MasTec, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparison is with Q1 2016. MasTec provides infrastructure construction, installation and maintenance services across communications, oil and gas, electrical transmission, power generation and industrial markets, primarily in North America. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $1,158.2 million | $974.2 million; up 19% |
| Income (loss) attributable to MasTec | $41.0 million | $(2.7) million |
| Diluted EPS | $0.50 | $(0.03) |
| EBITDA, as reported by the company | $123.5 million; 10.7% of revenue | $46.2 million; 4.7% of revenue |
| Adjusted EBITDA, non-GAAP | $134.8 million; 11.6% of revenue | $53.8 million; 5.5% of revenue |
| Cash from operating activities | $154.2 million | $15.9 million |
| Cash and cash equivalents | $15.7 million | $38.8 million at Dec. 31, 2016 |
| Debt, net of deferred financing costs | $956.1 million | $1,026.0 million at Dec. 31, 2016 |
| Working capital | $453.8 million | $562 million at Dec. 31, 2016 |
Costs of revenue excluding depreciation fell to 83.8% of revenue from 90.8%, implying improvement in gross margin before depreciation. G&A was 5.6% of revenue versus 6.2%; interest expense was $12.6 million. GAAP income tax expense was $27.4 million on $68.0 million of pretax income.
Operating cash flow improved substantially, supported by net income and a favorable $76 million impact from changes in assets and liabilities. Investing cash outflow was $69.6 million, including $53.3 million of payments for other investments, principally Waha joint-venture investment; financing cash outflow was $107.8 million, including net credit-facility repayments. The company reported $508.2 million of revolving borrowing capacity available at quarter-end, or capacity to issue up to $245.0 million in additional letters of credit. Its amended senior secured credit facility has $1.5 billion of commitments and matures in 2022. MasTec reported compliance with debt covenants.
Material changes and business drivers
- Oil and Gas revenue increased 56% to $455.9 million, principally from large long-haul pipeline projects; segment EBITDA rose to $93.9 million from $16.2 million.
- Communications revenue increased 9% to $559.5 million, but EBITDA declined to $48.4 million from $61.7 million, reflecting the absence of a prior-year settlement gain and growth-related inefficiencies.
- Electrical Transmission revenue rose 15% to $98.8 million. EBITDA improved to $3.2 million from a $23.8 million loss, helped by project efficiencies and the non-recurrence of a 2016 project loss.
- Power Generation and Industrial revenue fell 43% to $46.6 million, mainly because of lower renewable-power project activity and timing. Other segment EBITDA included $7.0 million of losses from a Canadian joint venture.
- Q1 2016 included approximately $10 million of income from a settlement related to a previously acquired business, as well as $13.5 million and $15.1 million project losses in Oil and Gas and Electrical Transmission, respectively. These items make year-over-year comparisons less representative of recurring performance.
Outlook, risks and unusual items
- Management estimated 18-month backlog at $5.685 billion as of March 31, 2017, and expected to recognize approximately 70% during 2017. Just over half of backlog related to service agreements without minimum purchase commitments; many can be canceled on short or no notice. Backlog is not a guarantee of future revenue.
- Management estimated 2017 capital expenditures of approximately $125 million, or $110 million net of asset disposals, and anticipated approximately $125 million of equipment purchases under capital leases or other financing arrangements.
- Management said available operating cash flow, credit-facility capacity and cash were expected to meet working-capital, debt-service, investment, insurance-collateral and other needs for at least the next 12 months. Results are seasonal, typically weakest in Q1, and can be affected by weather, project timing, customer spending, commodity prices, labor costs and competitive pricing.
- In April 2017, MasTec acquired SEFNCO Communications, a wireline/fiber contractor; the filing provides no purchase price in the supplied text.
- Customer concentration is significant: AT&T generated 36% of Q1 revenue and Energy Transfer affiliates 17%; the top ten customers generated 76%. Two separate customers represented 19% and 16% of net receivables at quarter-end.
- Other exposures include $405 million of outstanding credit-facility letters of credit, self-insurance liabilities, potential multiemployer pension-plan obligations, legal contingencies and joint-venture obligations. Management reported no material claims on outstanding letters of credit and no material changes to the previously disclosed risk factors.
- The company identified approximately $17 million of contract change orders and claims under resolution, primarily in Oil and Gas; ultimate collections could differ from estimates. It also noted that the fair values of certain goodwill reporting units exceeded carrying values by approximately 5% and 11%, leaving sensitivity to adverse changes in forecasts.
- The company adopted new stock-compensation accounting in 2017, which may add volatility to income tax expense. Adoption of the new revenue standard was planned for January 1, 2018; management had not quantified its effect but did not then expect a material change in revenue or earnings timing or amount.
Most important facts for investors to verify
- Whether pipeline-project volume and Oil and Gas margins are sustainable, and whether the strong cash flow reflects durable operations or seasonal working-capital movements.
- Progress and remaining exposure on the Canadian joint venture with $7.0 million of Q1 losses; management expected substantial completion in the latter half of 2017.
- Backlog conversion, cancellations and customer spending, particularly given the large share tied to cancellable service agreements and concentrated customers.
- Liquidity and covenant headroom after the credit-facility amendment, planned capital spending, Waha funding needs and the SEFNCO acquisition.
- Resolution and collectability of contract claims, customer receivables, legal contingencies, self-insurance and multiemployer plan exposures.