MasTec, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing also reports unaudited fourth-quarter results. MasTec provides infrastructure engineering, construction, installation and maintenance services, mainly in North America, across communications, oil and gas, electrical transmission, and power generation and industrial markets.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $6.607 billion | $5.135 billion |
| Net income attributable to MasTec | $347.2 million | $131.3 million |
| Diluted EPS | $4.22 | $1.61 |
| EBITDA and margin | $620.9 million; 9.4% | $441.5 million; 8.6% |
| Adjusted EBITDA and margin | $645.6 million; 9.8% | $476.9 million; 9.3% |
| Operating cash flow | $156.3 million | $205.6 million |
| Capital expenditures | $123.4 million | $117.1 million |
| Total debt | $1.369 billion | $1.026 billion |
| Working capital | $888.5 million | $562.5 million |
Revenue rose 29%, while reported net income attributable to MasTec increased substantially. The 2017 effective tax rate was 6.2%, including a $120.1 million non-cash tax benefit from remeasuring deferred tax balances following the 2017 Tax Act; adjusted net income was $241.9 million and adjusted diluted EPS was $2.92. Costs of revenue excluding depreciation and amortization increased to 87.0% of revenue from 86.5%, reflecting weaker Oil and Gas project efficiencies and mix, partly offset by improvements in other segments.
Operating cash flow fell by $49.3 million, primarily because higher activity increased working-capital needs. Receivables rose to $1.598 billion from $1.156 billion, and days sales outstanding, net of billings in excess of costs and earnings, increased to 81 from 68. Cash and equivalents were $40.3 million at year-end. The company reported $565.2 million of revolving availability and $888.5 million of working capital, and stated that expected liquidity sources would cover needs for at least the next 12 months.
Debt included $377.7 million of revolving loans, a $396.9 million term loan, $400 million of 4.875% senior notes due 2023, and capital lease obligations. MasTec was in compliance with its debt covenants at year-end. Management estimated 2018 capital expenditures of $220–$240 million, net of asset disposals of approximately $200–$220 million, plus $110–$130 million of equipment purchases through leases or other financing.
Material changes and segment trends
- Oil and Gas: Revenue increased 73% to $3.497 billion, mainly from large long-haul pipeline projects. EBITDA rose to $402.2 million, but margin declined to 11.5% from 14.7% due to project efficiency and mix.
- Communications: Revenue increased 4% to $2.424 billion. Acquisitions contributed about $110 million, while organic revenue was slightly lower, principally due to reduced install-to-the-home activity. EBITDA margin was 10.2%, down from 10.5%.
- Electrical Transmission: Revenue declined 2% to $378.2 million; EBITDA recovered to $17.6 million from a $42.9 million loss in 2016, reflecting improved project efficiencies and the absence of prior-year project losses and restructuring charges.
- Power Generation and Industrial: Revenue fell 26% to $299.9 million, primarily from lower renewable project activity and timing. EBITDA improved to $22.6 million, with margin rising to 7.5% from 4.5%.
- Three acquisitions were completed in 2017. They contributed approximately $160 million of revenue; acquisition consideration included $117.9 million cash and $93.5 million estimated contingent consideration.
Outlook, risks and unusual items
Management described growth opportunities in 5G and fiber deployment, FirstNet, pipeline construction, grid modernization, renewables, and industrial construction. Year-end 18-month backlog reached $7.087 billion, up from $5.419 billion a year earlier; management expected to realize approximately 80% in 2018. Backlog is not a GAAP measure: about half was under service agreements with no minimum purchase commitments, and much of it could be canceled on short notice. The filing gives market-opportunity commentary but no numerical 2018 revenue or earnings guidance.
- Customer and project concentration: Energy Transfer affiliates represented 40% of 2017 revenue and AT&T 25%; the top ten customers generated 78%. Fixed-price work, project delays, cost overruns, customer cancellations and collection timing can affect margins and cash flows.
- Claims and estimates: Approximately $146 million of change orders and claims were included in contract price adjustments at year-end, mostly in Oil and Gas; $142 million related to unapproved change orders. Final recoveries may differ from estimates.
- Tax and quarterly results: The tax-reform benefit materially boosted reported 2017 earnings. Fourth-quarter net income was $160.7 million versus $55.9 million in 2016, including the $120.1 million tax benefit and $5.6 million of excess share-based compensation tax benefits.
- Debt and commitments: Borrowings increased, and variable-rate debt exposes the company to rate changes; a 100-basis-point increase would have raised 2017 interest expense by about $7 million. Other exposures include leases, letters of credit, surety bonds, self-insurance and multiemployer pension plans.
- Other risks: Commodity and customer spending cycles, weather and seasonality, labor availability and costs, safety and environmental liabilities, regulatory/permitting delays, acquisition integration, goodwill impairment, and renewable-energy tax incentives could affect results. Several pension plans were underfunded; potential future contribution increases or withdrawal liabilities were not estimable.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. Internal controls at two 2017 acquisitions were excluded from management’s assessment and the auditor’s audit.
Important facts for investors to verify
- Whether the 2017 revenue and margin gains persist, particularly as large pipeline projects progress and Oil and Gas margins recover.
- Whether receivables, DSO and operating cash flow improve, and whether the $146 million of contract adjustments and claims are collected as estimated.
- How much of backlog converts to profitable revenue, given cancellation rights and the absence of minimum commitments in many service agreements.
- The ongoing earnings and cash-tax effects of the 2017 Tax Act, including any revisions to provisional tax accounting.
- Debt repayment and capital spending needs, acquisition-related earn-outs, and the potential dilution or cash cost of future acquisition consideration.
- Exposure to the two largest customers, related-party transactions, self-insurance claims, and underfunded multiemployer pension plans.