MasTec, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
MasTec is a North American infrastructure construction company serving communications, oil and gas, electrical transmission, and power generation and industrial markets. This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Management notes that first-quarter results are typically seasonally lower and may vary with weather, project timing, and customer spending.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $1,396.8 million | $1,158.2 million |
| Income before taxes | $37.6 million | $68.0 million |
| Net income attributable to MasTec | $26.6 million | $41.0 million |
| Diluted EPS | $0.32 | $0.50 |
| EBITDA (non-GAAP) | $104.6 million; 7.5% margin | $123.5 million; 10.7% margin |
| Adjusted EBITDA (non-GAAP) | $107.8 million; 7.7% margin | $134.8 million; 11.6% margin |
| Cash from operating activities | $83.5 million | $154.2 million |
Costs of revenue excluding depreciation and amortization were 88.6% of revenue, versus 83.8% a year earlier. The filing does not present a separate operating income line. Cash and cash equivalents were $40.2 million at March 31, 2018. Working capital was approximately $860 million.
Total debt, net of deferred financing costs, was $1.430 billion, including $86.6 million current and $1.344 billion long-term. The company had $514.5 million of revolving borrowing availability and was in compliance with debt covenants. Investing activities used $30.9 million and financing activities used $53.5 million. The company repurchased approximately 2.0 million shares for $98.4 million during the quarter; approximately $8 million was settled in April.
Material changes versus prior comparable period
- Revenue rose 21% to $1.397 billion; organic growth was approximately 14%, with acquisitions contributing $77 million.
- Net income attributable to MasTec declined 35% and diluted EPS fell from $0.50 to $0.32. EBITDA declined about 15%, with margin down 3.2 percentage points.
- Oil and Gas EBITDA fell to $33 million from $94 million, as reduced project efficiencies, closeouts, and mix outweighed revenue growth. Communications EBITDA increased to $82 million from $48 million, supported by efficiencies, storm restoration, and mix.
- Operating cash flow fell to $83.5 million, primarily due to increased project-related working capital and timing; accounts receivable increased to $1.705 billion from $1.598 billion at year-end. DSO, net of billings in excess, rose to 96 days from 81.
- Interest expense increased to $17.1 million from $12.6 million, reflecting higher average credit-facility balances and rates, as well as higher receivable-financing charges.
- The effective tax rate declined to 29.6% from 40.2%, primarily reflecting the U.S. corporate tax-rate reduction under the 2017 Tax Act, partially offset by elimination of certain deductions.
Outlook, management commentary, risks and unusual items
- Estimated 18-month backlog was $7.551 billion at March 31, up from $7.087 billion at year-end and $5.685 billion a year earlier. Management expects approximately 65% of March backlog to be realized in 2018. Separately, remaining performance obligations were $5.4 billion, with approximately $3.9 billion expected to be recognized in 2018. Backlog is not a GAAP measure; about 45% is under service agreements without minimum purchase commitments and may be canceled on short or no notice.
- Management expects funds from operations, the credit facility, and cash balances to cover anticipated needs for at least 12 months. 2018 capital expenditure expectations were approximately $110 million gross, or $90 million net of asset disposals; equipment purchases under capital leases or other financing were expected to be $110–$130 million.
- Change orders and claims included in contract transaction prices were approximately $280 million, versus $146 million at December 31, 2017, primarily associated with large Oil and Gas pipeline projects. Final customer approval could result in lower or higher realized amounts and revenue reversals.
- Customer concentration is significant: AT&T and Energy Transfer affiliates accounted for 27% and 26% of Q1 revenue, respectively. One customer represented approximately 43% of net accounts receivable at quarter-end.
- Other risks include project cost-to-complete estimates, weather and seasonality, competitive pricing and productivity, customer delays or cancellations, litigation and contract disputes, self-insurance and multiemployer plan liabilities, and possible impairment if Oil and Gas assumptions weaken. Two Oil and Gas reporting-unit/intangible valuations had only about 6% headroom over carrying value, with combined carrying value of approximately $110 million.
- Potential undiscounted acquisition earn-out obligations ranged from $28 million to $214 million, with no maximum payment amount; estimated fair value was $121 million. The company completed two small acquisitions during the quarter.
- MasTec adopted Topic 606 on January 1, 2018; the approximately $2 million transition adjustment was recorded to opening retained earnings, and management did not expect a material effect on revenue timing or amount. The company expected adoption of the new lease standard in 2019 to create material incremental lease assets and liabilities, not yet quantified.
Most important facts for investors to verify
- Whether Oil and Gas project closeouts and productivity recover, and whether pipeline-related claims and change orders are approved and collected.
- Whether rising receivables and DSO convert to cash as expected, particularly given the large customer receivable concentration.
- Whether backlog converts to revenue on schedule, including the cancellable service-agreement portion, and whether stated margin assumptions hold.
- Debt, interest costs, available revolver capacity, capital commitments, and potential earn-out payments following the share repurchases.
- Related-party transactions and acquisition earn-out estimates, as well as the company’s progress in quantifying lease-standard adoption effects.