MasTec, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. MasTec is a North American infrastructure construction company serving communications, oil and gas, electrical transmission, and power generation and industrial markets. Results are unaudited.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $964.0 million | $918.6 million |
| Net income from continuing operations | $16.2 million | $19.3 million |
| Net income attributable to MasTec | $16.0 million | $18.4 million |
| Diluted EPS from continuing operations | $0.19 | $0.23 |
| EBITDA / EBITDA margin | $71.6 million / 7.4% | $73.5 million / 8.0% |
| Operating cash flow | $(20.4) million | $26.1 million |
- Costs of revenue, excluding depreciation and amortization, were 87.2% of revenue versus 86.2%; management attributed the deterioration primarily to weather-related project inefficiencies. Net income from continuing operations margin was 1.7% versus 2.1%.
- At March 31, cash was $9.3 million, working capital was $538 million, and total debt was $894.2 million, including $841.3 million of long-term debt. The $750 million revolving credit facility had $128.6 million drawn, $134.7 million of letters of credit outstanding, and $486.8 million of remaining borrowing capacity.
- Accounts receivable was $1.196 billion, up from $1.135 billion at year-end; inventory was $89.1 million, up from $70.2 million. Days sales outstanding, net of billings in excess of costs and earnings, rose to 101 from 80 at year-end.
Material changes and operating results
- Revenue increased 5%, but acquisitions contributed approximately $120 million to the year-over-year increase while organic revenue declined approximately $74 million. Management cited winter weather disruptions and delayed project starts.
- Oil and Gas revenue rose 19% to $379.8 million, while segment EBITDA fell to $34.9 million from $42.4 million and margin declined to 9.2% from 13.3%. Communications revenue increased 5% to $447.1 million, but EBITDA margin declined to 9.7% from 10.9%.
- Power Generation and Industrial revenue decreased 39% to $54.2 million, reflecting the timing of renewable projects and lower commercial and industrial work. Electrical Transmission revenue fell 5% to $80.1 million.
- Interest expense increased to $12.0 million from $10.0 million, largely reflecting the 2013 issuance of senior notes. Q1 2013 included a $5.6 million debt-extinguishment loss; there was no corresponding charge in Q1 2014.
- Foreign currency translation reduced other comprehensive income by $5.3 million in Q1 2014, primarily related to Canadian operations.
Outlook, liquidity and risks
- Management estimated 2014 capital expenditures of $90–$100 million and approximately $100 million of equipment purchases under capital leases or other financing arrangements. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management expected operating cash flow, revolver availability and cash balances to meet liquidity needs for at least the next 12 months. It expected to refinance the $215 million principal amount of senior convertible notes maturing in 2014, through the credit facility or other funding sources. The company reported compliance with debt covenants at quarter-end.
- Cash used in operations was attributed largely to working-capital needs, weather-delayed billing milestones and increased unapproved change orders. Change orders and claims included in contract price adjustments rose to approximately $163 million from $79 million at year-end; a significant increase related to an Oil and Gas project was approved in principle after quarter-end.
- Estimated 18-month backlog was $4.218 billion, up from $4.127 billion at year-end and $3.455 billion a year earlier. Backlog is not a firm revenue guarantee: service agreements generally lack minimum purchase commitments and may be canceled on short or no notice.
- Customer concentration is material: AT&T, DIRECTV and Enbridge generated 22%, 14% and 14% of Q1 revenue, respectively; the top ten customers generated 73%. Approximately 47% of revenue came from project-specific work.
- In the SunLight solar-project disputes, a New Jersey appellate court ruled against MasTec’s asserted municipal and construction liens of approximately $50 million; the company was seeking further review. Arbitration was underway, with an award anticipated in summer 2014.
- MasTec disclosed potential multi-employer pension exposure: Central States demanded $11 million in withdrawal liability, versus the company’s $6.4 million estimate; $5.1 million remained outstanding at March 31. The company disputed the demand.
- Other relevant exposures include $1.0 billion of performance and payment bonds, self-insurance claims liabilities of $50.9 million, and acquisition-related earn-out liabilities estimated at approximately $184 million.
Important facts for investors to verify
- Whether the post-quarter approval of major change orders translates into timely billing and collection, and whether receivables and days sales outstanding improve.
- Whether seasonal recovery and project starts restore organic growth and segment margins after weather-related disruption.
- How MasTec refinances or repays the $215 million of convertible notes maturing in 2014, and the resulting effect on debt, interest expense and share dilution.
- Developments in the SunLight arbitration and lien appeal, and the outcome of the Central States withdrawal-liability dispute.
- Whether backlog converts to revenue as expected, given customer cancellation rights, project timing and significant customer concentration.