MasTec, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. MasTec provides infrastructure construction, installation and maintenance services across communications, oil and gas, electrical transmission, power generation and industrial markets. This unaudited report covers the three months ended March 31, 2015; comparative Q1 2014 figures are restated. The report was signed August 7, 2015.
Financial performance
| Metric | Q1 2015 | Q1 2014, restated |
|---|---|---|
| Revenue | $1,003.3 million | $957.8 million |
| Operating cash flow | $118.8 million | $(20.4) million |
| Net income (loss) attributable to MasTec | $(6.3) million | $12.1 million |
| Diluted EPS | $(0.08) | $0.14 |
| EBITDA, continuing operations | $42.8 million; 4.3% of revenue | $65.3 million; 6.8% |
| Adjusted EBITDA, continuing operations | $63.8 million; 6.4% | $68.5 million; 7.2% |
| Interest expense, net | $11.0 million | $12.0 million |
Revenue rose 5%, but management reported organic revenue declined $75 million; acquisitions added about $120 million. Costs of revenue excluding depreciation and amortization were 88.4% of revenue, versus 87.8% a year earlier. G&A rose to $74.0 million from $53.3 million, including $8.8 million of WesTower integration costs and $3.0 million related to the Audit Committee investigation. Adjusted measures are non-GAAP and exclude specified items; they should be read alongside reported results.
Cash, debt and liquidity
- Cash was $28.7 million at March 31, 2015. Working capital was $477 million, down from $551 million at year-end 2014.
- Total debt was $1.153 billion, including $303.5 million of revolving loans, a $250 million term loan and $400 million of 4.875% notes. Revolving borrowing capacity was $543.2 million; $153.2 million of letters of credit were outstanding.
- Operating cash flow improved by $139.2 million year over year, helped substantially by a $156 million positive effect from net changes in assets and liabilities. Investing cash use was $50.4 million; financing cash use was $62.8 million, including $83.3 million of share repurchases.
- Management expected available cash, operating cash flow and credit-facility availability to meet anticipated needs for at least the next 12 months. Estimated 2015 capital expenditures were about $70 million, or $60 million net of asset disposals, plus $40–$50 million of equipment purchases under lease or other financing.
Material changes and segment results
- Communications revenue increased 5% to $469.9 million; EBITDA rose to $51.7 million, with margin improving to 11.0% from 9.7%, reflecting productivity gains. Acquisitions contributed revenue, while wireless activity declined organically.
- Oil and Gas revenue fell 14% to $326.8 million and EBITDA fell to $21.5 million from $34.6 million. Management cited completion of a large pipeline project, lower oil prices and deferred or canceled work.
- Electrical Transmission revenue rose 57% to $116.0 million, largely due to project timing; EBITDA remained negative at $2.5 million.
- Power Generation and Industrial revenue rose 55% to $84.3 million, but EBITDA was $(8.9) million, including a $16 million loss on a troubled Canadian wind project. Other segment EBITDA was $(5.1) million, including $5.5 million of losses on a Canadian joint venture.
- Consolidated EBITDA declined about 34% year over year. Adjusted net income from continuing operations was $6.1 million, or $0.07 adjusted diluted EPS, versus $14.3 million, or $0.17, in Q1 2014.
Outlook, risks and unusual items
- Estimated 18-month backlog was $4.21 billion at March 31, down from $4.35 billion at December 31, 2014; management expected to realize about 60% in 2015. Backlog includes cancellable master service agreements and is not a firm revenue forecast. The filing provides no specific revenue or earnings guidance.
- Management cited oil-market weakness, project timing, weather, customer spending and pricing pressure as factors affecting demand and margins. The top ten customers represented 58% of Q1 revenue; AT&T and DIRECTV together represented 32% following their July 2015 combination.
- The company restated Q1, Q2 and Q3 2014 financial statements following an Audit Committee investigation. A material weakness related to documentation of cost-to-complete estimates for percentage-of-completion projects remained unresolved; management concluded disclosure controls were ineffective as of March 31, 2015. The company said it was cooperating with SEC staff. The cover page marks “No” for both timely-reporting and Interactive Data File compliance.
- MasTec reported receiving lender and noteholder consents in connection with delayed filings. It stated it was in compliance with debt covenants at March 31, 2015; the consents extended specified reporting deadlines. The filing also describes a shareholder securities class action and the PPL contract dispute, with a trial scheduled for October 2015. PPL-related claims exceed $40 million; outcomes are uncertain.
- Pacer’s acquired investments and guarantees create additional exposure: a receiver requested up to $54.6 million of financing in May 2015, of which about $37.2 million had been paid by August 3. Management expected repayment, but collection depends on the receivership wind-down. Separately, a June 2015 investment in two pipeline joint ventures included commitments for up to an additional $78 million in equity contributions and/or loan guarantees.
- About $82 million of contract change orders and claims were included in contract assets or receivables; ultimate customer approval and collection may differ from estimates. Other disclosed risks include multi-employer pension withdrawal liabilities and guarantees associated with joint ventures and projects.
Most important facts for investors to verify
- Progress and effectiveness of remediation for the cost-estimate documentation material weakness, and any further investigation or restatement developments.
- Whether Q1 operating cash flow’s working-capital-driven improvement is sustainable, and trends in receivables, collections and days sales outstanding.
- Backlog conversion, cancellations or deferrals, particularly in communications and oil and gas, and the concentration of revenue among major customers.
- Resolution and potential cash exposure from the Canadian wind project, Pacer receivership and joint-venture guarantees, PPL litigation, shareholder litigation and pension disputes.
- Debt-facility availability, covenant compliance and the company’s ability to fund capital spending, commitments and debt service while margins remain pressured.