available operating cash, credit-facility borrowings and cash balances to cover anticipated needs for at least 12 months.
- Fourth-quarter 2018 included a $47.7 million pre-tax, non-cash goodwill impairment in a Canadian Oil and Gas reporting unit. Another Oil and Gas reporting unit’s estimated fair value exceeded carrying value by only approximately 5%.
- At year-end, the company included approximately $56 million of unresolved change orders and claims in contract transaction prices, primarily for Oil and Gas pipeline projects. If not approved, some previously recognized revenue could be reduced or reversed.
- Customer concentration is material: AT&T contributed 23% of 2018 revenue, EQT 20%, and Energy Transfer affiliates 14%. The top ten customers accounted for 72% of revenue. Many contracts and master service agreements permit cancellation on short or no notice.
- Key risks include project-cost estimation and execution, weather and seasonality, customer spending and collection risk, commodity and regulatory changes, labor availability and cost, safety and environmental liabilities, self-insurance and multiemployer pension exposure, cybersecurity, and acquisition integration. Self-insured claims liabilities were $108.9 million at year-end; several participating multiemployer pension plans were underfunded, with potential future contributions not estimable.
- The company repurchased 7.2 million shares for approximately $319 million in 2018. The filing reports $118 million of estimated earn-out liabilities, including contingent future amounts. Cash dividends are not currently anticipated.
- Adoption of the new lease standard in 2019 was expected to add approximately $200–$230 million of operating-lease assets and liabilities to the balance sheet, without a material effect on earnings or cash flows.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective; the acquired Lemartec entity was excluded from the internal-control assessment.
Important facts for investors to verify
- Whether the $7.690 billion backlog converts to revenue and earnings on schedule, especially the portion based on cancellable agreements.
- Progress, margins and final customer approval for major pipeline projects, including the $56 million of unresolved claims and change orders.
- Oil and Gas unit performance and assumptions supporting goodwill recoverability after the impairment.
- Cash conversion and working-capital trends, given the rise in accounts receivable to $1.924 billion and the reliance on favorable working-capital changes for 2018 operating cash flow.
- Debt, variable-rate interest exposure, capital commitments and cash deployed for share repurchases; a 100-basis-point rate increase was estimated to add about $10 million of annual interest expense.
- Customer concentration, related-party transactions, earn-out obligations, self-insurance reserves and potential multiemployer pension contributions.