UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number 001-08106
MasTec, Inc.
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
| Florida | 65-0829355 | |
| (State or | (I.R.S. Employer | |
| Identification No.) | ||
| 800 S. Douglas Road, 12th Floor | ||
| Coral Gables, | Florida | 33134 |
| (Address of | (Zip Code) | |
(305) 599-1800
(Registrant’s Telephone Number, Including Area Code)telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of | Trading symbol(s) | Name of |
| Common Stock, $0.10 Par Value | MTZ | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer;issuer, as defined in ruleRule 405 of the Securities Act. Yesþ☑ No ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐Noþ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ ☑No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ ☑No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |||
| Non-accelerated filer | ||||
| ☐ | Smaller reporting company | |||
| Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ¨☐ No þ☑
The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $3.0$3.1 billion, (basedbased on athe closing price of $45.15 per share for the registrant’s common stock on the New York Stock Exchange on June 30, 2017).28, 2019.
There were 82,824,89376,584,117 shares of common stock outstanding as of February 21, 2018.24, 2020.
The registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the 20182020 annual meeting of shareholders is incorporated by reference in Part III of this Form 10-K to the extent stated herein.
TABLE OF CONTENTS
| Page | ||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
2
Cautionary Statement Regarding Forward-Looking Statements
The Company is making this statement pursuant to the safe harbor provisions for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. We make statements in this Annual Report on Form 10-K (“this Form 10-K” or this “Annual Report”) and in the documents that we incorporate by reference into this Annual Report that are forward-looking. When used in this Annual Report or in any other presentation, statements which are not historical in nature, including the words “anticipate,” “estimate,” “could,” “should,” “may,” “might,” “plan,” “seek,” “expect,” “believe,” “intend,” “target,” “will,” “project,” “forecast,” “continue” and variations of these words and negatives thereof and similar expressions are intended to identify forward-looking statements. They also include statements regarding:
our future growth and profitability;
our competitive strengths; and
our business strategy and the trends we anticipate in the industries and economies in which we operate.
These forward-looking statements are based on our current expectations. These statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Important factors that could cause actual results to differ materially from those in forward-looking statements include:
market conditions, technological developments, regulatory changes or other governmental policy uncertainty that affects us or our customers’ industries;
the effect on demand for our services of changes in the amount of capital expenditures by our customers due to, among other things, economic conditions, including potential adverse effects of public health issues, such as the coronavirus outbreak on economic activity generally, commodity price fluctuations, the availability and cost of financing, and customer consolidation in the industries we serve;
activity in the oil and gas, utility and power generation industries and the impact on our customers’ expenditure levels caused by fluctuations in prices of oil, natural gas, electricity and other energy sources;
our ability to manage projects effectively and in accordance with our estimates, as well as our ability to accurately estimate the costs associated with our fixed price and other contracts, including any material changes in estimates for completion of projects;projects and estimates of the recoverability of change orders;
the timing and extent of fluctuations in operational, geographic and weather factors affecting our customers, projects and the industries in which we operate;
the highly competitive nature of our industry;
industry and the ability of our customers, including our largest customers, to terminate or reduce the amount of work, or in some cases, the prices paid for services, on short or no notice under our contracts, and/or customer disputes related to our performance of services;
risks related to completed or potential acquisitions, including our ability to identify suitable acquisition or strategic investment opportunities, to integrate acquired businesses within expected timeframes and to achieve the revenue, cost savings and earnings levels from such acquisitions at or above the levels projected, including the risk of potential asset impairment charges and write-downs of goodwill;
our dependence on a limited number of customers and our ability to replace non-recurring projects with new projects;
risks associated with potential environmental issues and other hazards from our operations;
disputes with, or failures of, our subcontractors to deliver agreed-upon supplies or services in a timely fashion, and the risk of being required to pay our subcontractors even if our customers do not pay us;
risks related to our strategic arrangements, including our equity investees;investments;
any exposure resulting from system or information technology interruptions or data security breaches;
any material changes in estimates for legal costs or case settlements or adverse determinations on any claim, lawsuit or proceeding;
the effect of state and federal regulatory initiatives, including costs of compliance with existing and potential future safety and environmental requirements;
the effect of federal, local, state, foreign or tax legislation and other regulations affecting the industries we serve and related projects and expenditures, including the effect of corporate income tax reform;expenditures;
the adequacy of our insurance, legal and other reserves and allowances for doubtful accounts;reserves;
the outcome of our plans for future operations, growth and services, including business development efforts, backlog, acquisitions and dispositions;
our ability to maintain a workforce based upon current and anticipated workloads;
our ability to attract and retain qualified personnel, key management and skilled employees, including from acquired businesses, and our ability to enforce any noncompetition agreements;
fluctuations in fuel, maintenance, materials, labor and other costs;
risks related to our operations that employ a unionized workforce, including labor availability, productivity and relations, as well as risks associated with multiemployer union pension plans, including underfunding and withdrawal liabilities;
risks associated with operating in or expanding into additional international markets, including risks from fluctuations in foreign currencies, foreign labor and general business conditions and risks from failure to comply with laws applicable to our foreign activities and/or governmental policy uncertainty;
restrictions imposed by our credit facility, senior notes and any future loans or securities;
our ability to obtain performance and surety bonds;
a small number of our existing shareholders have the ability to influence major corporate decisions;
risks associated with volatility of our stock price or any dilution or stock price volatility that shareholders may experience in connection with shares we may issue as consideration for earn-out obligations or as purchase price consideration in connection with past or future acquisitions, or as a result of other stock issuances; and
other factors referenced in this Annual Report, including, without limitation, under Item 1. “Business,” Item 1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other factors detailed from time to time in the reports and other filings we make with the SEC.Securities and Exchange Commission (the “SEC”).
We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Furthermore, forward-looking statements speak only as of the date they are made. If any of these risks or uncertainties materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in, or imply by, any of our forward-looking statements. These and other risks are detailed in this Form 10-K, in the documents that we incorporate by reference into this Form 10-K and in other documents that we file with the SEC. We do not undertake any obligation to publicly update or revise these forward-looking statements after the date of this Form 10-K to reflect future events or circumstances, except as required by applicable law. We qualify any and all of our forward-looking statements by these cautionary factors.
4
PART I
| ITEM 1. | BUSINESS |
We are a leading infrastructure construction company operating mainly throughout North America across a range of industries. Our primary activities include the engineering, building, installation, maintenance and upgrade of communications, energy, utility and utilityother infrastructure, such as: wireless, wireline/fiber install-to-the-home and customer fulfillment activities; petroleum and natural gas pipeline infrastructure; electrical utility transmission and distribution; conventional and renewable power generation;generation, including renewables; heavy civilcivil; and industrial infrastructure. Our customers are primarily in these industries. Including our predecessor companies, we have been in business for almost 90 years. For the twelve month period ended December 31, 2019, we had an average of approximately 21,000 employees and 350 locations. We offer our services primarily under the MasTec service mark and, as of December 31, 2017, we had approximately 17,300 employees and 400 locations.mark. We have been consistently ranked among the top specialty contractors by Engineering News-Record for the past several years.
We provide our services to a diversified base of customers. We often provide services under master service and other service agreements, which are generally multi-year agreements. The remainder of our work is generated pursuant to contracts for specific projects or jobs that require the construction or installation of an entire infrastructure system or specified units within an infrastructure system. Revenue from non-recurring, project specific work may experience greater variability than master service and other service agreement work due to the need to replace the revenue as projects are completed. If we are not able to replace work from completed projects with new project work, we may not be able to maintain our current revenue levels or our current level of capacity and resource utilization. We actively review our backlog of project work and take appropriate action to minimize such exposure.
We seek to grow and diversify our business organically and through acquisitions and/or other strategic arrangements in order to deepen our market presence, broaden our geographic reach and expand our service offerings. For discussion of our recent acquisitions, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business,” which is incorporated by reference.
We manage our operations under five operating segments, which represent our five reportable segments: (1) Communications; (2) Oil and Gas; (3) Electrical Transmission; (4) Power Generation and Industrial and (5) Other. This structure is generally focused on broad end-user markets for our labor-based construction services.
The Communications segment performs engineering, construction, maintenance and customer fulfillment activities related to communications infrastructure, primarily for wireless and wireline/fiber communications and install-to-the-home customers, and, to a lesser extent, infrastructure for utilities, among others. We perform engineering, construction and maintenance services onfor oil and natural gas pipelines and processing facilities for the energy and utilities industries through our Oil and Gas segment. TheOur Electrical Transmission segment primarily serves the energy and utility industries through the engineering, construction and maintenance of electrical transmission lines and substations. TheOur Power Generation and Industrial segment primarily serves energy, utility and other end-markets through the installation and construction of conventional andpower facilities, including from renewable power facilities,sources, related electrical transmission infrastructure, ethanol/biofuel facilities and various types of heavy civil and industrial infrastructure. The Other segment includes equity investees, the services of which vary from those provided by our four primary segments, as well as other small business units that perform construction and other services for a variety of international end-markets. See Note 13 - Segments and Related Information and Note 14 - Commitments and Contingencies in the notes to the audited consolidated financial statements, which are incorporated by reference, for segment related information and significant customer concentrations.
In this Form 10-K, “$” means U.S. dollars unless otherwise indicated. Customer revenue by segment for the years indicated was as follows (in millions):
| For the Years Ended December 31, | ||||||||||||||||||||
| Reportable Segment: | 2017 | 2016 | 2015 | |||||||||||||||||
| Communications | $ | 2,424.4 | 37 | % | $ | 2,323.6 | 45 | % | $ | 1,973.2 | 47 | % | ||||||||
| Oil and Gas | 3,497.2 | 53 | % | 2,024.4 | 39 | % | 1,495.1 | 36 | % | |||||||||||
| Electrical Transmission | 378.2 | 6 | % | 383.8 | 7 | % | 341.5 | 8 | % | |||||||||||
| Power Generation and Industrial | 299.9 | 5 | % | 405.7 | 8 | % | 381.6 | 9 | % | |||||||||||
| Other | 20.8 | — | % | 15.9 | — | 24.1 | — | % | ||||||||||||
| Eliminations | (13.5 | ) | — | % | (18.7 | ) | — | (7.2 | ) | — | % | |||||||||
| Consolidated revenue | $ | 6,607.0 | 100 | % | $ | 5,134.7 | 100 | % | $ | 4,208.3 | 100 | % | ||||||||
Industry Trends
Our industry is composed of national, regional and local companies that provide services to customers in a range of industries. We believe the following industry trends affect demand for our services:
Significant advances in technology and rapid innovation in service offerings to data consumers have substantially increasedcontinue to increase demand for faster and more reliable wireless and wireline/fiber communications network services. In its 2017 Visual Networking Index: Forecast and Methodology, 2016-2021 report (the “2017 VNI report”),February 2020 Annual Internet Report, 2018-2023, Cisco Systems, Inc. (“Cisco”) predicts that global network traffic will increase nearly threefold over the next five years, with an expected compound annual growth rate of approximately 25%, and that broadband connection speeds in North America will nearlymore than double by 2021,
2023, from 27.5approximately 55 Mbps to 53over 140 Mbps. With the adoptionAs a result of increased usage of mobile devices, andcombined with advancements in the “internet“Internet of things,Things (IoT),” the amount of data affecting network traffic is at an all-time high and is expected to continue to substantially increase in the future.experience significant and accelerating levels of future growth. Increased mobile consumer and businessdata usage of data,from video and voice transmission, including fromdigital video and music download services, high definitionstreaming, ‘smart’ television mobile television streaming,technology, home security,automation and connected home automationmonitoring offerings, ‘Smart City’ initiatives, artificial intelligence, augmented and virtual reality and other advanced data services, including machine-to-machine connections, such as autonomous vehicles, video surveillance, smartrobotics, drones, ‘smart’ meters and digital health monitors, have increasedamong others, are expected to significantly increase data traffic, resulting in the need for new and upgraded networks.
