Business context and reporting period
MasTec, Inc. is a North American infrastructure construction company serving communications, oil and gas, electric transmission, power generation and industrial markets. This Form 10-Q covers the quarter and nine months ended September 30, 2015. The 2014 comparative results are restated; the filing attributes that restatement primarily to project cost-to-complete estimates, especially in Electrical Transmission.
Financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014, restated | Nine months 2015 | Nine months 2014, restated |
|---|---|---|---|---|
| Revenue | $1,111.0 | $1,315.5 | $3,180.9 | $3,380.5 |
| GAAP net income (loss) attributable to MasTec | $7.6 | $49.0 | ($2.3) | $94.8 |
| Diluted EPS | $0.09 | $0.57 | ($0.03) | $1.10 |
| EBITDA, continuing operations (non-GAAP) | $67.8 | $134.2 | $164.4 | $303.6 |
| Adjusted EBITDA, continuing operations (non-GAAP) | $91.1 | $138.3 | $225.9 | $315.2 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $260.6 | $81.0 |
- Revenue fell 16% in Q3 and 6% year to date. GAAP pretax income was $13.6 million in Q3 and $0.5 million for the nine-month period; net income from continuing operations was $7.4 million and a $2.8 million loss, respectively.
- EBITDA margin was 6.1% in Q3 and 5.2% year to date, versus 10.2% and 9.0% in the comparable 2014 periods. Costs of revenue excluding depreciation rose to 87.6% of revenue in Q3 and 88.2% year to date, from 85.4% and 86.2%.
- Q3 segment results included Communications revenue of $513 million and Oil and Gas revenue of $407 million; Electrical Transmission EBITDA was negative $23.7 million. Year-to-date Electrical Transmission EBITDA was negative $47.6 million.
- Cash from operations benefited from a $283 million positive contribution from net working-capital changes, largely receivables and inventory. Investing cash outflow was $170.5 million, including $109.3 million for investments; financing cash outflow was $107.2 million, including $100 million of share repurchases.
- Cash was $7.2 million at quarter-end. Working capital was $451 million. Total debt was $1.177 billion, including $148.1 million of capital lease obligations; current maturities were $78.8 million. Revolver borrowing capacity was $478.3 million, with $172.4 million of letters of credit outstanding.
Material changes versus the prior comparable period
- Q3 Oil and Gas revenue declined 27%, largely reflecting completion of a large pipeline project in 2014, delayed work and Canadian project deferrals amid lower oil prices. Electrical Transmission revenue declined 45%; lower activity, project delays, weaker-than-expected awards and management distraction from the Audit Committee investigation were cited.
- For the nine months, revenue declined across Oil and Gas, Electrical Transmission and Communications; Power Generation and Industrial revenue increased 15%, mainly from renewable power projects. Acquisitions added revenue but organic revenue declined.
- Profitability weakened substantially. The filing cites lower cost utilization, adverse weather and project inefficiencies; a $21.4 million loss on a Canadian wind project and $8.3 million of losses on a non-controlled Canadian joint venture contributed to results.
- Operating cash flow increased from $81.0 million to $260.6 million, primarily due to working-capital movements, despite a year-to-date net loss. Debt rose from $1.135 billion at year-end 2014 to $1.177 billion at September 30, 2015; cash declined from $24.1 million to $7.2 million.
Outlook, management commentary, risks and unusual items
- Management expects funds from operations, the credit facility and cash balances to be sufficient for anticipated needs for at least the next 12 months. Estimated 2015 capital expenditures are approximately $85 million, or $75 million net of asset disposals; expected equipment purchases under leases or other financing are $25 million to $35 million.
- Estimated 18-month backlog was $4.562 billion at September 30, up from $4.070 billion at June 30 and $4.138 billion a year earlier. Management expects about 20% to be realized in 2015. Approximately 60% is under master or other service agreements, many cancellable on short or no notice; backlog is not a guarantee of revenue.
- The company recorded a $12.2 million charge related to a court-mandated mediation settlement in the PPL dispute. It reported that settlement proceeds were expected in Q4 2015. Other unusual costs included WesTower integration costs ($17.8 million year to date), Audit Committee investigation costs ($13.7 million year to date), and a $2.6 million tax expense from an Alberta tax-law change.
- Credit-facility terms were amended in September 2015 to provide short-term covenant flexibility, including a maximum consolidated leverage ratio of 4.25 through September 29, 2016, then 4.00 through December 30, 2016, and 3.50 thereafter. The company reported compliance with debt covenants at quarter-end.
- Disclosure controls were deemed ineffective as of September 30, 2015 because of a material weakness in documentation and review of significant cost-to-complete estimates in an Electrical Transmission service line. The weakness led to restatement of 2014 interim financial statements; remediation was ongoing. The company was cooperating with the SEC’s information requests and defending a putative securities class action related to accounting disclosures.
- Key risks include customer concentration (AT&T, including DIRECTV, represented 31% of nine-month revenue), project deferrals and cancellations, oil-market volatility, weather, execution and cost-estimate risk, foreign-currency translation losses ($32.1 million year to date in other comprehensive loss), and potential claims or obligations tied to guarantees, joint ventures, self-insurance and multi-employer pension plans.
Important facts for investors to verify
- Progress and effectiveness of remediation for the material weakness, any further accounting corrections, and developments in the SEC inquiry and securities litigation.
- Whether segment margins recover, particularly in Electrical Transmission, and whether the Canadian wind and joint-venture losses require further charges.
- Conversion of backlog into revenue and cash, including cancellation or deferral risk under service agreements and changes in customer spending.
- Cash generation quality: the nine-month operating cash flow increase depended heavily on working-capital releases; review subsequent receivable collections and project billing balances.
- Debt and liquidity headroom, covenant compliance under amended terms, and cash requirements for investments, contingent consideration, guarantees and other commitments.