Business context and reporting period
MasTec, Inc. is an infrastructure construction company serving communications, utilities and government customers, primarily in North America. This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the same period in 2011. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $778.5 | $618.5 |
| Income before taxes | $23.5 | $34.6 |
| Net income attributable to MasTec | $14.2 | $21.1 |
| Diluted EPS | $0.17 | $0.26 |
| EBITDA, a non-GAAP measure | $53.5 | $57.6 |
| Operating cash flow | $43.4 | $50.3 |
- Revenue increased 25.9%. Acquisitions made in 2011 contributed $120.3 million; organic revenue grew 6.4% to $658.2 million.
- Net income attributable to MasTec fell about 33%. Net margin was 1.8%, versus 3.4%; diluted EPS declined about 35%.
- Costs of revenue excluding depreciation and amortization rose to 87.9% of sales from 85.5%. Gross margin on that basis was 12.1%, down from 14.5%. Management cited unfavorable project mix, weather-related pipeline inefficiencies, weaker wireless work-order volumes and higher commission costs.
- Depreciation and amortization increased to $21.0 million from $15.1 million, largely reflecting acquisitions and higher capital spending. General and administrative expense rose to $40.8 million from $32.5 million, while remaining 5.2% of revenue.
- Net interest expense was $9.0 million, compared with $7.9 million. The effective tax rate was 39.8%, versus 39.0%.
- Operating cash flow less capital expenditures was approximately $29.3 million, compared with $35.7 million in Q1 2011; this is a simple cash-flow comparison, not a company-reported free-cash-flow measure. Capital expenditures were $14.1 million.
Financial position, debt and liquidity
- At March 31, 2012, cash was $20.1 million and working capital was $245.1 million. Current assets were $823.7 million and current liabilities $578.6 million.
- Total debt was $461.2 million, down from $494.9 million at December 31, 2011; $34.4 million was current and $426.8 million long-term. Cash less total debt was approximately $441.1 million.
- The $600 million revolving credit facility matures in August 2016. MasTec had $30.8 million drawn and approximately $92.0 million of letters of credit; $477.2 million of borrowing capacity remained available, subject to facility terms. The company reported compliance with debt covenants.
- Accounts receivable were $667.1 million. Days sales outstanding increased to 78 from 58 a year earlier; management attributed this to project close-outs, billing terms, customer/project mix and collection timing, and said it was working through a backlog of project billings.
- Cash from operations decreased year over year. Financing used $27.1 million, primarily reflecting net repayments on the credit facility. Cash was $20.1 million at quarter-end, compared with $20.3 million at year-end.
Material changes and operating developments
- Utilities contributed 51% of revenue, up from 43%; communications contributed 48%, down from 56%. Government remained about 1%.
- Renewables revenue rose to $108.5 million from $36.2 million, with demand supported by projects seeking to meet the December 31, 2012 federal production tax credit deadline. Management also cited install-to-the-home and energy-transmission growth.
- Pipeline revenue benefited from the Fabcor acquisition and increased shale-basin activity, but long-haul revenue declined after completion of the Ruby pipeline project. Severe flooding in the Northeast continued to hurt productivity and margins on certain pipeline work.
- Revenue from 2011 acquisitions was $120.3 million in the quarter. Estimated 18-month backlog was $3.327 billion at March 31, slightly below $3.339 billion at year-end. Backlog includes work under agreements that may be cancellable and is not a firm guarantee of future revenue.
- The top ten customers accounted for 72% of revenue, down from 82%. DIRECTV represented 23% and AT&T 18%. DirectStar contributed $34.9 million of Q1 revenue; management anticipated a possible sale in Q2 2012 under Red Ventures’ option, but noted that exercise and completion were not assured.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management estimated 2012 capital expenditures of approximately $65 million and said cash from operations, cash balances and credit-facility availability should cover expected needs for at least the next 12 months.
- Management warned that results are seasonal and cyclical, with weather, project schedules, customer spending, competitive pricing, regulation and energy prices affecting demand and margins. Q1 is typically the slowest quarter.
- Customer concentration, cancellable service agreements and the need to replace completed project work expose revenue, liquidity and cash flow to customer or project changes. DirectStar’s potential sale could reduce future DIRECTV-related revenue.
- MasTec reported $915.2 million of performance and payment bonds supporting projects, with estimated costs to complete those projects of $361.9 million. It also had $92.0 million of standby letters of credit and $41.8 million of accrued workers’ compensation, general liability and automobile claims.
- Several multi-employer pension plans were underfunded or in critical status and may require higher contributions. The company recorded a $6.4 million withdrawal liability for its 2011 withdrawal from the Central States plan; the plan disputes the effectiveness or timing of that withdrawal, and additional liability is possible.
- Pending matters include claims by MasTec against an insurance broker exceeding $5 million and against the City of Marathon and its engineers exceeding $6 million. A Spanish proceeding relating to former subsidiary Sintel alleges approximately €300 million in damages; potential loss to MasTec, if any, could not be determined and no accrual was recorded. The company disputes the claims and is defending the matter.
- MasTec held auction-rate securities with $17.9 million par value and $14.0 million estimated fair value. Valuation relies on a model because of limited market liquidity; the structured-finance security is rated CCC and has credit-default exposure. No other-than-temporary impairment was recorded in the quarter.
- Management stated disclosure controls were effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether margins recover as weather-affected pipeline projects are completed and wireless work volumes change.
- Collections and billing progress given DSO of 78 days, and the conversion of backlog into revenue and cash.
- Customer concentration and the outcome and timing of Red Ventures’ DirectStar purchase option.
- Available credit-facility capacity, covenant headroom and the company’s ability to settle convertible-note principal in cash if converted.
- Potential pension withdrawal or contribution obligations, litigation exposure, and the assumptions supporting auction-rate-security valuations.