MasTec, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Filed July 31, 2015.
Business context
MasTec provides engineering, construction, installation and maintenance of communications, pipeline, electrical transmission, power generation and industrial infrastructure, primarily in North America. FY 2014 revenue was concentrated in Communications and Oil and Gas. Acquisitions, including WesTower and Pacer, expanded those businesses; acquired companies contributed $565 million to year-over-year revenue growth.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $4.612 billion | $4.325 billion |
| Income from continuing operations | $122.0 million | $147.7 million |
| Net income attributable to MasTec | $115.9 million | $140.9 million |
| Diluted EPS from continuing operations | $1.42 | $1.74 |
| EBITDA from continuing operations | $403.7 million; 8.8% of revenue | $427.6 million; 9.9% of revenue |
| Adjusted EBITDA from continuing operations | $424.9 million; 9.2% of revenue | $448.9 million; 10.4% of revenue |
| Cash from operating activities | $323.0 million | $200.4 million |
| Cash and cash equivalents at year-end | $24.1 million | $22.9 million |
| Total debt at year-end | $1.135 billion | $816.8 million |
| Working capital at year-end | $550.9 million | $477.8 million |
Costs of revenue, excluding depreciation and amortization, rose to 86.3% of revenue from 85.1%; net income margin was 2.5%, versus 3.3%. Cash used in investing activities was $439.3 million, principally reflecting $345.5 million of acquisition payments and $109.3 million of capital expenditures. Cash provided by financing activities was $118.7 million.
The amended senior secured credit facility had $1.25 billion of commitments. At year-end, revolving loans were $282.7 million, the term loan was $250 million, and reported availability was $563.7 million for revolving borrowings or up to $296.4 million for additional letters of credit. The company reported compliance with debt covenants at December 31, 2014.
By segment, revenue was $2.041 billion in Communications, $1.731 billion in Oil and Gas, $471.9 million in Electrical Transmission, and $357.0 million in Power Generation and Industrial. Segment EBITDA margins weakened in Communications (10.0% versus 12.6%) and Oil and Gas (11.3% versus 13.3%); Power Generation and Industrial improved to a 4.0% margin from negative EBITDA in 2013.
For Q4 2014, revenue was $1.231 billion, income from continuing operations was $26.6 million, and net income attributable to MasTec was $21.1 million. The filing presents Q1–Q3 2014 results as restated.
Material changes versus prior year
- Revenue increased 6.6%, but organic revenue declined $278 million; acquisitions contributed $565 million. Organic weakness included lower long-haul pipeline activity and lower wireless and wireline/fiber work.
- Continuing-operations net income fell to $122.0 million from $147.7 million, and continuing-operations EBITDA declined to $403.7 million from $427.6 million. Management cited lower productivity, Communications overhead and production inefficiencies, and project startup timing in Oil and Gas.
- Operating cash flow increased by $122.6 million. Management attributed a positive $134 million contribution from net asset and liability changes largely to receivables, improved payment terms and lower expected fourth-quarter organic wireless revenue; DSO nevertheless rose to 86 days from 80.
- Debt increased by $318.0 million, reflecting higher credit-facility borrowings, acquisitions and the 2014 settlement of convertible notes. The company paid approximately $202 million in cash and issued 6.6 million shares in connection with the notes’ maturity and conversion.
Outlook, risks and unusual items
- Restatement and controls: The Audit Committee’s independent investigation into project cost-to-complete estimates remained ongoing. Q1, Q2 and Q3 2014 results were restated, primarily for two large Electrical Transmission projects using percentage-of-completion accounting. The nine-month restatement increased previously reported net income by $1.5 million to $94.8 million, despite a $3.9 million reduction in Q1. The company identified a material weakness in documentation and review of significant cost-to-complete judgments; management and the auditor concluded internal control over financial reporting was ineffective at year-end. The financial-statement audit opinion was unqualified, while the auditor issued an adverse opinion on internal controls.
- Reporting and legal exposure: The 10-K and Q1 2015 10-Q were filed late. The company reported SEC cooperation, a shareholder securities class action, and potential additional regulatory, litigation and restatement risk. It said late filings made it temporarily ineligible to use Form S-3. Lenders and noteholders granted reporting extensions.
- Demand and backlog: Management expected 2015 growth opportunities in fiber, grid upgrades, renewable projects and natural-gas infrastructure, but anticipated slightly lower wireless spending from a key customer and possible negative effects from oil-price declines. Year-end 18-month backlog was $4.346 billion, with about 75% expected to be realized in 2015. Backlog is an estimate, includes cancellable master-service agreements, and some oil and gas work was canceled or deferred.
- Capital spending: Management estimated 2015 capital expenditures of about $70 million, or $60 million net of disposals, plus $40–$50 million of equipment purchases under leases or other financing. No formal numerical revenue or earnings guidance is provided.
- Subsequent and contingent items: The company recorded a $16 million loss on a troubled Canadian wind project in Q1 2015. Pacer-related joint venture guarantees and receiver financing created additional exposure; by July 24, 2015, Pacer had paid approximately $37.2 million under receiver financing commitments. Other risks include customer concentration, fixed-price project estimates, oil and gas cyclicality, acquisition integration, self-insurance, multi-employer pension plans and foreign currency effects.
Important facts for investors to verify
- Progress and conclusions of the Audit Committee investigation, any further adjustments, and remediation of the material weakness.
- Whether control improvements prevent repeat project-estimate errors and whether future SEC filings are timely.
- Cash conversion, receivables and DSO trends, including collection performance at acquired businesses.
- Debt, covenant headroom, interest costs, and liquidity after acquisition spending, share repurchases and contingent obligations.
- Backlog conversion and cancellations, particularly exposure to wireless customer spending and oil-price-sensitive projects.
- Resolution and potential financial impact of the securities lawsuit, PPL dispute, pension withdrawal claims, and Pacer-related guarantees and financing.