In response to these growing demands, communications service providers (“CSPs”) are expanding, densifying and optimizing current wireless and wireline/fiber communications network requirements. One industry publication predictscapacity, while initiating a build-out of 5G infrastructure, the next generation of wireless and fixed wireless network capacity. An August 2019 Gartner, Inc. forecast indicates that to achieve nationwide coverage levels, changes to the demandstructure of the network architecture for data capacity5G wireless communications will require a longer period of installation when compared to past generation changes in ten years could be almost 1,000 times what itwireless infrastructure. In order to maintain performance standards as 5G is today, andbuilt-out, CSPs will need to undertake targeted strategic improvements to their 4G legacy networks by upgrading 4G core infrastructure alongside 5G deployment areas. Cisco, in its 2017 VNI report,Annual Internet Report, predicts that 5G devices and connections will be over 10 percent of global mobile devices and connections by 2023. Large scale 5G deployments, which are expected over the number of devices connected to the networknext several years, will exceed three times the global population by 2021.
We believe that the initiation of nationwide 5G tower deployments, deployment of small/micro cells, initiation of fiber projects to support 5G, initial deployment and subsequent capacity additions to FirstNetTM, as well as an expected increase in activity levels for various nationwide CSPs subsequent to expected industry merger activity, will lead to significant increases in 5G telecommunications capital expenditures over multiple years.
One industry publication anticipates that up to an estimated $250 billion will be constructedinvested in 5G technologies over the next several years. AT&T has stated that it expects to spend approximately $40 billion over the next 25 years as it buildsdecade, and manages the network, along with a potential $6.5 billion federal government sponsored investment by FirstNetTM over the next five years.
We believe that we are well positionedwell-positioned, as one of the largest providers of communications infrastructure services, to significantlysubstantially benefit from the expected multi-year significant and multiple infrastructurebroad opportunities in the telecommunications market as previously described. Initial field testing and global standard development for 5G technology has recently been completed, with multiple major market deployments expected to begin in 2018, and we also believe that the buildout and deployment of the FirstNetTM network will also commence during 2018. These initiatives, along with the expected benefit to our customers of lower corporate income tax rates and the accelerated depreciation provisions of the 2017 Tax Act are expected to drive communications infrastructure investment for years to come.
We believe that we are one of the leadinglargest pipeline contractors in North America, and havewith a balanced portfolio of service offerings, including union and non-union services, for the construction and maintenance of large diameter (“long-haul”) pipeline, midstream pipeline, gathering lines and related compressor and pumping stations and treatment plants, offering both union and non-union services.plants. Demand for pipeline infrastructure and the related level of oil, and natural gas and product pipeline construction activity in North America has grown significantly in recent years. Technologicalyears as technological advances and increasingly cost-effective drilling, completion and production have significantly increased producible North American oil and natural gas reserves. Technological advances in 3D seismic imaging, digitization and data analysis have led to significant improvements in the identification of oil and natural gas reserves as well as the precision with which drilling operations can be performed, lowering the cost of production and changedmaximizing output.
The effect of these advances on oil and gas production activities in North America has also driven changes in the geographic sourceslocations of North American energy production. ThisThe increase in oil and natural gas production across multiple basins, such as the Permian, Bakken and Marcellus/Utica basins, has generated increasedled the industry to initiate actions to address ‘takeaway’ capacity issues, whereby more pipeline infrastructure is required to move production to market. As a result, construction of additional pipeline capacity across multiple basins and throughout the U.S. is underway and in plans for future development to improve available distribution and reduce transportation costs.
According to the Department of Energy’s (“DOE”) Short-Term Energy Outlook 2020, the U.S., which was already a net exporter of natural gas, also became a net exporter of oil for the first time since the early twentieth century. In October 2019, Enverus Drillinginfo predicted that oil production in the Permian Basin, which accounts for approximately 35% of all U.S. oil production, will increase four-fold, from 4.3 million barrels/day to 17.3 million barrels/day over the next ten years. These trends have driven oil and natural gas pipeline construction in recent years and are expected to continue. Additionally, industry reporting indicates that the abundance of low-cost North American natural gas will continue to drive growth of natural gas as a source of lower-carbon power generation, both in the U.S. and abroad. According to the DOE’s Annual Energy Outlook 2020, U.S. natural gas continued to surpass coal and hydroelectric power as the leading fuel type for electric power generation in 2019, and the U.S. continues to produce historically high levels of natural gas and crude oil. Additionally, in recent years, demand for liquified natural gas (“LNG”) exports has risen dramatically, driven in part by the easing of certain export regulations, which is expected to drive construction of pipeline infrastructure for the long-distance transportationtransport of LNG to coastal export facilities in North America.
These trends are expected to continue to drive demand for North American oil and gas production, creating opportunities for new pipeline infrastructure throughout. Significant investment in pipeline infrastructure will be required to move the increased volumes of oil and gas production to refining centers, distribution hubs, LNG export facilities and industrial users throughout North America, most often through conversionas well as to meet demand resulting from the desire to convert the transportation of oil and gas from traditional methods, such as truck and rail transportationtransport, to lower cost and safer pipeline infrastructure. For example,In its August 2019 Oil & Gas Pipeline Construction in October 2017, the Federal Energy Regulatory Commission (“FERC”) reportedUS report, IBISWorld predicts that capital expenditures by energy producers for pipeline infrastructure in the U.S. will grow at an annualized rate of 1.6% over 2,700the next five years to almost $70 billion. In addition to potential opportunities in the U.S., initiatives in Mexico are expected to provide long-term growth opportunities. According to the Pipeline & Gas Journal’s 2020 Global Pipeline Construction Outlook, there were approximately 32,000 miles of pending natural gasnew and planned pipeline projects each with a project length in excesswithin North America at the end of 100 miles.2019. We anticipate that demand for pipeline infrastructure in North America will provide significantcontinued opportunities for years to come, and that our diverse capabilities and expertise will enable us to continue to be a leading service provider in this market.
upgrades to existing pipeline infrastructure, fromincluding pipeline integrity and maintenance upgrades, replacement and modernization efforts, including digitization and other technology upgrades and upgrades to address safety regulations.
We believe that thesethe above-mentioned trends along with the expected benefit to our customers of lower corporate income tax rates and the accelerated depreciation provisions of the 2017 Tax Act, as well as recent trends toward more favorable permitting and regulatory approval processes, will support continued expanded levels of project activity, creatingcontinuing a multi-year cycle of demand for pipeline construction projects.projects, and that we are well-positioned to benefit from these trends.
The U.S. electrical transmission and distribution infrastructure requires(the “grid”), comprising a network of electricity generation, high voltage transmission lines, substations and distribution lines that bring power to homes and businesses, will continue to require significant ongoing maintenance, upgrade and expansion to managecontinue delivery of reliable and affordable power, line congestion and avoid delivery failures, as well as to address future grid resiliency and changing energy supply and distribution requirements. Increased investment in electrical infrastructure will be required to address increasing demand, modernize the grid and visually improvestrengthen aging infrastructure. According to a May 2019 S&P Global Market Intelligence report, electric transmission and distribution infrastructure capital expenditures were projected to exceed $50 billion in 2019, driven by the existing electrical systemneed to upgrade aging infrastructure, digitize, and secure the grid against natural and man-made disasters, including storms, hurricanes and wildfires as well as strengthen aging infrastructure to withstand natural disasters and potential cyber attacks. In addition, we believeIncreasing levels of disruption from natural disasters, such as hurricanes and wildfires continue a pattern that regional shiftsis expected to lead to required incremental future investment in population and industry and increasing trends towards the use of electric vehicles, could create incremental demand for transmission and distribution constructionsystems by utility companies. In addition, clean energy production trends are expected to lead to additional electric infrastructure investment, with shifting trends in power generation to cleaner energy sources, such as natural gas and upgrades. Electrical grid expansions in Canadarenewables, while older power plants, including coal-fired and Mexico may also create opportunitiesnuclear plants are retired or repurposed.
According to the DOE’s Annual Energy Outlook 2020, the percentage of electricity generated by renewable sources is expected to double to almost 40% by 2050. Future demand for electrical transmission and distribution infrastructure services. Additionally,is also expected to result from grid resiliency efforts, technological advances, digitization, expected growth in usage of electric/hybrid vehicles, Smart City initiatives and the increasingcontinued development of electrical power generation from renewable power sources, among others. The expected growth in demand for, and expected growth in deployment of, renewable energy electrical power generation has implications forfrom renewable energy sources will require significant investment in transmission spending. Windlines, as wind and solar power generation resources are typically located in remote areas of the country, far away from industrial users and major population centers. As a result, significant spending forGrowth in electrical power generation from renewable energy transmissionsources in the U.S. will require the grid to be updated. Transmission lines maywill be required to interconnectconnect the power generated from renewable energy sources to the grid and infrastructure will be required to provide for grid-scale storage of electricity from renewable energy sources, as well as to provide grid flexibility that can accommodate the related supply and demand for these new sources of power with the electrical grid. energy sources.
According to the DOE’s Annual Energy Outlook 2018, approximately 2602020, almost 650 net gigawatts of new electricity generating capacity are expected to be added in the U.S. through 2050, requiring significant investment in transmission and distribution by electric utility companies.
We believe significant capital investment in the transmission and distribution system will continue to be required to meet thesethe above-mentioned needs, and that MasTec is well positioned in this sector.we are well-positioned to benefit from these trends.
