Business context and reporting period
MasTec, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2013. The company provides infrastructure construction, installation and maintenance services across communications, oil and gas, electrical transmission, power generation and industrial markets, primarily in North America. Comparisons below are against the corresponding 2012 periods unless noted.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,269.4 million | $1,067.3 million | $3,165.7 million | $2,794.4 million |
| Income from continuing operations before tax | $81.6 million | $59.6 million | $170.6 million | $130.2 million |
| Net income attributable to MasTec | $46.1 million | $26.8 million | $99.4 million | $71.1 million |
| Diluted EPS, continuing operations | $0.59 | $0.45 | $1.24 | $0.97 |
| Diluted total EPS | $0.54 | $0.34 | $1.18 | $0.87 |
| EBITDA, continuing operations | $132.1 million | $91.7 million | $308.3 million | $223.2 million |
- Costs of revenue excluding depreciation and amortization were 85.2% of revenue in Q3 versus 86.6%; nine-month costs were 85.1% versus 87.5%. EBITDA margins improved to 10.4% from 8.6% for Q3 and to 9.7% from 8.0% for nine months. These are non-GAAP measures.
- Operating cash flow was $125.0 million for the first nine months, up from $114.7 million. Investing cash flow was negative $253.1 million, including $159.4 million for acquisitions and $101.4 million of capital expenditures. Financing cash flow was positive $104.3 million.
- Cash was $2.8 million at September 30, 2013, down from $26.4 million at year-end 2012. Working capital was approximately $450 million. Accounts receivable increased to $1,225.1 million from $877.2 million; adjusted days sales outstanding rose to 89 from 83 at year-end.
- Total debt was $833.2 million, up from $598.9 million at year-end; long-term debt was $779.9 million. Credit-facility borrowings were $36.4 million, with $425.2 million of remaining borrowing capacity, subject to facility terms and letters of credit.
Material changes versus prior comparable periods
- Q3 revenue rose 19%; nine-month revenue rose 13%. Oil and gas was the main growth driver, alongside communications and electrical transmission. Acquisitions contributed $142 million of Q3 revenue and $270 million for the nine-month period.
- Oil and gas EBITDA margins improved, supported by higher-margin long-haul pipeline work, better pricing and execution; prior-year results included approximately $25 million of losses on two pipeline projects. Communications margins also improved.
- Power Generation and Industrial revenue declined 60% in Q3 and 55% for nine months, largely reflecting reduced wind and solar activity following delayed renewal of federal wind production tax credits. The segment reported negative EBITDA of $6.4 million in Q3 and $14.6 million for nine months.
- Electrical Transmission revenue grew, but margins weakened due to higher costs on certain projects. Higher depreciation and amortization and G&A reflected business growth, acquisitions and increased capital investment.
- In March, MasTec issued $400 million of 4.875% senior notes due 2023 and redeemed its $150 million of 7.625% notes, recording a $5.6 million extinguishment loss. Nine-month interest expense increased to $34.5 million from $27.9 million.
Outlook, commentary, risks and unusual items
- Management estimated 2013 capital expenditures of approximately $120 million and expected an additional $110–$120 million of equipment purchases through leases or other financing. No specific revenue or earnings guidance is provided in the supplied filing text.
- Estimated 18-month backlog was $3.969 billion at September 30, up from $3.330 billion a year earlier but below $4.143 billion at June 30. Backlog is not a firm revenue commitment: service agreements may be canceled, and project timing or customer requirements may change.
- Management expected operating cash flow, facility availability and cash balances to cover anticipated needs for at least 12 months, while noting dependence on the credit facility. On October 29, 2013, the facility was amended: commitments increased from $600 million to $750 million, maturity extended to October 2018, and pricing reduced.
- Customer concentration is significant: AT&T, DIRECTV and Enbridge accounted for 18%, 15% and 14% of nine-month continuing-operations revenue, respectively; the top ten customers represented 69%. About 51% of nine-month revenue came from project-specific work.
- Other notable exposures include $177 million of recorded acquisition earn-out liabilities, including estimated contingent future obligations; underfunded multi-employer pension plans and a disputed Central States withdrawal-liability demand that could raise the liability from $5.7 million outstanding to approximately $10.8 million; and ongoing SunLight project arbitrations and a City of Marathon claim. The filing does not quantify a clear expected loss for these disputes.
- MasTec completed the sale of Globetec in August 2013 for nominal consideration, retained certain assets and contingent obligations, and reported discontinued-operation losses of $3.7 million in Q3 and $5.2 million for nine months. The Sintel legacy litigation was resolved, with a $2.8 million charge recorded in 2013.
- Management cited seasonality, weather, project delays, competitive pricing, customer capital-spending changes, fuel and labor costs, and acquisition integration as risks. The company reported compliance with debt covenants at September 30 and effective disclosure controls.
Most important facts for investors to verify
- Whether higher receivables and DSO convert to cash as projects are billed and collected, given the rise in DSO and very low reported cash.
- Whether backlog converts to revenue and earnings, especially in oil and gas, wind/solar and electrical transmission; backlog is subject to cancellation and schedule changes.
- Debt, lease and earn-out obligations, liquidity under the amended credit facility, and refinancing or settlement plans for convertible notes maturing in 2014.
- Potential financial effects of customer concentration, project claims and arbitrations, pension-plan exposure, and Globetec-related retained obligations.
- The sustainability of improved margins, distinguishing organic performance from acquisition contributions and one-time items; reconcile reported GAAP results with management’s non-GAAP measures.