Business context and reporting period
MasTec, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2014. The infrastructure contractor operates primarily in North America across communications, oil and gas, electrical transmission, and power generation and industrial markets. Results below compare the third quarter and first nine months of 2014 with the same 2013 periods.
Financial performance and position
Amounts are in U.S. dollars; figures are rounded.
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $1,309.6M | $1,269.4M | $3,378.2M | $3,165.7M |
| Net income attributable to MasTec | $45.3M | $46.1M | $93.3M | $99.4M |
| Diluted EPS, total | $0.53 | $0.54 | $1.08 | $1.18 |
| Continuing-operations EBITDA | $128.2M | $132.1M | $301.2M | $308.3M |
| EBITDA margin | 9.8% | 10.4% | 8.9% | 9.7% |
| Operating cash flow | Not separately stated for quarter | $81.0M | $129.3M |
- Costs of revenue, excluding depreciation and amortization, were 85.7% of revenue in Q3 and 86.3% for 9M, versus 85.2% and 85.1%, respectively. G&A was 4.6% of Q3 revenue and 5.0% of 9M revenue, unchanged year over year.
- At September 30, cash was $7.1M; working capital was $663M. Accounts receivable was $1.390B, including $451.7M of costs and earnings in excess of billings. DSO, net of billings in excess, was 88 days, compared with 81 days a year earlier.
- Total debt was $1.160B, up from $816.8M at December 31, 2013; long-term debt was $1.088B. The $400M 4.875% senior notes remained outstanding. The company had $449.5M drawn on its credit facility and $262.5M remaining borrowing capacity, subject to a temporary $152M reduction expected to be restored after the December 2014 convertible-note maturity.
- For 9M, investing cash use was $242.7M, including $162.9M for acquisitions and $91.0M for capital expenditures; financing provided $147.0M. Cash declined by $15.9M from year-end.
Material changes versus prior period
- Q3 revenue rose 3%, but acquisitions added $133M while organic revenue declined $93M. For 9M, revenue rose 7%, with $342M from acquisitions offset by a $130M organic decline.
- Profitability weakened: Q3 continuing-operations income was $45.7M versus $49.9M; 9M was $94.0M versus $104.8M. EBITDA margins declined in both periods, reflecting lower productivity, project timing and pricing pressure.
- Q3 Communications revenue declined 7% and EBITDA margin fell to 10.4% from 13.2%, with lower wireless work and related cost-reduction expenses. Nine-month Oil and Gas EBITDA margin fell to 11.0% from 14.3%. Power Generation and Industrial improved, including a swing from negative to positive EBITDA, aided by renewable-power projects.
- Debt increased, in part as the company funded the June settlement of $115M of 4.0% convertible notes: $105.3M was paid in cash and 4.2M shares were issued. The remaining $100M of 4.25% convertible notes matured in December 2014.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected sufficient operating cash flow, credit-facility availability and cash to meet needs for at least the next 12 months, and forecast 2014 capital expenditures of $95M–$100M ($80M–$85M net of disposals), plus $80M–$85M of equipment purchases through leases or other financing.
- Estimated 18-month backlog was $4.14B at September 30, up from $3.97B a year earlier. Management cautions that service agreements often lack minimum purchase commitments and can be canceled on short or no notice; backlog timing and conversion are uncertain.
- On October 1, after quarter-end, MasTec acquired WesTower for approximately $199M cash and amended its credit facility to add a $75M term loan, increasing commitments to $1.075B.
- In June, MasTec acquired Pacer, a Canadian civil-construction business, for preliminary total consideration of $152.2M, including contingent consideration. Pacer-related performance guarantees were approximately $219M gross ($92M based on ownership share), plus approximately $31M of other financial guarantees. The Pacer earn-out has no maximum payment amount; estimated undiscounted payments range from $0 to $69M.
- A subsidiary received arbitration awards totaling $59.6M in a dispute involving three New Jersey solar projects. Collection, additional interest, fees and costs remain uncertain; related court proceedings and challenges to liens continue.
- Other notable exposures include customer concentration (AT&T 21%, DIRECTV 13%, Enbridge 10% of 9M revenue), variable-rate borrowings, foreign-currency translation losses, self-insurance liabilities of $60.3M, and potential increases in multi-employer pension contributions. Central States sought approximately $11M in withdrawal liability; MasTec disputes the claim.
- Revenue recognition on fixed-price contracts depends on cost-to-complete estimates and resolution of claims and change orders. Approximately $78M of contract adjustments and claims were included in contract prices and remain under resolution. Actual recoveries could differ.
Important facts for investors to verify
- Whether organic demand and segment productivity recover, particularly in Communications and Oil and Gas, and how much reported growth depends on acquisitions.
- Collection quality and timing for receivables, unbilled contract assets, and the $59.6M solar arbitration award; monitor DSO and operating cash conversion.
- December 2014 settlement of the $100M convertible notes, resulting cash borrowing, share dilution and available credit-facility capacity.
- Integration, funding and purchase accounting for WesTower, as well as earn-out obligations and guarantees tied to acquisitions and joint ventures.
- Potential outcomes of the solar litigation, pension withdrawal-liability dispute, contract claims, and other contingencies.
- Customer retention and contract renewal risk, given high revenue concentration and the cancellable nature of many service agreements and backlog estimates.