MasTec, Inc. — Q1 2019 Form 10-Q
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 three months ended March 31, 2019, compared with the same period in 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1.518 billion | $1.397 billion |
| Net income attributable to MasTec | $43.1 million | $26.6 million |
| Diluted EPS | $0.57 | $0.32 |
| EBITDA; EBITDA margin | $136.4 million; 9.0% | $104.6 million; 7.5% |
| Adjusted EBITDA; margin | $140.1 million; 9.2% | $107.8 million; 7.7% |
| Operating cash flow | $(46.8) million | $83.5 million |
| Investing cash flow | $(111.2) million | $(30.9) million |
| Cash and cash equivalents, March 31 | $43.2 million | $40.2 million |
At March 31, 2019, working capital was approximately $1.0 billion. Debt, net of deferred financing costs, was $1.629 billion, including $660.4 million of revolving loans, $371.9 million of term loans and $400 million of senior notes. Revolving availability was $349.1 million; MasTec reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue increased 9%, with organic growth of approximately 6%. Oil and Gas revenue rose 16% and Power Generation and Industrial rose 61%; Communications declined 2% and Electrical Transmission declined 17%.
- Oil and Gas EBITDA increased to $107.4 million from $33.0 million, attributed mainly to productivity, project efficiencies, closeouts and mix. Communications EBITDA fell to $45.3 million from $82.1 million, reflecting less storm restoration work, mix and costs to expand capacity.
- Costs of revenue excluding depreciation and amortization declined to 86.4% of revenue from 88.6%, which MasTec attributed primarily to improved productivity and project efficiencies. Net income also benefited from a lower effective tax rate: 21.8% versus 29.6%.
- Operating cash flow swung to a use of $46.8 million, primarily due to working-capital movements, including accounts payable and accrued expenses. Days sales outstanding, net of billings in excess of costs and earnings, rose to 104 from 81 at year-end; the company said substantial amounts related to certain pipeline billings had subsequently been collected.
- Debt increased from $1.407 billion at December 31, 2018, while cash increased to $43.2 million. Investing outflows grew, including $93.7 million of acquisition spending and $34.4 million of capital expenditures.
Outlook, commentary, risks and unusual items
- Management expected available operating cash, cash balances and credit-facility borrowings to meet liquidity needs for at least the next 12 months. For 2019, it estimated capital expenditures of approximately $110 million, net of asset disposals approximately $85 million, and equipment purchases under finance leases of approximately $160 million.
- Remaining performance obligations were $5.6 billion, with approximately $4.4 billion expected to be recognized as revenue in 2019. Estimated 18-month backlog was $8.0 billion, and MasTec expected to realize approximately 65% in 2019. Backlog is not a U.S. GAAP measure; approximately 45% related to service agreements without minimum purchase commitments, many cancelable on short or no notice.
- Two acquisitions were completed in Q1, in oil-and-gas water management/pipeline systems and cell-tower construction and maintenance. Their aggregate stated consideration included approximately $116 million in cash and $15 million in estimated earn-out liabilities. Total estimated earn-out liabilities were $140.5 million; actual future payments may differ, and the filing states there is no maximum payment amount.
- In April 2019, an arbitration award of approximately $50 million was finalized in MasTec’s favor in a Canadian acquisition matter. Collectibility was uncertain, and additional legal and arbitration costs were expected.
- Key operating risks include seasonality, weather and project timing, customer spending and cancellations, regulatory disruption, competitive pricing, labor and fuel costs, and estimates of project costs to complete. Customer concentration is notable: AT&T represented 23% of Q1 revenue; Energy Transfer affiliates represented 6%, down from 26% a year earlier. The top ten customers supplied 62% of revenue.
- MasTec adopted the new lease accounting standard in Q1, recording approximately $223 million of operating lease assets and $227 million of liabilities; it reported no material effect on earnings or cash flows. Other notable items included approximately $7 million of expense from changes in estimated earn-out accruals and a $5.5 million after-tax unrealized loss on Waha joint-venture interest-rate swaps in other comprehensive income.
Important facts for investors to verify
- Whether the improvement in Oil and Gas project margins and the decline in Communications EBITDA persist in subsequent quarters.
- Whether the working-capital cash outflow and elevated DSO reverse as expected, and whether receivables and contract assets are collected on schedule.
- How much of backlog and service-agreement estimates converts to revenue, given cancellation, delay and customer-demand uncertainty.
- Whether the $50 million arbitration award is collected, and how acquisition earn-outs and other acquisition-related obligations evolve.
- Debt levels, borrowing availability and covenant compliance as seasonal working-capital requirements, capital spending and acquisitions continue.