MaStec, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited consolidated financial statements. MasTec provides infrastructure construction, installation, maintenance and upgrade services, primarily in communications and utilities.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $865.3 million | $631.9 million | $2,234.7 million | $1,577.3 million |
| Gross profit / margin | $120.3 million / 13.9% | $103.4 million / 16.4% | $318.0 million / 14.2% | $242.5 million / 15.4% |
| Net income attributable to MasTec | $31.8 million | $30.0 million | $97.4 million | $52.0 million |
| Diluted EPS | $0.36 | $0.35 | $1.13 | $0.62 |
| Adjusted EBITDA | $80.3 million (9.3% margin) | $72.8 million (11.5%) | $208.7 million (9.3%) | $153.0 million (9.7%) |
- Revenue growth: Q3 increased 37% year over year; nine-month revenue increased 42%. Acquisitions contributed $114.8 million to Q3 revenue and $152.7 million to nine-month revenue. Management attributed organic growth to wireless, pipeline, install-to-the-home and energy transmission work.
- Earnings quality: Nine-month GAAP results included a $29.0 million pretax gain from remeasuring MasTec’s prior EC Source investment when it acquired the remaining interest. Adjusted nine-month net income was $79.7 million and adjusted diluted EPS was $0.92, excluding the after-tax gain.
- Margins and costs: Gross margin fell 2.5 percentage points in Q3 and 1.2 points for the nine-month period. Management cited DirectStar commissions, wireless pricing discounts and project inefficiencies, higher labor and fuel costs, flooding-related pipeline costs, and lower renewable-project utilization. G&A fell as a share of revenue, to 4.6% in Q3 from 4.9%, and to 4.9% for nine months from 5.7%.
- Cash flow: Nine-month operating cash flow was negative $40.4 million, versus positive $100.7 million a year earlier. Management cited working-capital growth, including receivables and unbilled revenue, and a $61.9 million decline in billings in excess of costs and earnings. Investing cash outflow was $133.6 million, including acquisitions and $57.0 million of capital expenditures; financing cash inflow was $12.8 million.
- Liquidity: September 30 cash was $16.4 million, down from $177.6 million at year-end 2010; working capital was $279.4 million. The company reported $451.9 million of total debt, including current maturities. Its amended $600 million revolver had $27.0 million drawn, $89.5 million of letters of credit outstanding and $483.5 million of remaining borrowing capacity. MasTec reported compliance with debt covenants.
Material changes and notable developments
- MasTec acquired full ownership of EC Source in May and acquired Fabcor and other businesses during 2011. The acquisitions added scale and new infrastructure capabilities, while increasing goodwill, intangible assets and contingent earn-out obligations. Acquisition-related contingent consideration was $81.9 million at September 30; management reported total recorded future earn-out obligations of approximately $90.4 million.
- In August, MasTec replaced its asset-based credit facility with a cash-flow-based, senior secured $600 million revolver, increased from $260 million, and extended maturity to August 2016. Facility covenants include a maximum leverage ratio of 3.50:1 and minimum interest coverage of 3.00:1.
- The company exchanged most of its 4.0% and 4.25% convertible notes for substantially similar notes with cash, physical-share or combination settlement options. New-note principal was $202.3 million; the notes’ accounting discount increases reported interest expense over their stated coupon rates.
- Total assets rose to $2.08 billion from $1.66 billion at December 31, 2010, including goodwill increasing to $801.4 million from $613.4 million, primarily reflecting acquisitions.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management estimated 2011 capital expenditures of approximately $65 million and said operating cash flow, the credit facility and cash balances should meet expected needs for at least the next 12 months.
- Management expected ongoing flooding and above-average rainfall in the Marcellus shale basin to pressure fourth-quarter pipeline project margins. Renewable-energy work was weakened by constrained customer financing, changed spending plans and pricing competition. Management also cited competitive bidding, economic and regulatory conditions, fuel costs, seasonality and weather as factors that can affect demand and margins.
- Estimated 18-month backlog was $3.09 billion, but excluded approximately $300 million of awarded work subject to financing contingencies. Backlog includes service agreements that customers may cancel, and is not a firm indicator of future revenue.
- Customer concentration is substantial: the top ten generated 73% of revenue in both nine-month periods; DIRECTV and AT&T contributed 23% and 24%, respectively, in the first nine months of 2011. Red Ventures may exercise an option between March and November 2012 to repurchase the DirectStar business, which management said would materially reduce DIRECTV-related revenue and profits.
- Liquidity and execution risks include high working-capital needs, cash conversion of receivables, debt service and restrictive covenants, and the possibility that cash settlement of convertible-note principal could require additional funding. Performance and payment bonds covered $629.4 million of projects; estimated cost to complete those projects was $170.4 million.
- MasTec described a Spanish legacy litigation matter alleging approximately 300 million euros in damages; the company called the claims frivolous, is defending the case, and recorded no accrual because potential loss could not be determined. Certain multi-employer pension plans were reported in critical status, potentially requiring additional contributions that the company could not estimate.
Important facts for investors to verify
- Whether the deterioration in gross margin and negative operating cash flow reverse, particularly as flooding affected pipeline work and receivables and unbilled revenue grew.
- How much of reported earnings growth is sustainable apart from the $29.0 million EC Source remeasurement gain, and whether acquisition contributions meet expectations.
- Backlog conversion, including the financing-contingent project, cancellation rights under service agreements, and the potential effect of the DirectStar repurchase option.
- Available revolver capacity after letters of credit, covenant headroom, and the company’s ability to fund debt service, earn-outs and any cash settlement of convertible notes.
- Final acquisition purchase-price allocations and contingent consideration, as well as exposure to the unresolved litigation, pension-plan assessments, bonds and self-insurance claims.