The DOE’s Annual Energy Outlook 2018 projected approximately 802020 projects that almost 120 gigawatts of new wind and solar capacity will be added from 20182020 to 2021. These2023 and predicts that renewable power generation will exceed that of natural gas-fired generation after 2045, contributing almost 40% of U.S. power generation capacity by 2050. Advancing technologies and improvements in cost and scalability of renewable energy projects are making these energy sources, particularly solar power projects, increasingly competitive. As a result, we expect these trends as well as certain tax incentives currently applicable to the renewables industry, are expected towill continue to drive demand for construction of renewable resources throughout North Americainfrastructure in the coming years. WeAccording to a January 2020 report by IHS Markit, U.S. solar installations are expected to grow 20% in 2020, and the DOE’s Annual Energy Outlook 2020 projects continued growth in new generating capacity from solar installations through 2050 due to declining costs for solar photovoltaic (PV) panels. In addition, we believe we are onethat replacement and repowering of the leading renewables contractorsexisting wind turbines and foundations with next generation, higher efficiency turbines, as well as maintenance of aging wind farms, will provide increased opportunities for wind infrastructure projects.
Investment in North America, with expertise in wind, solar and industrial plant construction, and expect to benefit from these market trends.
industries may seek to expand, convert or construct new plants to take advantage of this economical, cleaner, natural gaslower cost and the construction of other plants which use natural gas as alower carbon fuel source. Biofuel and biomass as alternative fuel sources also present opportunities for the renewable energy market. Industrial facilities and power plants that supportin the biofuels,biofuels/biomass, food processing, natural gas, petroleum and related industries present opportunities as additional domestic energy reserves are produced, transported and processed.
We are one of the leading renewables contractors in North America, with expertise in wind, solar and biomass, as well as industrial and other power plant construction, and expect to benefit from these market trends.
Competitive Strengths
Our competitive strengths include:
Diverse Customer Relationships. We serve a diversified customer and industry base. Our customers include some of the largest communications, utility and power companies in North America.America, among others. We have longstanding relationships and have developed strong alliances with many of our customers, and we strive to maintain these customer relationships and our status as a preferred vendor to our customers.
Reputation for Reliable Customer Service and Technical Expertise. We have established a reputation for quality customer service and technical expertise. Our reputation gives us an advantage when competing for new work, both from existing and potential customers. In addition, we have broad capabilities and expertise in a wide variety of service offerings, including wireless, wireline/fiber and install-to-the-homecustomer fulfillment activities, pipeline, electrical utility, power generation, including renewables, heavy civil and heavy industrial infrastructure.
North American Footprint. Including our predecessor companies, we have been in business for almost 90 years and are one of the largest companies in the infrastructure construction services industry, with approximately 400350 locations and 17,300an average of 21,000 employees for the twelve month period ended December 31, 2019, operating throughout North America, primarily in the United States and Canada, and, to a lesser extent, in Mexico.Mexico and the Caribbean. We offer comprehensive end-to-end infrastructure services to our customers and believe that our experience, technical expertise, geographic reach, financial resources and size are important to our customers.
Ability to Respond Quickly and Effectively. The skills required to serve our end-markets are similar, which allows us to utilize qualified personnel across multiple end-markets and projects. We are able to respond quickly and effectively to industry and technological changes, demand and major weather events by allocating our employees, fleet and other assets as and where they are needed, enabling us to provide cost effectivecost-effective and timely services for our customers.
Experienced Management Team. Our management team plays a significant role in establishing and maintaining long-term relationships with our customers, supporting the growth of our business, integrating acquired businesses and managing the financial aspects of our operations. Our chief executive officer, chief operating officer andmanagement team, business unit presidents and project management teams have broad industry experience and a deep understanding of our customers and their requirements. Generally, keyKey management personnel of acquired businesses generally continue to work for us under employment or services agreements.
We seek to develop an inclusive, diverse workplace focused on delivering high quality construction, installation and maintenance services through safe and ethical business practices. We are one of the largest renewables contractorsactive in North America, having constructed a significant percentage of North America’s wind farms. Our renewables business also builds solar power plantsour local communities and biofuel/biomass
We seek to align the interests of our Board of Directors and management with thatthose of our shareholders.shareholders and stakeholders. We believe that an independent, well-diversified Board makes us a better corporate citizen, and we have a Board with racial, ethnic, gender and skill diversity. We also believe that our separation of Chairman and CEO further enhances accountability and social responsibility. Our management team and our Board of Directors also have significant ownership in MasTec’s common stock, which further aligns their interests with those of our other shareholders.
We have detailed governance procedures, including an Audit Committee Charter, a Compensation Committee Charter and a Nominating, Sustainability and Corporate Governance Committee Charter, as well as a comprehensive Code of Business Conduct and Ethics Director and Communication Principles and Board of Director Governance Principles, all of which can be reviewedviewed on the “Investors” page of our website at MasTec.com.
Through the services we provide, we help to modernize, connect and make our communities safer and more sustainable while helping to build our nation’s infrastructure, including the development and expansion of our nation’s renewable energy footprint. Investment in sustainable business opportunities is a key component of our business strategy for future growth, with selected examples highlighted below.
Renewables infrastructure. We are one of the largest renewables contractors in North America, having constructed a significant percentage of North America’s wind farms. Our power generation and industrial group provides engineering, procurement and construction services and project management solutions to the power market, including for renewable energy power sources, such as wind, solar, biofuel, biomass, waste-to-energy (WtE) and biogas, cogeneration or combined heat and power projects and gas-fired power projects. We continue to invest in our renewable energy infrastructure business, which has grown significantly in the past few years to approximately 10% of our total business revenue for the year ended December 31, 2019. As interest in climate change solutions continues to increase, we anticipate continued strong growth opportunities in our renewables infrastructure business and will continue to invest in this area to support and nurture this growth.
Electrical transmission and distribution infrastructure. We build the infrastructure that connects our nation’s power generation to consumers, including solutions to access new renewable and efficient natural gas generation sources. We also work with our customers to design and build innovative, smart energy solutions, including for the modernization of overstressed sections of the electric grid with insufficient capacity, and to upgrade aging electric infrastructure. Our projects improve the performance, safety, resiliency and efficiency of the nation’s electrical grid and advance the goal of modern, smart energy solutions for our nation’s future.
Communications infrastructure. We build wireless and wireline/fiber infrastructure that connects communities and improves communications infrastructure across our nation. Our projects incorporate cutting edge technological advances that improve speed, connectivity and bandwidth nationwide, including dense urban areas, and expand services into new areas, including rural communities. We are proud to be participating in the buildout of FirstNetTM, the nation’s first wireless official public safety network for first responders. We are also participating in the buildout of the nation’s 5G telecommunications infrastructure, helping to revolutionize telecommunications technologies. The faster speeds and reduced latency associated with 5G will serve as the foundation for transformative technological innovations, including Smart City and urbanization projects and advances in connected technologies, such as connected cars, healthcare, industrial applications and entertainment.
Pipeline infrastructure. The state-of-the-art pipelines that we construct provide a lower carbon emission and environmentally safer transportation alternative for oil and gas products versus traditional truck and rail transport. Additionally, our natural gas pipeline construction services help our customers access and distribute cleaner burning natural gas throughout the Unites States, assisting in the transition from high carbon emission electricity sources to natural gas as a cleaner burning and lower carbon emission fuel source. In addition, our pipeline integrity and replacement services help promote environmental and public safety while enhancing the safety, productivity and life of our customers’ assets.
Water pipelines. We recently invested in a water infrastructure company that specializes in energy drilling, completion and production technologies. Our water pipeline services increase the efficiency of water used in energy field operations in an environmentally focused manner. We build expansive water pipeline networks, which allow for the recycling of water, thereby reducing fresh water requirements as well as the amount of water disposed. Additionally, the use of water pipelines reduces truck traffic, resulting in lower carbon emissions.
Strategy
The key elements of our business strategy are as follows:
Focus on Growth Opportunities. We believe that our end-markets offer multiple growth opportunities, and we expect continued spending by key customers in many of the industries we serve. We expect development of wireless and wireline/fiber infrastructure; oil and natural gas pipeline infrastructure, wireless and wireline/fiber infrastructure,infrastructure; expansion, maintenance and upgrades of electrical transmission capacity and the electrical distribution grid,grid; development of power generation infrastructure, including renewable energy sources,renewables; and heavy civil and industrial and civilinfrastructure construction projects to be areas of investment and opportunity in the coming years. We intend to use our broad geographic presence, technical expertise, financial and operational resources, customer relationships and full range of services to capitalize on these trends and grow our business.
Operational Excellence. We seek to improve our profit margins and cash flows by focusing on profitable services and projects that have high margin potential. We also strive to identify opportunities for leverage within our business, such as deploying resources across multiple customers and projects in order to enhance our operating effectiveness and utilization rates, while continuingrates. We also seek to maintain strong working capital management practices. We continue to pursueOur management team pursues actions and programs designed to achieve these goals, such as increasing accountability throughout our organization, effectively managing customer contract bidding procedures, evaluating opportunities to improve our working capital cycle time, through contractual provisions and certain financing arrangements, hiring and retaining experienced operating and financial professionals, and developing, expanding and further integrating the use of financial systems and information technology capabilities within our financial and other management information systems.business.
Maintain Conservative Capital Structure. We evaluate our capital structure on an ongoing basis and have expanded our financial resources in recent years. We believe that we have sufficient capital resources to fund our planned operations andoperations. As of December 31, 2019, we had approximately $565 million$0.9 billion of borrowing availability under our revolving credit facility, as of December 31, 2017. We havewith aggregate borrowing commitments of $1.5$1.75 billion under our senior secured credit facility and $400 million of 4.875% senior notes due 2023. We may consider opportunities to borrow additional funds, or to refinance, repurchase or retire outstanding debt or repurchase shares in the future as part of our ongoing capital structure evaluation. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Summary of Financial Condition, Liquidity and Capital Resources,” for details pertaining to our debt instruments.instruments and share repurchase activities.
Leverage Core Performance and Expertise through Strategic Acquisitions and Other Arrangements. We may pursue selected acquisitions, investments and strategic arrangements that allow us to expand our operations, service offerings, customer base or geographic reach. We have diversified our business and expanded our service offerings and geographic footprint in recent years, both organically and through acquisition. ToIn order to maximize thetheir potential, of acquired businesses, our strategy includes timely and efficient integration ofis to integrate acquired businesses into our operations and internal control environment.environment in a timely and efficient manner. We evaluate our business on a regular basis, and from time to time, we may divest certain businesses or assets, or curtail selected business activities or operations that do not produce adequate revenue or margin or if theythat no longer fit within our long-term business strategy.
