MasTec, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone Q4 filing; quarterly Q4 figures are included below. MasTec provides infrastructure construction, installation, maintenance and upgrade services, primarily across North America, in communications, oil and gas, electrical transmission, and power generation and industrial markets.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $5.135 billion | $4.208 billion |
| Net income (loss) attributable to MasTec | $131.3 million | $(79.1) million |
| Diluted EPS from continuing operations | $1.61 | $(0.98) |
| EBITDA from continuing operations (non-GAAP) | $441.5 million | $150.0 million |
| Adjusted EBITDA from continuing operations (non-GAAP) | $476.9 million | $308.1 million |
| Net cash provided by operating activities | $205.6 million | $367.4 million |
| Capital expenditures | $117.1 million | $84.4 million |
| Cash and cash equivalents at year-end | $38.8 million | $5.0 million |
| Total debt, net of deferred financing costs | $1.026 billion | $1.010 billion |
| Working capital | $562.5 million | $377.2 million |
- Revenue rose 22.0%, led by Oil and Gas (+35%) and Communications (+18%). Costs of revenue, excluding depreciation and amortization, fell to 86.5% of revenue from 88.4%, indicating improved cost performance. Reported net income rebounded from a 2015 loss that included a $78.6 million goodwill and intangible-asset impairment.
- Segment EBITDA improved notably in Oil and Gas ($297.3 million versus $157.0 million) and Communications ($244.6 million versus $194.8 million). Electrical Transmission remained loss-making, with EBITDA of $(42.9) million, improved from $(71.3) million.
- Operating cash flow declined $161.8 million, primarily because higher activity increased working-capital needs; accounts receivable grew to $1.156 billion from $911.1 million. Year-end days sales outstanding, net of billings in excess, remained 68 days.
- At December 31, 2016, the company reported approximately $405.9 million of revolving loan availability under its then-current credit facility. A February 2017 amendment increased total credit commitments from $1.2 billion to $1.5 billion and extended maturity to February 2022. The company stated it expected available resources to meet its needs for at least 12 months.
- Q4 2016: Revenue was $1.342 billion; net income was $55.9 million, including $53.6 million attributable to MasTec; diluted continuing-operations EPS was $0.66.
Material changes and business outlook
- Oil and Gas growth reflected multiple large long-haul pipeline projects, partly offset by weaker Canadian gathering and related facilities work. Oil and Gas backlog increased to $2.223 billion from $2.006 billion year over year.
- Communications growth came from install-to-the-home, wireline/fiber and wireless work. Electrical Transmission revenue increased 12%, but segment results remained negative amid project inefficiencies and restructuring. Renewable project activity supported Power Generation and Industrial.
- Estimated 18-month backlog was $5.419 billion at year-end, down from $5.674 billion a year earlier. MasTec expected to recognize approximately 80% of year-end backlog during 2017. Backlog is not a GAAP measure; about half was under service agreements that generally require no minimum customer purchases and may be canceled on short notice.
- Management described expected opportunities in pipelines, communications network upgrades, grid modernization, renewables and gas-fired power and industrial construction. It anticipated strong renewable activity into 2017 as developers pursued projects eligible for time-limited tax incentives, but provided no specific 2017 revenue or earnings guidance in the supplied text.
- Management estimated 2017 capital expenditures of approximately $100 million, net of asset disposals, and $85–$100 million of equipment purchases through leases or other financing arrangements.
Risks, contingencies and unusual items
- Customer and project concentration is substantial: AT&T, including DIRECTV, represented 34% of FY 2016 revenue and Energy Transfer affiliates 27%. The top ten customers accounted for 76% of revenue. Many contracts can be terminated on short or no notice.
- Fixed-price and percentage-of-completion work depends on cost estimates and project execution. Cost overruns, delays, weather, permitting, claims and customer changes can reduce margins or require loss recognition. The company reported approximately $17 million of unresolved contract change orders and claims included in estimated contract adjustments.
- FY 2016 included $15.2 million of restructuring charges, a $13.5 million western Canadian oil and gas project loss, a $15.1 million large transmission project loss, and $5.1 million of losses on a Canadian joint venture. Other income included approximately $10 million from a settlement related to a previously acquired business.
- Electrical Transmission goodwill had only about 5% estimated fair-value headroom; a 100-basis-point increase in the discount rate would have put carrying value above estimated fair value. Management reported no impairment in 2016 but warned that lower profitability or cash flows could prompt future charges.
- Multiemployer pension plans include underfunded plans; the company paid the recorded balance of its Central States withdrawal liability in 2016 but remained in arbitration over any residual amount. Self-insurance liabilities were $85.8 million at year-end, excluding employee medical claims.
- The company disclosed a securities class action related to prior accounting matters; a motion to dismiss was granted without prejudice, and plaintiffs could file another complaint. The SEC notified MasTec in November 2016 that it did not intend to recommend an enforcement action. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
- Related-party disclosures include $12.9 million of 2016 subcontracting expenses to an entity whose minority owners included entities associated with the chairman and CEO and subsidiary managers. Related-party operational facility and equipment lease payments totaled $43.3 million.
Key facts for investors to verify
- Whether the 2016 earnings and margin recovery is repeatable, particularly in Oil and Gas, and whether Electrical Transmission can return to profitability.
- Conversion, timing and profitability of backlog, including customer cancellation rights, project delays and the concentration of revenue in AT&T and Energy Transfer affiliates.
- Cash conversion and receivables collection as activity grows, given the decline in operating cash flow and increase in accounts receivable.
- Debt, borrowing availability, covenant headroom and future interest costs following the February 2017 credit-facility amendment.
- Potential exposure from claims and change orders, pension plans, self-insurance, joint ventures and related-party arrangements; also monitor goodwill valuation sensitivity and the pending securities litigation.