MasTec, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; compared with the corresponding 2016 periods. Amounts are U.S. dollars. MasTec provides infrastructure construction and maintenance across communications, oil and gas, electrical transmission, power generation and industrial markets.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,955.8 million | $1,586.2 million | $5,004.1 million | $3,792.8 million |
| Income before taxes | $107.6 million | $95.3 million | $314.3 million | $132.4 million |
| Net income attributable to MasTec | $63.8 million | $56.3 million | $186.4 million | $77.7 million |
| Diluted EPS | $0.77 | $0.69 | $2.27 | $0.96 |
| EBITDA | $175.3 million | $151.0 million | $497.7 million | $292.6 million |
| EBITDA margin | 9.0% | 9.5% | 9.9% | 7.7% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $178.6 million | $127.1 million |
Revenue increased 23% in Q3 and 32% year to date. Q3 net income attributable to MasTec rose about 13%; nine-month net income more than doubled. The reported Q3 EBITDA margin declined year over year, while the nine-month margin improved. Adjusted EBITDA, a non-GAAP measure, was $179.6 million in Q3 versus $164.8 million and $516.7 million year to date versus $322.8 million.
Segments and material changes
- Oil and Gas drove growth, with revenue up 58% in Q3 and 90% year to date, principally from large long-haul pipeline projects. Q3 EBITDA margin fell to 9.3% from 16.0%, reflecting weaker project efficiencies and mix; year-to-date margin was 12.9%, unchanged.
- Communications revenue declined 2% in Q3 and rose 2% year to date. Lower install-to-the-home and customer fulfillment activity weighed on organic revenue. Year-to-date EBITDA margin fell to 9.8% from 11.0%.
- Electrical Transmission revenue declined 20% in Q3 and 2% year to date, with timing and project activity cited. EBITDA improved from a Q3 loss in 2016 to $4.5 million and from a nine-month loss of $42.0 million to income of $11.2 million, reflecting improved efficiencies and non-recurrence of prior-year project losses.
- Power Generation and Industrial revenue declined 22% in Q3 and 37% year to date, mainly due to lower renewable power activity and timing. EBITDA margins improved in both comparisons.
Cash, liquidity and debt
- At September 30, cash was $43.8 million and working capital was $746 million, versus $562 million at December 31, 2016. Accounts receivable rose to $1.535 billion from $1.156 billion; management attributed the increase primarily to higher revenue and project ramp-ups. DSO, net of billings in excess of costs and earnings, was 67 days versus 68 at year-end.
- Nine-month operating cash flow was $178.6 million. Investing used $249.4 million, including $116.0 million for acquisitions, $83.3 million of capital expenditures and $77.1 million of other investment payments. Financing provided $75.6 million; cash increased $5.1 million.
- Debt, net of deferred financing costs, was $1.279 billion, versus $1.026 billion at December 31, 2016. The balance included $300.6 million of revolving loans, a $400 million term loan, $400 million of 4.875% notes due 2023 and $179.9 million of capital leases. Revolver availability was $610.3 million. MasTec reported compliance with debt covenants.
- The amended credit facility provides $1.5 billion of commitments and matures in February 2022. Management expected cash, operating flows and facility availability to meet anticipated needs for at least 12 months.
Outlook, risks and unusual items
- Estimated 18-month backlog was $5.014 billion at September 30, 2017, down from $5.265 billion at June 30 and up from $4.651 billion a year earlier. About 25% was expected to be realized in the remainder of 2017. Approximately 65% related to master service or other service agreements without minimum purchase commitments; backlog may be delayed, reduced or canceled.
- After quarter-end, MasTec received an award for a large pipeline project with expected contract value above $1.5 billion, expected to be reflected in year-end backlog.
- Management estimated 2017 capital expenditures of approximately $105 million, or $90 million net of asset disposals, and equipment purchases of approximately $155 million through capital leases or other financing arrangements. No full-year revenue or earnings guidance is stated in the provided filing text.
- Three acquisitions were completed in the first nine months. Acquisition consideration included $118.8 million cash and $89.6 million estimated contingent consideration; preliminary purchase accounting included $135.3 million of goodwill. Earn-out liabilities totaled $104.9 million, with potential undiscounted payments estimated at $15 million to $170 million and no stated maximum.
- Customer concentration is significant: Energy Transfer affiliates represented 49% of Q3 revenue and 40% year to date; AT&T represented 21% and 25%, respectively. One customer accounted for approximately 44% of net receivables at quarter-end.
- Management cited reduced Q3 Oil and Gas project efficiencies and mix, seasonal and project-timing variability, customer spending and market conditions, weather, labor and fuel costs, and the risk of project delays or cancellations. Percentage-of-completion accounting relies on estimates of costs to complete; revisions can materially affect reported results.
- Change orders and claims included in contract estimates totaled approximately $77 million at quarter-end, primarily in Oil and Gas, and remained subject to resolution and collection. Management said final recoveries could differ from estimates.
- Third-quarter tax credits were recognized based on an ongoing study; further adjustment was possible when the study was finalized, expected in Q4. Goodwill and indefinite-lived intangible asset fair values exceeded carrying values by about 10% for identified reporting units; changes in assumptions could result in future impairment charges.
- Other items included $12 million of year-to-date expense from changes in expected recoveries on an investment and a note receivable, substantially offset by $12 million of income from reductions in estimated earn-out liabilities. The company also reported ongoing legal and contingency exposure, self-insurance liabilities, performance bonds and possible future multiemployer pension contributions.
Most important facts for investors to verify
- Whether large pipeline projects convert backlog into revenue and cash on schedule, and whether the awarded project is added to year-end backlog as expected.
- Oil and Gas project margins and productivity, given the sharp Q3 margin decline despite strong revenue growth.
- Receivables, unbilled work and customer concentration, including the collectability of change orders and claims.
- Debt, capital-lease commitments, acquisition earn-outs and available credit capacity as investment and equipment spending continue.
- The final tax-credit study outcome, acquisition purchase-accounting adjustments, and any changes to goodwill or contingent-consideration estimates.