Services
Our core services are the engineering, building, installing, maintaining and upgrading of infrastructure, primarily for communications, oil and gas, utility and power generation customers. We provide similar services to each of these customers, including:
Build. We build infrastructure projects for customers across a range of industries. We specialize in building underground and overhead distribution systems, including trenches, conduits, cell towers, cable and power lines, which provide wireless and wireline/fiber communications; natural gas, crude oil and refined product transport pipelines; electrical power generation, transmission and distribution systems; power generation infrastructure, including renewable energy; heavy industrial plants; compressor and pump stations and treatment plants; water and sewer infrastructure;infrastructure, including water pipelines; and other civil construction infrastructure.
Install. We install electrical and other energy distribution and transmission systems, power generation facilities, buried and aerial fiber optic and other cables, satellite dishes, home security, home automation and energy management solutions in a variety of environments for our customers. In connection with our installation work, we deploy and manage network connections that involve our customers’ hardware, software and network equipment.
Maintain and Upgrade. We offer 24 hour/365 days-a-year maintenance and upgrade support to our customers. Our comprehensive service offerings include the regular maintenance of our customers’ distribution facilities, networks and infrastructure, including natural gas and petroleum pipeline, communications, electrical distribution and transmission, power generation and heavy civil infrastructure. We also provide emergency services for accidents or storm damage. Our upgrade work ranges from routine replacements and upgrades to major overhauls.
Customers
We have longstanding relationships with many customers, and often provide services under master service and other service agreements, which are generally multi-year agreements. Our master service agreements are typically exclusive up to a specified dollar amount per work order for each defined geographic area, but do not obligate our customers to undertake any infrastructure projects or other work with us. Work performed under master service and other service agreements is usually generated through work orders, each of which is performed for a fixed fee. Services provided under these agreements range from engineering, project management and installation work to maintenance and upgrade services. Master service and other service agreements are frequently awarded on a competitive bidding basis, although customers are sometimes willing to negotiate contract extensions beyond their original terms without re-bidding. Our master service and other service agreements have various terms, depending upon the nature of the services provided, and typically provide for termination on short or no advance notice. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, 36%, 43%35% and 48%36%, respectively, of our revenue respectively, was derived from projects performed under master service and other service agreements.
The remainder of our work is generated pursuant to contracts for specific projects or jobs requiring the construction and installation of an entire infrastructure system or specified units within an entire infrastructure system. Customers are billed with varying frequency, the timing of which is generally monthlydependent upon advance billing terms, milestone billings based on completion of certain phases of the work, or upon attainingwhen services are provided. Under the typical payment terms of master and other service agreements and contracts for specific milestones. Suchprojects, the customer makes progress payments based on quantifiable measures of performance as defined in the agreements. Some of our contracts may include retainage provisions, under which a portion of the contract amount (generally, from 5% to 10% of billings) can be withheld from us until the work has been completed and acceptedretained by the customer.customer until final contract settlement.
We believe that our industry experience, technical expertise and reputation for customer service, as well as the relationships developed between our customers and our senior management and project management teams are important to our being retained by our customers. See Note 13 - Segments and Related Information and Note 14 - Commitments and Contingencies in the notes to the audited consolidated financial statements, which are incorporated by reference, for customer concentration information.
Backlog
Estimated backlog represents the amount of revenue we expect to realize over the next 18 months from future work on uncompleted construction contracts, including new contracts under which work has not begun, as well as revenue from change orders and renewal options. Our estimated backlog also includes amounts under master service and other service agreements and includes our proportionate share of estimated revenue from proportionately consolidated non-controlled contractual joint ventures. Estimated backlog for work under master service and other service agreements is determined based on historical trends, anticipated seasonal impacts, experience from similar projects and estimates of customer demand based on communications with our customers. We expect to realize approximately 80% of our estimated year end 20172019 backlog in 2018.2020. The following table presents 18-month estimated backlog by reportable segment, as of the dates indicated:
Reportable Segment (in millions): | December 31, 2017 | September 30, 2017 | December 31, 2016 | December 31, 2019 | September 30, 2019 | December 31, 2018 | ||||||||||||||||
| Communications | $ | 3,628 | $ | 3,505 | $ | 2,824 | $ | 4,228 | $ | 3,968 | $ | 4,276 | ||||||||||
| Oil and Gas | 2,525 | 907 | 2,223 | 1,929 | 2,109 | 2,125 | ||||||||||||||||
| Electrical Transmission | 354 | 268 | 257 | 512 | 457 | 610 | ||||||||||||||||
| Power Generation and Industrial | 577 | 331 | 109 | 1,289 | 988 | 678 | ||||||||||||||||
| Other | 3 | 3 | 6 | 1 | 1 | 1 | ||||||||||||||||
| Estimated 18-month backlog | $ | 7,087 | $ | 5,014 | $ | 5,419 | $ | 7,959 | $ | 7,523 | $ | 7,690 | ||||||||||
Approximately half of our backlog as of December 31, 20172019 is attributable to amounts under master service or other service agreements, pursuant to which our customers are not contractually committed to purchase a minimum amount of services. Most of these agreements can be canceled on short or no advance notice. Timing of revenue for construction and installation projects included in our backlog can be subject to change as a result of customer delays or cancellations, regulatory factorsor other delays and/or other project-related factors. These changes could cause estimated revenue to be realized in periods later than originally expected, or not at all. In the past, we haveWe occasionally experiencedexperience postponements, cancellations and reductions in expected future work from master service agreements and/or construction projects due to changes in our customers’ spending plans, as well as on construction projects due to market volatility, and regulatory delays and/or other factors. There can be no assurance as to our customers’ requirements or the accuracy of our estimates. As a result, our backlog as of any particular date is an uncertain indicator of future revenue and earnings.
Backlog is not a term recognized under accounting principles generally accepted in the United States (“U.S. GAAP”); however, it is a common measurement used in our industry. Our methodology for determining backlog may not, however, be comparable to the methodologies used by others. Backlog differs from the amount of our remaining performance obligations, which are described in Note 1 - Business, Basis of Presentation and Significant Accounting Policies in the notes to the audited consolidated financial statements, which is incorporated by reference. As of December 31, 2019, total 18-month backlog differed from the amount of our remaining performance obligations due primarily to the inclusion of $3.0 billion of estimates of future revenue under master service and other service agreements within our backlog estimates, as described above, and the exclusion of approximately
$0.3 billion of remaining performance obligations in excess of 18 months, which amount is not included in the backlog estimates above. Backlog expected to be realized in 2020 differed from the amount of remaining performance obligations expected to be recognized for the same period due primarily to the inclusion of approximately $1.7 billion of estimates of future revenue under master service and other service agreements that is included within the related backlog estimate.
Sales and Marketing
Our customers increasingly require resources from multiple disciplines. Therefore, our subsidiary services companies market their services not only individually, but also in combination with other companies, including other MasTec companies and independent companies, to provide what we believe are the most efficient and effective solutions to meet our customers’ demands. Through our unified MasTec® brand and an integrated organizational structure designed to permit rapid deployment of labor, equipment and materials, we are able to quickly and efficiently allocate resources to meet customer needs. We offer services that are branded under the MasTec® service mark and other service marks.
We have developed a marketing plan emphasizing the MasTec® registered service mark and trade names of certain acquired companies, as well as an integrated service offering to position ourselves as a provider of a full range of service solutions, providing services including installation as
well as sophisticated engineering, design and integration. We believe our longstanding relationships with customers and our reputation for reliability and efficiency facilitate our recurring business. Our marketing efforts are principally carried out by the management of our business units and project groups in coordination with our corporate business development organization. Our management team has many years of industry experience, both at the service provider level, and in some cases, with the customers we serve. Our business unit and project group managers market directly to existing and potential customers for new contracts and also seek our inclusion on lists of vendors invited to submit proposals for service agreements and individual projects. We also market our services in conjunction with certain business partners, strategic investments and arrangements. Our executive management supplements these efforts at the national and international level.
Safety and Insurance/Risk Management
We strive to instill and enforce safe work habits in our employees, and we require that our employees participate in training programs relevant to their employment, including all those required by law. We evaluate employees in part based upon their safety records and the safety records of the employees they supervise. Our business units have established robust safety programs to monitor and improve compliance with safety procedures and regulations. We also provide company-wide training where appropriate, including for information technology and cyber security as well as for workplace and employee awareness programs.
Our business involves the use of heavy equipment and exposure to potentially dangerous workplace conditions. While we are committed to operating safely and prudently, we are subject to claims by employees, customers and third parties for property damage and personal injuries that occur in connection with our work. Our insurance policies are subject to high deductibles and we are self-insured up to the amount of the deductible. We maintain insurance policies for workers’ compensation, general liability and automobile liability that are subject to per claim deductibles. We also maintain excess umbrella coverage and an insurance policy with respect to employee group medical claims, which is subject to annual per employee maximum losses. We are required to post letters of credit and provide cash collateral to certain of our insurance carriers, and to providegenerally in the form of letters of credit, surety bonds in certain states.and cash. See Note 14 - Commitments and Contingencies in the notes to the audited consolidated financial statements, which is incorporated by reference.
Suppliers, Materials and Working Capital
Under many of our contracts, our customers provide the necessary materials and supplies for projects and we are responsible for the installation of, but not the cost or warranty of those materials. Under certain other projects, we purchase the necessary materials and supplies on behalf of our customers from third-party providers. We are not dependent on any one vendor and have not experienced significant difficulty in obtaining project-related materials or supplies as and when required for the projects we manage.
We utilize independent contractors to assist on projects and to help us manage our work flow. Our independent contractors typically provide their own vehicles, tools and insurance coverage. We are not dependent on any one independent contractor. We need working capital to support seasonal variations in our business, including the spending patterns of our customers and the effects of weather conditions on external construction and maintenance work, both of which can influence the timing of spending to support related customer demand. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Working Capital,” which is incorporated by reference.
Competition
Our industry is highly competitive and highly fragmented. We compete with a number of companies in the markets in which we operate, ranging from small local independent companies to large national firms. The national or large regional firms, that compete with us includeincluding Quanta Services, Inc., MYR Group, Inc., Dycom Industries, Inc., Jacobs Engineering Group Inc., Primoris Services Corporation, Pike Electric, Inc., Bechtel Corporation, D.H. Blattner & Sons, Inc., M.A. Mortenson Company, Black & Veatch and Nexius.
Certain barriers to entry exist in the markets in which we operate, including adequate financial resources, technical expertise, high safety ratings and a proven track record of operational success. Some of our customers employ their own personnel to perform infrastructure services of the type we provide. We compete based upon our industry experience, technical expertise, financial and operational resources, geographic presence, industry reputation, safety record and reputation for customer service. While we believe our customers consider a number of factors when selecting a service provider, they award most of their work through a bid process, and price is often a principal factor in determining which service provider is selected.
