MasTec, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
MasTec is a North American infrastructure construction company serving communications, oil and gas, electrical transmission, power generation and industrial markets. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.977 billion | $1.956 billion | $4.992 billion | $5.004 billion |
| Net income attributable to MasTec | $120.7 million | $63.8 million | $227.7 million | $186.4 million |
| Diluted EPS | $1.52 | $0.77 | $2.83 | $2.27 |
| EBITDA, non-GAAP | $222.8 million | $175.3 million | $516.1 million | $497.7 million |
| EBITDA margin, non-GAAP | 11.3% | 9.0% | 10.3% | 9.9% |
| Net cash from operating activities | Not presented for quarter | $26.8 million | $166.5 million |
Q3 costs of revenue, excluding depreciation and amortization, were 85.0% of revenue versus 88.3% a year earlier; for nine months they were 85.8% versus 86.4%. Q3 pretax income was $145.6 million and the effective tax rate was 17.2%; the nine-month rate was 24.0%.
At September 30, cash was $68.5 million and working capital was approximately $1.296 billion. Total debt, net of deferred financing costs, was $1.772 billion, up from $1.369 billion at year-end 2017. Debt included $815 million in revolving loans, a $382 million term loan, $400 million of 4.875% senior notes and $174 million of capital-lease obligations. Revolver availability was $196 million; MasTec reported compliance with its debt covenants.
Material changes versus prior periods
- Q3 revenue grew 1%, while nine-month revenue slipped 0.2%. Communications and Power Generation and Industrial grew; Oil and Gas declined 11% in Q3 and 15% year to date, largely from timing of major pipeline work and regulatory and hurricane-flooding disruptions.
- Q3 earnings improved substantially, with higher productivity and project efficiencies, particularly in Oil and Gas and Communications. Nine-month pretax income nevertheless declined to $299.4 million from $314.3 million, while net income rose partly because of lower income tax expense.
- Q3 revenue was $662 million in Communications, $1.036 billion in Oil and Gas, $99 million in Electrical Transmission and $180 million in Power Generation and Industrial. Q3 EBITDA margin improved in Oil and Gas and Communications but weakened in Electrical Transmission and Power Generation and Industrial.
- Nine-month operating cash flow fell to $26.8 million from $166.5 million, primarily due to working-capital investment and higher receivables. Accounts receivable, net, increased to $2.369 billion from $1.598 billion at year-end; days sales outstanding, net of billings in excess, rose to 101 from 81.
- MasTec repurchased 4.3 million shares for $198.4 million during the nine months. A new $150 million repurchase authorization was announced in September and remained unused at quarter-end.
Outlook, commentary, risks and unusual items
- Management expected sufficient operating cash flow, cash and credit-facility availability to meet liquidity needs for at least the next 12 months. It estimated 2018 capital expenditures of approximately $150 million, net of asset disposals approximately $115 million, plus $90–$110 million of equipment purchases through leases or other financing.
- Estimated 18-month backlog was $7.833 billion, up from $5.014 billion a year earlier; management expected about 25% to be realized in the remainder of 2018. Approximately half of backlog relates to master service or other service agreements, many of which have no minimum purchase commitments and can be canceled on short or no notice. Separately, remaining performance obligations were $5.3 billion, including approximately $1.7 billion expected to be recognized in the remainder of 2018.
- Management expected the elevated pipeline-related unbilled contract assets and DSO to decline during Q4 through normal billing and collection. The filing attributes the weak cash conversion mainly to timing of project activity, not identified material customer collection problems.
- The 2017 Tax Act reduced the U.S. corporate tax rate to 21%. A net tax benefit related to the Act of approximately $18 million in Q3 and $16 million for the nine months lowered reported effective tax rates; management noted further estimate adjustments could affect future tax expense.
- Revenue estimates for variable contract consideration involve change orders and claims. Approximately $56 million remained included in contract transaction prices at September 30, primarily for large Oil and Gas pipeline projects; amounts ultimately realized could be lower or higher. Contract-estimate changes can materially affect results.
- Customer concentration is significant: AT&T represented 21% of Q3 revenue, EQT 28%, and Energy Transfer affiliates 12%. Two customers represented approximately 36% and 27% of net accounts receivable. Legal disputes, project execution, customer spending changes, weather, regulatory delays, labor and pricing pressures, and variable-rate borrowing are among the disclosed risks. Management identified no material changes to the risk factors in its prior annual report.
- Other notable items: G&A rose 21% in Q3, including timing of legal matters and settlements, compensation and professional fees; interest expense increased with higher average borrowings, rates and receivables-financing charges. The company expected adoption of the new lease standard in 2019 to add a material amount of lease assets and liabilities to its balance sheet, although it did not expect a material change in lease expense.
Important facts for investors to verify
- Whether Q4 billing and collections reduce the $1.539 billion costs-and-earnings-in-excess-of-billings balance and elevated DSO as management expected.
- Whether Oil and Gas pipeline project schedules recover, and whether Communications and renewable-power growth offsets continued weakness or timing shifts elsewhere.
- How much of the $7.833 billion backlog converts to revenue, given that roughly half is under cancellable service agreements without minimum purchase commitments.
- Cash generation, revolving-credit availability and leverage after share repurchases, capital spending and seasonal working-capital needs.
- Resolution and collectability of the $56 million in pending change orders and claims, and the effect of variable consideration or project cost estimates on margins.
- Durability of reported earnings excluding tax benefits, as well as potential impacts from customer concentration, contingencies and the expected lease-standard balance-sheet adoption.