Ma.tec, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The interim financial statements are unaudited. MasTec provides infrastructure construction and maintenance services, primarily in North America, across utility, communications, energy, and government markets. Unless noted, amounts below are in U.S. dollars.
Financial results and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $1.067 billion, up 30.8% from 2011 | $2.794 billion, up 33.1% |
| Income from continuing operations | $36.1 million, versus $30.8 million | $79.0 million, versus $90.5 million |
| Diluted EPS from continuing operations | $0.45, versus $0.35 | $0.97, versus $1.05 |
| Net income attributable to MasTec, including discontinued operations | $26.8 million, versus $31.8 million | $71.1 million, versus $97.4 million |
| Total diluted EPS, including discontinued operations | $0.34, versus $0.36 | $0.87, versus $1.13 |
| Operating cash flow | $114.7 million for nine months, compared with cash used of $63.1 million in 2011 |
For Q3, costs of revenue excluding depreciation and amortization were 86.6% of revenue, compared with 86.1% a year earlier. The corresponding nine-month figures were 87.5% and 86.0%. Q3 pretax income was $59.6 million (5.6% of revenue), versus $48.9 million (6.0%). The nine-month comparison was $130.2 million (4.6%) versus $146.8 million (7.0%). Management cited project mix and lower margins on certain pipeline, power-generation, and industrial work; it also reported approximately $25 million of losses on two pipeline projects in Q2.
At September 30, cash and cash equivalents from continuing operations were $10.5 million; working capital was $276.1 million. Total debt was $453.0 million, down from $494.8 million at December 31, 2011. Accounts receivable, net, was $873.1 million, up from $652.6 million; management reported continuing-operations DSO of 75 days, down from 82 days at year-end. The $600 million revolving credit facility had $10.0 million drawn and $99.4 million in letters of credit; $490.6 million of borrowing capacity remained available. MasTec reported compliance with debt covenants. Balance-sheet cash is $10.5 million for continuing operations; cash-flow-statement ending cash of $11.2 million includes $0.7 million classified with discontinued operations.
Material changes and unusual items
- Continuing-operations revenue growth reflected strong demand in power generation and industrial, oil and gas pipeline and facility, and electrical transmission work. Nine-month organic revenue growth was 25.2%; 2011 acquisitions contributed $164.7 million of the year-over-year increase.
- Utilities rose to 59% of Q3 continuing-operations revenue from 46% a year earlier; communications contributed 41%, down from 53%. Approximately 60% of Q3 revenue came from project-specific work.
- Q3 continuing-operations results included a $9.6 million pretax reserve related to the Sintel litigation. Excluding its $5.8 million after-tax effect, management reported adjusted Q3 continuing income of $41.9 million and adjusted diluted EPS of $0.53; these are non-GAAP measures.
- DirectStar was sold in June 2012 for $98.9 million net cash proceeds and is reported as discontinued operations. In September, MasTec approved a plan to sell Globetec by September 30, 2013. The company recorded $12.7 million of Globetec impairment charges; management warned that additional impairment could result if sale proceeds fall short of its current estimate.
- The share-repurchase program was completed in July 2012. MasTec repurchased 9.5 million shares from the program for a total of $150 million, including $75 million during the first nine months of 2012.
- Investing cash flow included $97.7 million of net proceeds from the DirectStar sale. Financing cash flow included $75.0 million of treasury-stock purchases and $50.0 million of net repayments on the credit facility.
Outlook, risks, and contingencies
- Management estimated 2012 capital expenditures of approximately $75 million and stated that operating cash flow, credit-facility availability, and cash balances should cover liquidity needs for at least the next 12 months. The filing gives no specific revenue or earnings forecast.
- Management said wind-project demand was driven partly by the federal production tax credit deadline requiring qualifying facilities to be in service by December 31, 2012. It also cited reduced wireless work-order volume during 2012, competitive pricing pressure, weather and project-timing variability, and sensitivity to customer capital spending and energy-market conditions.
- Customer concentration is significant: the top ten customers accounted for 67% of Q3 and 66% of nine-month continuing revenue. AT&T and DIRECTV each represented 16%–17% in these periods. The sale of DirectStar is expected to reduce future revenue and profit associated with DIRECTV.
- The Sintel matter remained conditional: MasTec recorded the reserve after reaching a tentative agreement intended to dismiss the company and its defendants, but further negotiation and conditions remained, and completion was not assured. Separately, MasTec agreed to recover $3.5 million from Aon; payment received in October was expected to affect Q4 results.
- Several participating multi-employer pension plans were underfunded or in critical status and may require higher contributions. Central States disputed the effectiveness and timing of MasTec’s 2011 withdrawal, which could increase withdrawal liability. Other exposures include self-insurance claims, performance and payment bonds, letters of credit, litigation, and contingent acquisition earn-outs.
- The company held auction-rate securities with $17.9 million par value and $14.1 million fair value; limited market liquidity and valuation assumptions create uncertainty. MasTec also noted that cash settlement of convertible-note principal may be constrained by credit-facility requirements and could otherwise require additional funding or share settlement.
Important facts for investors to verify
- Whether project margins recover from the Q2 pipeline losses and Q3 cost-of-revenue pressure, and how much near-term demand is tied to the wind tax-credit deadline.
- Collection and working-capital trends given the increase in receivables, including retainage and unbilled costs, alongside management’s reported DSO improvement.
- Final terms and proceeds from the Globetec sale, and whether further impairment charges are recorded.
- Resolution and ultimate cost of the Sintel matter, and the timing and accounting for the Aon recovery.
- Customer concentration, backlog conversion, and replacement of project-specific work; the company cautions that backlog is an uncertain indicator and service agreements may be canceled on short notice.
- Liquidity after letters of credit, bonding requirements, earn-out obligations, debt service, and any cash requirements related to convertible-note settlement.