Regulation, Environmental and EnvironmentalClimate Change Matters
We are subject to state and federal laws that apply to businesses generally, including laws and regulations related to labor relations, wages, worker safety and environmental protection. While many of our customers operate in regulated industries (for example, utilities regulated by the public
service commission or communications companies regulated by the Federal Communications Commission (“FCC”), we are not generally subject to such regulation and oversight.
As a contractor, our operations are subject to various laws, including:
regulations related to worker safety and health, including those established by the Occupational Safety and Health Administration (“OSHA”) and state equivalents;
regulations related to vehicle registrations, including those of the states and the U.S. Department of Transportation (“DOT”);
contractor licensing requirements;
permitting and inspection requirements; and
building and electrical codes.
We are also subject to numerous environmental laws, regulations and programs, including the handling, transportation and disposal of non-hazardous and hazardous substances and wastes, laws governing emissions and discharges into the environment, including discharges into air, surface
water, groundwater and soil, and programs related to the protection of endangered species.
We have a substantial investment in construction equipment that utilizes fuel. Any changes in laws requiring us to use equipment that runs on alternative fuels could require a significant investment, which could have a material adverse effect on our results of operations, cash flows and liquidity.
We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, liabilities can be imposed for cleanup of properties, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. The presence of contamination from such substances or wastes could interfere with ongoing operations or adversely affect our business. In addition, we could be held liable for significant penalties and damages under certain environmental laws and regulations. See Item 1A. “Risk Factors - Our failurecontracts with customers may also impose liabilities on us regarding environmental issues that arise through the performance of our services. From time to comply withtime, we may incur costs and obligations related to environmental laws could result in significant liabilities.”compliance and/or remediation matters.
We believe we have all material licenses and permits needed to conduct operations and that we are in material compliance with all applicable regulatory and environmental requirements. However, weWe could, however, incur significant liabilities if we fail to comply with applicable regulatorysuch requirements.
The potential effects of climate change on our operations is highly uncertain. Climate change may result in, among other things, changes in rainfall patterns, storm patterns and intensities and temperature levels. Our operating results are significantly influenced by weather. Therefore, major changes in weather patterns could have a significant effect on our future operating results. For example, if climate change results in significantly more adverse weather conditions in a given period, we could experience reduced productivity, which could negatively affect our revenue and profitability. Climate change could also affect our customers and the projects that they award. Demand for power projects, underground pipelines or other projects could be negatively affected by significant changes in weather or from legislation or regulations governing climate change.
Financial Information About Geographic Areas
We operate throughout North America, primarily in the United States and Canada, and, to a lesser extent, in Mexico.Mexico and the Caribbean. See Note 13 - Segments and Related Information in the notes to the audited consolidated financial statements, which is incorporated by reference.
Employees
We hire employees from a number of sources, including our industry, trade schools, colleges and universities. Our primary sources for employees include promotion from within, team member referrals, direct recruiting and various forms of advertising, including social media. We attract and retain employees by offering competitive salaries, technical training opportunities, bonus opportunities, stock ownership, employee incentive programs and a comprehensive benefits package. We believe that our team culture, along with our focus on employee training and career development helps us to attract and retain employees. Our employees participate in ongoing educational programs, many of which are internally developed, to enhance their technical and management skills through classroom and field training. We provide opportunities for promotion and mobility within our organization, which we also believe helps us to retain our employees. We believe we have good employee relations.
Available Information
A copy of this Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 are available free of charge on the internet at our website, www.mastec.com, as soon as reasonably practicable after we electronically file these reports with, or furnish these reports to, the SEC. Copies of our Board of Directors Governance Principles and Code of Business Conduct and Ethics, which applies to all of our directors, officers, including our principal executive, financial and accounting officers, and employees and includes additional criteria that are applicable to our Chief Executive Officer and senior financial officers, and the charters for each of our Audit, Compensation and Nominating and Corporate Governance Committees are also available on our website in the Investors section under the tab “Corporate Governance,” or may be obtained by contacting our Vice President of Investor Relations by phone at (305) 406-1815, or by email at investor.relations@mastec.com. We intend to provide any amendments or waivers to our Code of Business Conduct and Ethics for any of our directors and senior officers on our website within four business days of any such amendment or waiver. The reference to our
website address does not constitute incorporation by reference of the information contained on the website and such information is not part of this report. Our reports filed with the SEC may be accessed at the SEC’s website at www.sec.gov, or alternatively, may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE., Washington, D.C. 20549. Information on the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.www.sec.gov.
Use of our Website to Distribute Material Company Information
We use our website as a channel of distribution for important company information. We routinely post on our website important information, including press releases, investor presentations and financial information, which may be accessed by clicking on the Investors section of www.mastec.com. We also use our website to expedite public access to time-critical information regarding our company in advance of or in lieu of distributing a press release or a filing with the SEC disclosing the same information. Therefore, investors should look to the Investor Relations subpage of our website for important and time-critical information. Visitors to our website can also register to receive automatic e-mail and other notifications alerting them when new information is made available on the Investor Relations subpage of our website.
| ITEM 1A. | RISK FACTORS |
Our business is subject to a variety of risks and uncertainties, including, but not limited to, the risks and uncertainties described below. Additional risks and uncertainties not known to us or not described below could also negatively affect our operations. If any of the risks described below, or other risks that are unknown to us were to occur, our business, financial condition, results of operations and cash flows could suffer, and/or the trading price of our common stock could decline. We also may not be able to achieve our goals or expectations. You should carefully consider the risks described below, together with all of the other information in this Form 10-K. If any of these risks actually occur,10-K, including our business, financial condition and results of operations could suffer, and the trading price of our common stock could decline.Cautionary Statement Regarding Forward-Looking Statements described above.
Risks Related to Our Industry and Our Customers’ Industries
Many of the industries we serve are subject to customer consolidation as well as rapid technological and regulatory changes. Our inability or failure to adjust to our customers’ changing needssuch changes could result in decreased demand for our services. Additionally, demand for construction services depends on industry activity and expenditure levels, which can be affected by a variety of factors, including changes in governmental regulations and policies.
We derive a substantial portion of our revenue from customers in industries that are subject to consolidation, rapid changes in technology, changing consumer demands and governmental regulation. Regulatory requirements pertaining to permitting and/or political or social activism related to potential or ongoing project work could result in cancellations or deferrals of projects, which could materially affect demand for our services. Consolidation of any of our customers, or groups of our customers, could result in the loss of customers or could affect customer demand for the services we provide. Additionally, changes in technology could reduce demand for the services we provide. For example, the telecommunications industry is characterized by rapid technological change, intense competitionMany of our customers face stringent regulatory and changing consumer demands. In the energy industries, technological advancesenvironmental requirements and permitting processes, including governmental regulations and policies. Regulatory requirements pertaining to permitting could result in lower costsproject cancellations or deferrals of projects, which could materially affect demand for sources
our services. The industries we serve are also subject to effects of energy,environmental regulation, climate change initiatives and political or social activism, any of which could result in reduced demand for our services and/or delays or cancellations of current or planned future projects. Additionally, technological advances in the markets we serve could render existing natural gas and/or renewable energy projects andor technologies uncompetitive or obsolete. New technologiesSuch changes in technology or upgrades to existing technologies by customers could reduce demand for our services. Additionally, our failure to rapidly adopt and master new technologies as they are developed in any of the industries we serve could reduce demand for our services. Any of the above factors could have a material adverse effect on our results of operations, cash flows and liquidity.
Unfavorable market conditions, market uncertainty and/or economic downturns could reduce capital expenditures in the industries we serve or could adversely affect our customers, which could result in decreased demand for ourthe services we provide or impair our customers’ ability to pay for our services.
Our industry is highly competitive, which could reduce our market share and harm our financial performance.
Our industry is highly fragmented, and we compete with other companies in most of the markets in which we operate, ranging from small independent firms servicing local markets to larger firms servicing regional and national markets. We also face competition from existing and prospective customers that employ in-house personnel to perform some of the services we provide.provide, which could reduce the amount of services our customers request us to perform. There are relatively few barriers to entry into certain of the markets in which we operate and, as a result, any organization that has adequate financial resources and access to technical expertise and skilled personnel may become a competitor. Most of our customers’ work is awarded through a bid process. Consequently, price is often the principal factor that determines which service provider is selected, especially on smaller, less complex projects. Smaller competitors sometimes winprocesses, and our project bids for these projects based on price alone due to their lower costs and financial return requirements. However, our bids for certain projects may not be successful because of a customer’s perception of our relative ability to perform the work as compared to our competitors or a customer’s perception of technological advantages held by our competitors as well as other factors.successful. Our results of operations, cash flows and liquidity could be materially and adversely affected if we are unsuccessful in bidding for projects or renewing our master service agreements, or if our ability to win such projects or agreements requires that we accept lower margins. We also face competition from the in-house service organizations of our existing or prospective customers. As such, we cannot be certain that our existing or prospective customers will continue to outsource services in the future, either at the same rate, or at all.
Risks Related to Our Business
Our failure to properly manage projects, or project delays, could result in additional costs or claims, which could have a material adverse effect on our operating results, cash flows and liquidity.
Certain of our engagements involve large-scale, complex projects that may occur over extended time periods. The quality of our performance on such a project depends in large part upon our ability to manage our client relationship and the project itself, and toincluding the timely deploydeployment of appropriate resources, including third-party contractors and our own personnel. Our results of operations, cash flows and liquidity could be adversely affected if we miscalculate the resources or time needed to complete a project with capped or fixed fees, or the resources or time needed to meet contractual milestones. Additionally, delays on a particular project, including delays in designs, engineering information or materials provided by the customer or a third party, delays or difficulties in equipment and material delivery, schedule changes, delays from a customer’s failure to timely obtain permits or rights-of-way or to meet other regulatory requirements, weather-related delays permitting delays,and governmental, market, political and other factors, some of which are beyond our control, could result in cancellations or deferrals of project work, which could lead to a decline in revenue, or, for project deferrals, could cause us to incur costs for standby pay, and could lead to personnel shortages on other projects scheduled to commence at a later date.
We could also encounter project delays due to local opposition, including political and social activism, which could include injunctive actions or public protests related to the siting of oil, natural gas, or electric power transmission lines or for power generation or other facilities, and such delays could adversely affect our project margins. In addition, some of our agreements require that we share in cost overages or pay liquidated damages if we do not meet project deadlines; therefore, any failure to properly estimate or manage cost, or delays in the completion of projects, could subject us to penalties, which could adversely affect our results of operations, cash flows and liquidity. Further, any defects or errors, or failures to meet our customers’ expectations, could result in large damage claims against us. Due to the substantial cost of, and potentially long lead-times necessary to acquire certain of the materials and equipment used in our complex projects, damage claims could substantially exceed the amount we can charge for our associated services.
Our failure to recover adequately on claims against project owners, subcontractors or suppliers for payment or performance could have a material adverse effect on our financial results.
We occasionally bring claims against project owners for additional costs that exceed the contract price or for amounts not included in the original contract price. Similarly, we present change orders and claims to our subcontractors and suppliers. If we fail to properly document the nature of change orders or claims, or are otherwise unsuccessful in negotiating a reasonable settlement, we could incur reduced profits, cost overruns or project losses. These types of claims can often occur due to matters such as owner-caused delays or changes from the initial project scope, which result in additional costs, both direct and indirect, or from project or contract terminations. From time to time, these claims can be the subject of lengthy and costly proceedings, and it is often difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we may invest significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to promptly recover on these types of claims could have a material adverse effect on our liquidity and financial results.
We may not accurately estimate the costs associated with services provided under fixed price contracts, which could impair our financial performance.
We derive a significant portion of our revenue from fixed-pricefixed price master service and other service agreements. Under these contracts, we typically set the price of our services on a per unit or aggregate basis and assume the risk that costs associated with our performance may be greater than what we estimated. In addition to master service and other service agreements, weWe also enter into contracts for specific projects or jobs that may require the installation or construction of an entire infrastructure system or specified units within an infrastructure system, many of which are priced on a fixed price or per unit basis. Profitability will be reduced ifIf actual costs to complete a project exceed our original estimates. Ifestimates, our profitability will be reduced. Additionally, if estimated costs to complete the remaining work for a project exceed the expected revenue to be earned, the full amount of anysuch expected loss on the project is recognized in the period the loss is determined. Our profitability is therefore dependent upon our ability to accurately estimate the costs associated with our services and our ability to execute in accordance with our plans. A variety of factors could negatively affect these costs, such as lower than anticipatedestimates, including changes in expected productivity levels, conditions at work sites differing materially from those anticipated at the time we bid on the contract and higher than expected costs of materials and labor.labor and/or materials. These variations, along with other risks inherent in performing fixed price contracts, could cause actual project revenue and profitsresults to differ materially from our original estimates, which could result in lower margins than anticipated, or losses, which could reduce our profitability, cash flows and liquidity.
Our business may be affected by difficult work sites and environments, which could cause delays and/or increase our costs and reduce profitability.
We perform work under a variety of conditions, including, but not limited to, challenging and hard to reach terrain and difficult site conditions. Performing work under such conditions can result in project delays or cancellations, potentially causing us to incur additional, unanticipated costs, reductions in revenue or the payment of liquidated damages. In addition, some of our contracts require that we assume the risk should actual site conditions vary from those expected. Some of our projects involve challenging engineering, procurement and construction phases, which may occur over extended time periods. We may encounter difficulties in engineering, delays in designs or materials provided by the customer or a third party, equipment and material delivery delays, schedule changes, delays from customer failure to timely obtain rights-of-way, weather-related delays, delays by subcontractors in completing their portion of the project and other factors, some of which are beyond our control, but whichthat affect our ability to complete a project as
originally scheduled. In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay. We may not be able to recover any of such costs. Any such delays, or cancellations, or errors or other failures to meet customer expectations could result in damage claims substantially in excess of the revenue associated with a project. Delays or cancellations could also negatively impactaffect our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.
We recognize revenue for certain projects using the percentage-of-completioncost-to-cost method of accounting; therefore, variations of actual results from our assumptions could reduce our profitability.
We recognize revenue from fixed price contracts, as well as for certain projects pursuant to master and other service agreements, usingover time utilizing the percentage-of-completioncost-to-cost measure of progress, or the “cost-to-cost” method of accounting, under which the percentage of revenue to be recognized in a given period is measured by the percentage of costs incurred to date on the contract to the total estimated costs for the contract. The percentage-of-completioncost-to-cost method, therefore, relies on estimates of total expected contract costs. Contract revenue and total cost estimates are reviewed and revised on an ongoing basis as the work progresses. Adjustments arising from changes in the estimates of contract revenuesrevenue or costs are reflected in the fiscal period in which such estimates are revised. Estimates are based on management’s reasonable assumptions, judgment and experience, but are subject to the risks inherent in estimates, including
unanticipated delays or technical complications.complications, changes in job performance, job conditions and management’s assessment of expected variable consideration. Variances in actual results from related estimates on a large project, or on several smaller projects, could be material. The full amount of an estimated loss on a contract is recognized in the period that our estimates indicate such a loss. Suchlosses are determined. Any such adjustments could result in reduced profitability which couldand negatively affect our results of operations.
We derive a significant portion of our revenue from a few customers, and the loss of one or more of these customers, or a reduction in their demand for our services, could impair our financial performance.
Our business is concentrated among relatively few customers, and a substantial proportion of our services are provided on a non-recurring, project by projectproject-by-project basis. Our revenue could significantly decline if we were to lose one or more of our significant customers, or if one or more of our customers electedreduce the amount of business they provide to us and/or elect to perform the work that we provide withusing in-house service teams. In addition, our results of operations, cash flows and liquidity could be negatively affected if our customers reduce the amount of business they provide to us, or if we complete the required work on non-recurring projects and cannot replace them with similar projects. Many of the contracts with our largest customers may be canceled on short or no advance notice. Any of these factors could negatively impactaffect our results of operations, cash flows and liquidity. See Note 1 - Business, Basis of Presentation and Significant Accounting Policies, Note 13 - Segments and Related Information and Note 14 - Commitments and Contingencies in the notes to the audited consolidated financial statements, which are incorporated by reference, for customer and projectrevenue concentration information.
Amounts included in our backlog may not result in actual revenue or translate into profits. Our backlog is subject to cancellation and unexpected adjustments and is, therefore, an uncertain indicator of future operating results.
Our backlog consists of the estimated amount of servicesrevenue we expect to be completedrealize from future work on uncompleted contracts, including new contracts under which work has not begun, as well as revenue from change orders and renewal options.options and our proportionate share of estimated revenue from proportionately consolidated non-controlled contractual joint ventures. A significant portion of our 18-month backlog is attributable to master service agreements and other service agreements, none of which require our customers to purchase a minimum amount of services and are cancelable on short or no advance notice. The balance of our backlog is our estimate of work to be completed on fixed price agreements.under contracts for specific projects. Backlog amounts are determined based on estimates that incorporate historical trends, anticipated seasonal impacts, experience from similar projects and fromestimates of customer demand based on communications with our customers. These estimates may prove inaccurate, which could cause estimated revenue to be realized in periods later than originally expected, or not at all. In the past, we have occasionally experienced postponements, cancellations and reductions in expected future work due to changes in our customers’ spending plans, or due to market volatility, regulatory delays and/or other factors. There can be no assurance as to our customers’ requirements or the accuracy of our estimates. As a result, our backlog as of any particular date is an uncertain indicator of future revenue and earnings. In addition, contracts included in our backlog may not be profitable. If our backlog fails to materialize, our results of operations, cash flows and liquidity would be materially and adversely affected.
We maintain a workforce based upon current and anticipated workloads. We could incur significant costs and reduced profitability from underutilization of our workforce if we do not receive future contract awards, if contract awards are delayed, or if there is a significant reduction in the level of services we provide.
Our estimates of future performance and results of operations depend, among other factors, on whether and when we receive new contract awards, which affect the extent to which we are able to utilize our workforce. The rate at which we utilize our workforce is affected by a variety of factors, including our ability to forecast ourthe need for our services, which allows us to maintain an appropriately sized workforce, our ability to transition employees from completed projects to new projects or between internal business groups, our ability to manage attrition, and our need to devote resources to non-chargeable activities such as training or business development. While our estimates are based upon our good faith judgment, professional knowledge and experience, these estimates canmay not be unreliableaccurate and may frequently change based on newly available information. In the case of large-scale projects where timing is often uncertain, it is particularly difficult to predict whether and when we will receive a contract award. The uncertainty of contract award timing can present difficulties in matching our workforce size to our contractproject needs. If an expected contract award is delayed or not received, we could incur costs resulting from reductions in staff orunderutilization of our workforce, redundancy of facilities, or from efforts to right-size our workforce and/or operations, which could reduce our profitability and cash flows.
Many of our contracts do not obligate our customers to undertake any infrastructure projects or other work with us. Additionally,us, and most of our contracts may be canceled on short or no advance notice, which could reduce our revenue, andrevenue. In addition, certain of our contracts with customers are subject to theirour customers’ ability to secure financing or other conditions and therefore, may not result in revenue or profits.
We derive a significant portion of our revenue from multi-year master service and other service agreements, under which we provide customers with project services through work orders within defined geographic areas on a fixed fee basis. Under these agreements, our customers have no obligation to undertake any infrastructure projects or other work with us. This makes it difficult to estimate our customers’ demand for our services. A significant decline in the projectsvolume of work our customers assignrequest us to perform under these service agreements could negatively affect our results of operations, cash flows and liquidity. In addition, most of our contracts are cancelable on short or no advance notice, ranging from immediate cancellation to cancellation upon
180 days notice, even if we are not in default under the contract. Many of our contracts, including our service agreements, are periodically open to public bid. We may not be the successful bidder on existing contracts that are re-bid. For our services that are provided on a non-recurring, project-by-project basis, we could experience a reduction in revenue, profitability and liquidity if our customers cancel a significant number of contracts, or if we fail to win a significant number of existing contracts upon re-bid, or if we complete the required work under a significant number of our non-recurring projects and cannot replace them with similar projects. Additionally, from time to time, we enter into contracts that contain financing or other conditions that must be satisfied before we can begin work. Certain of these contracts may not result in revenue or profits if our customers are unable to obtain financing or to satisfy other conditions associated with such projects.
Our business is seasonal and is affected by the spending patterns of our customers as well as weather conditions and natural catastrophes, which exposes us to variations in quarterly results.
Some of our customers reduce their expenditures and work order requests towards the end of the calendar year. In addition, adverse weather conditions, particularly during the winter season, can affect our ability to perform outdoor services in certain regions of North America. As a result, we generally experience reduced revenue in the first quarter of each calendar year. Natural catastrophes such as hurricanes or other severe weather, could have an effect on demand for our services,wildfires or flooding could affect our ability to perform outdoor services or utilize equipment and crews stationed in affected regions,regions. These events, as well as global economic effects resulting from concerns over infectious diseases or other health issues, could also have an effect on the economy overall,demand for our services which could negatively affect our results of operations, cash flows and liquidity.
We have made, and in the future may continue to make, strategic acquisitions and investments. However, weAcquisitions may expose us to operational challenges and risks, including:
the ability to profitably manage the acquired business or successfully integrate the operations, internal controls and procedures, financial reporting and accounting systems of the acquired business into our business;
increased indebtedness and contingent earn-out obligations;
the ability to fund cash flow shortages that may occur if anticipated revenue is not realized or is delayed, whether by general economic or market conditions, or other unforeseen difficulties;
the expense of integrating acquired businesses;
the availability of funding sufficient to meet increased capital needs;
diversion of management’s attention; and
the ability to retain or hire qualified personnel required for expanded operations.
We may not be able to identify suitable acquisition or strategic investment opportunities, or may be unable to obtain the required consent of our lenders and, therefore, may not be able to complete such acquisitions or strategic investments. We may pay for acquisitions or strategic investments with our common stock or with debt instruments, including convertible debt securities, which could dilute the ownership interests of our common shareholders, or we may decide to pursue acquisitions with which our investors may not agree. Borrowings or issuances of debt associated with these acquisitions could also result in higher levels of indebtedness, which could negatively affect our ability to service our debt within the scheduled repayment terms. In addition, in connection with most of our acquisitions, we have agreedagree to substantial future earn-out arrangements. To the extent we defer the payment of thean acquisition’s purchase price for an acquisition through a cash earn-out arrangement, it will reduce our cash flows in subsequent periods.
In addition, acquisitionsacquired companies may exposehave liabilities that we failed, or were unable, to discover in the course of performing due diligence investigations. We cannot assure you that the indemnifications granted to us by sellers of acquired companies will be sufficient in amount, scope or duration to fully offset potential liabilities associated with acquired businesses. We may learn additional information about the businesses we have acquired that could materially adversely affect us, such as unknown or contingent liabilities, unprofitable projects and liabilities related to compliance with applicable laws. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business. Failure to successfully manage the operational challenges and risks including:
We generally require that key management and former principals of the businesses we acquire enter into non-competition agreements in our favor. Enforceability of these non-competition agreements varies from state to state, and state courts will generally examine all of the facts and circumstances at the time a party seeks to enforce a non-competition agreement; consequently, we cannot predict with certainty whether, if challenged, a court will enforce any particular non-competition agreement. If one or more former principals or members of key management of the businesses we acquire terminate their employment with us and the courts refuse to enforce the non-competition agreement entered into by such person or persons, we might be subject to increased competition, which could materially and adversely affect our operating results, cash flows and liquidity.
We have incurred goodwill and intangible asset impairment charges, and in the future, could incur additional impairment charges, which could harm our profitability.
We have significant amounts of long-lived assets, goodwill and intangible assets. When we acquire a business, we record goodwill equal to the excess of the amount we pay for the business, including anticipated future liabilities, over the estimated fair value of the acquired net assets of thatthe acquired business. We periodically review the carrying values of goodwill and intangible assets to determine whether such carrying values exceed their fair market values. Declines in the profitability of individual reporting units due to economic or market conditions or otherwise, as well as adverse changes in financial,
competitive and other conditions, or other adverse changes in the key valuation assumptions contributing to the estimated fair value of our reporting units, could adversely affect the estimated fair values of the related reporting units, resultingwhich could result in an impairment of the recorded balances of goodwill or intangible assets. See Note 13 - Business, Basis of PresentationGoodwill and Significant Accounting PoliciesOther Intangible Assets in the notes to the audited consolidated financial statements, which
is incorporated by reference, for additional details. Changes in economic and capital market conditions, as well as the operating performance of our reporting units, could result in future impairment charges, which could adversely affect our financial condition and operating results.
Our financial results are based, in part, upon estimates and assumptions that may differ from actual results. In addition, changes in accounting principles may cause unexpected fluctuations in our reported financial information.
In preparing our consolidated financial statements in conformity with U.S. GAAP, management makes a number of estimates and assumptions that affect the ordinary courseamounts reported in our consolidated financial statements and accompanying notes. These estimates and assumptions must be made because certain information used in the preparation of our business, we may become subject to lawsuits, indemnityconsolidated financial statements is either dependent on future events or other claims, which could materially and adversely affect our business, resultscannot be calculated with a high degree of operations and cash flows.
In addition, concerns about climateaccounting rules and regulations are subject to review and interpretation by the Financial Accounting Standards Board (the “FASB”), the SEC and various other governing bodies. A change in U.S. GAAP could result in potentialhave a significant effect on our reported financial results. Additionally, the adoption of new regulations, regulatory actions or requirementsrevised accounting principles could require that we make significant changes to fund energy efficiency activities, anyour systems, processes and controls. We cannot predict the effect of future changes to accounting principles, which could negatively affect our customers and decrease demand for their services, or result in increased costs associated with our operations. For example, if new regulations are adopted regulating greenhouse gas emissions from sources such as cars and trucks, we could experiencehave a significant increase in environmental compliance costs in light ofeffect on our large fleet and the amount of construction machinery we own. In addition, if our operations are perceived to result in high greenhouse gas emissions reported financial results and/or to otherwise pose environmental risks, our reputation could suffer.
Our subcontractors may fail to satisfy their obligations to us or other parties, or we may be unable to maintain these relationships, either of which may have a material adverse effect on our results of operations, cash flows and liquidity.
Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products, polychlorinated biphenyls (“PCBs”), fuel storage and air quality. Certain of our current and historical construction operations have used hazardous materials and, to the extent that such materials are not properly stored, contained or recycled, they could become hazardous waste. Additionally, some of our contracts require that we assume the environmental risk of site conditions and require that we indemnify our customers for any damages, including environmental damages, incurred in connection with our projects. We may be subject to claims under various environmental laws and regulations, federal and state statutes and/or common law doctrines for toxic torts and other damages, as well as for natural resource damages and the investigation and clean-up of soil, surface water, groundwater, and other media under laws such as the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). Such claims may arise, for example, out of current or former conditions at project sites, current or former properties owned or leased by us, or contaminated sites that have always been owned or operated by third parties. Liability may be imposed without regard to fault and may be strict and joint and several, such that we may be held responsible for more than our share of any contamination or other damages, or even for the entire share, and we may be unable to obtain reimbursement from the parties that caused the contamination.
We also own and lease several facilities at which we store our equipment. Some of these facilities contain fuel storage tanks that may be above or below ground. If these tanks were to leak, we could be responsible for the cost of remediation as well as potential fines. New environmental laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, or the imposition of new clean-up requirements could require us to incur significant costs or result in new or increased liabilities that could have a material adverse effect on our results of operations, cash flows and liquidity. We are also subject to laws and regulations protecting endangered species. We may incur work stoppages to avoid violating these laws and regulations, or we may risk fines or other sanctions if we inadvertently violate these laws and regulations.
In addition, concerns about climate change could result in potential new regulations, regulatory actions or requirements to fund energy efficiency activities, any of which could negatively affect our customers and decrease demand for their services, or result in increased costs associated with our operations. There are significant environmental regulations under consideration to encourage the use of clean energy technologies and regulate emissions of greenhouse gases to address climate change. The establishment of rules limiting greenhouse gas emissions could affect our ability to perform construction services or to perform these services at current levels of profitability. For example, if new regulations were adopted regulating greenhouse gas emissions from sources such as cars and trucks, we could experience a significant increase in environmental compliance costs in light of our large fleet and the amount of construction machinery we own. New regulations may require us to acquire different equipment or change processes. The new equipment may not be available, or we may not be able to purchase or rent this equipment in a cost-effective manner. Compliance with any new laws or regulations regarding the reduction of greenhouse gases could result in significant changes to our operations and a significant increase in the cost of conducting our business. In addition, if our operations are perceived to result in high greenhouse gas emissions or to otherwise pose environmental risks, our reputation could suffer and/or we could experience a reduction in the amount of future work we are awarded. Project deferrals, delays or cancellations resulting from climate change initiatives and/or the effects of such regulations could adversely affect our business.
Many of our customers are highly regulated. New regulations, or changes to existing regulations, could adversely affect demand for our services and/or the profitability of those services.
Most of our communications customers are regulated by the FCC, and our energy customers are regulated by the Federal Energy Regulatory Commission (“FERC”), among others. In addition, our utility customers are regulated by state public utility commissions. These agencies could change their interpretation of current regulations and/or may impose additional regulations. Interpretative changes or new regulations having an adverse effect on our customers and/or the profitability of the services they provide could reduce demand for our services, which could adversely affect our results of operations, cash flows and liquidity.
Additionally, various federal, state, local, or foreign legislative and regulatory initiatives have been undertaken that could result in additional requirements or restrictions being imposed, including for drilling and completion operations. Future regulations or restrictions that might be adopted could lead to operational delays and increased operating costs for our customers in the oil and gas industry, which could result in reduced capital spending and/or delays or cancellations of future oil and gas infrastructure projects that could materially and adversely affect our results of operations, cash flows and liquidity.
We rely on information, communications and data systems in our operations. Systems and information technology interruptions and/or data security breaches could adversely affect our ability to operate, and/or our operating results or could result in harm to our reputation.
We are heavily reliant on computer, information and communications technology and related systems in order to operate. We also rely, in part, on third-party software and information technology to run certain of our critical accounting, project management and financial information systems. From time to time, we experience system interruptions and delays. Our operations could be interrupted or delayed, or our data security could be breached, if we are unable to deploy software and hardware, gain access to, or effectively maintain and upgrade our systems and network infrastructure and/or take other steps to improve and otherwise protect our systems. In addition, our information technology and communications systems and our operations could be damaged or interrupted by cyber attacks and/or physical security risks, including from natural disasters, power loss, telecommunications failures, intentional or inadvertent user misuse or error, failures of information technology solutions, computer viruses, malicious code, ransomware attacks, acts of terrorism and physical or electronic security breaches, including breaches by computer hackers, cyber-terrorists and/or unauthorized access to or disclosure of our and/or our employees’ or customers’ data. Furthermore, such unauthorized access or cyber attacks could go unnoticed for some period of time.
These events, among others, could cause system interruptions, delays and/or the loss or release of critical or sensitive data, including the unintentional disclosure of customer, employee or our information, and could delay or prevent operations, including the processing of transactions and reporting of financial results or cause processing inefficiency or downtime, all of which could have a material adverse effect on our business, results of operations and financial condition and could harm our reputation and/or result in significant costs, fines or litigation. Similar risks could affect our customers, subcontractors or suppliers, indirectly affecting us.
While we have security, internal control and technology measures in place to protect our systems and network, if these measures fail as a result of a cyber-attack, other third-party action, employee error, malfeasance or other security failure, and someone obtains unauthorized access to our or our employees’ or customers’ information, our reputation could be damaged, our business may suffer and we could incur significant liability, or, in some cases, we may lose access to our business data. In the ordinary course of business, we have been targeted by malicious cyber-attacks, although our systems have been sufficiently resilient to prevent disruption of our operations; however, because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, our current or future defenses may not be adequate to protect against new or revised techniques. As a result, we may be required to expend significant resources to protect against the threat of system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events could damage our reputation and have a material adverse effect on our business, results of operations, financial condition and cash flows. Furthermore, while we maintain insurance policies that we consider to be adequate, our coverage may not specifically cover all types of losses or claims that may arise.
In addition, the unauthorized disclosure of confidential information and current and future laws and regulations governing data privacy, including the California Consumer Privacy Act and the European Union’s General Data Protection Regulation, may pose complex compliance challenges and/or result in additional costs. A failure to comply with such laws and regulations could result in penalties, fines and/or legal liabilities and/or harm our reputation. The continuing and evolving threat of cyber attacks has also resulted in increased regulatory focus on risk management and prevention. New cyber-related regulations or other requirements could require significant additional resources and/or cause us to incur significant costs, which could have an adverse effect on our results of operations and cash flows.
We regularly evaluate the need to upgrade and/or replace our systems and network infrastructure to protect our information technology environment, to stay current on vendor supported products and to improve the efficiency and scope of our systems and information technology capabilities. The implementation of new systems and information technology could adversely impact our operations by requiring substantial capital expenditures, diverting management’s attention, and/or causing delays or difficulties in transitioning to new systems. In addition, our system implementations may not result in productivity improvements at the levels anticipated. System implementation disruptions and/or any other information technology disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on our business.
In the ordinary course of our business, we may become subject to lawsuits, indemnity or other claims, which could materially and adversely affect our business, results of operations and cash flows.
From time to time, we are subject to various claims, lawsuits and other legal proceedings brought or threatened against us in the ordinary course of our business. These actions and proceedings may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination and other employment-related damages, breach of contract, property damage, environmental liabilities, multiemployer pension plan withdrawal liabilities, liquidated damages, consequential damages, punitive damages and civil penalties or other losses, or injunctive or declaratory relief. We may also be subject to litigation in the normal course of business involving allegations of violations of the Fair Labor Standards Act and state wage and hour laws. In addition, we generally indemnify our customers for claims related to the services we provide and actions we take under our contracts, and, in some instances, we may be allocated risk through our contract terms for actions by our joint venture partners, equity investments, customers or other third parties.
Claimants may seek large damage awards and defending claims can involve significant costs. When appropriate, we establish accruals for litigation and contingencies that we believe to be adequate in light of current information, legal advice and our indemnity insurance coverages. We reassess our potential liability for litigation and contingencies as additional information becomes available and adjust our accruals as necessary. We could experience a reduction in our profitability and liquidity if we do not properly estimate the amount of required accruals for litigation or contingencies, or if our insurance coverage proves to be inadequate or becomes unavailable, or if our self-insurance liabilities are higher than expected. The outcome of litigation is difficult to assess or quantify, as plaintiffs may seek recovery of very large or indeterminate amounts and the magnitude of the potential loss may remain unknown for substantial periods of time. Furthermore, because litigation is inherently uncertain, the ultimate resolution of any such claim, lawsuit or proceeding through settlement, mediation, or court judgment could have a material adverse effect on our business, financial condition or results of operations. In addition, claims, lawsuits and proceedings may harm our reputation or divert management’s attention from our business or divert resources away from operating our business and cause us to incur significant expenses, any of which could have a material adverse effect on our business, results of operations or financial condition.
Our business is subject to operational and physical hazards that could result in substantial liabilities and weaken our financial condition.
Our business is subject to operational hazards due to the nature of services we provide and the conditions in which we operate, including electricity, fires, explosions, mechanical failures and weather-related incidents. Construction projects undertaken by us expose our employees to electrical lines, pipelines carrying potentially explosive or toxic materials, heavy equipment, transportation accidents, adverse weather conditions and the risk of damage to equipment and property. These hazards, among others, can cause personal injuries and loss of life, severe damage to or destruction of property and equipment and other consequential damages and could lead to suspension of operations and large damage claims which could, in some cases, substantially exceed the amount we charge for the associated services. In addition, if serious accidents or fatalities occur, or if our safety records were to deteriorate, we may be restricted from bidding on certain work or obtaining new contracts, and certain existing contracts could be terminated. Our safety processes and procedures are monitored by various agencies and ratings bureaus. The occurrence of accidents in the course of our business could result in significant liabilities, employee turnover, an increase the costs of our projects or harm our ability to perform under our contracts or enter into new customer contracts, all of which could materially adversely affect our revenue, profitability and liquidity.
Our failure to comply with the regulations of OSHA, the U.S. DOT and other state and local agencies that oversee transportation and safety compliance could reduce our revenue, profitability and liquidity.
OSHA establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by OSHA and various recordkeeping, disclosure and procedural requirements. Various standards, including standards for notices of hazards and safety in excavation and demolition work, may apply to our operations. We incur capital and operating expenditures and other costs in the ordinary course of business in complying with OSHA and other state and local laws and regulations, and could incur penalties and fines in the future, including, in extreme cases, criminal sanctions.
Our service activities involve a high degree of operational risk, and while we invest substantial resources in occupational health and safety programs, there can be no assurance that we will avoid significant liability. Although we have taken what we believe to be appropriate precautions, we have had employee injuries and fatalities in the past, and may suffer additional injuries or fatalities in the future. Serious accidents of this nature may subject us to substantial penalties, civil litigation or criminal prosecution. Personal injury claims for damages, including for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our financial condition, results of operations or cash flows. In addition, detecting, investigatingif our safety record were to deteriorate, or if we suffered substantial penalties or criminal prosecution for violation of health and resolving actualsafety regulations, customers could cancel existing contracts and not award future business to us, which could materially adversely affect our liquidity, cash flows and results of operations. From time to time, we have received notice from the DOT that our motor carrier operations will be monitored and that the failure to improve our safety performance could result in suspension or alleged FCPA violations is expensiverevocation of vehicle registration privileges. If we were not able to successfully resolve such issues, our ability to service our customers could be damaged, which could lead to a material adverse effect on our results of operations, cash flows and can consume significant time and attention of our senior management.liquidity.
We are subject to foreign exchangerisks associated with climate change.
In recent years, there has been an increased focus on climate change, greenhouse gas and currency risks that could adversely affectother emissions and other potential damage to the environment caused by human activities. The potential effects of climate change on our operations and our ability to reinvest earnings from operations,is highly uncertain. Climate change may result in, among other things, an increase in extreme weather events, such as well as to mitigate our foreign exchange risk through hedging transactions, may be limited.
The renewable energy industry is partially reliant on tax incentives, the availability of which may be uncertain and could adversely affect demand for our services.
and investment tax credits. Furthermore,if extended or renewed, the provisions regarding anyrelated to such extensions or renewals may not be as favorable as those that currently exist. We cannot assure you that any extensions or renewals of the existing production tax and/or the investment tax credits would be enacted prior to their expiration or, if allowed to expire, that any extensions or renewals enacted thereafter would be enacted with retroactive effect. We also cannot assure you that the tax laws providing for accelerated and bonus depreciation with respect to renewable energy generation assets will not be modified, amended or repealed in the future. If the investment tax credit is not effective or if the federal production tax credit is not extended or renewed, or is extended or renewed at a lower rate, these generating facilities may be less profitable to build and operate and the ability of our customers to obtain financing for these projects may be impaired or eliminated,exist, which could materially and adversely affect demand for our services, results of operations, cash flows and liquidity.
If we are unable to attract and retain qualified managers and skilled employees, we will be unable to operate efficiently, which could reduce our revenue, profitability and liquidity.
Our business is labor intensive, and some of our operations experience a high rate of employee turnover. In addition, given the nature of the highly specialized work we perform, many of our employees are trained in, and possess, specialized technical skills that are necessary to operate our business and maintain productivity and profitability. At times of low unemployment, it can be difficult for us to find qualified and affordable personnel. We may be unable to hire and retain a sufficiently skilled labor force necessary to support our operating requirements and growth strategy. Our labor and training expenses may increase as a result of a shortage in the supply of skilled personnel. We may not be able to pass these expenses on to our customers, which could adversely affect our profitability. Additionally, our business is managed by a number of key executive and operational officers, many of whom have extensive industry experience, and is dependent upon retaining and recruiting qualified management to execute our business strategy. Labor shortages, increased labor or training costs, or the loss of key personnel could materially adversely affect our results of operations, cash flows and liquidity.
Our subcontractors may fail to satisfy their obligations to us or other parties, or we may be unable to maintain these relationships, either of which could have a material adverse effect on our results of operations, cash flows and liquidity.
We depend on subcontractors to perform work for some of our projects. There is a risk that we could have disputes with subcontractors arising from, among other things, the quality and timeliness of the work they perform, customer concerns, or our failure to extend existing work orders or issue new work orders under a subcontracting arrangement. If any of our subcontractors fail to perform the agreed-upon services on a timely basis and/or deliver the agreed-upon supplies, our ability to fulfill our obligations as a prime contractor could be jeopardized. In addition, the absence of qualified subcontractors with whom we have satisfactory relationships could adversely affect our ability to perform under some of our contracts, or the quality of the services we provide. Additionally, in some cases, we pay our subcontractors before our customers pay us for the related services. We could experience a material decrease in profitability and liquidity if we choose, or are required, to pay our subcontractors for work performed for customers that fail to pay us, or delay paying us, for the related work. Any of these factors could have a material adverse effect on our results of operations, cash flows and liquidity.
We also rely on suppliers to obtain the necessary materials for certain projects, and on equipment manufacturers and lessors to provide us with the equipment we require to conduct our operations. Although we are not dependent on any single supplier, equipment manufacturer or lessor, any substantial limitation on the availability of suppliers or equipment, including from economic or market conditions, could negatively affect our operations. If we cannot acquire sufficient materials or equipment, it could materially and adversely affect our results of operations, cash flows and liquidity.
Our participation in strategic arrangements, including joint ventures and equity investments, exposes us to numerous risks.
We have certain strategic arrangements, including joint ventures and equity investments, which provide us the opportunity to combine our skills and resources with those of others to allow for the performance of particular projects for which we do not control the day-to-day operations. The success of these arrangements depends, in large part, on whether our partners satisfy their contractual and performance obligations. In certain of these arrangements, we and our partners are jointly and severally liable for liabilities and obligations of the entity or joint venture. If one of our partners fails to perform or is financially unable to bear its portion of required capital contributions or other obligations, including liabilities stemming from claims or lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Further, if we are unable to adequately address our partner’s performance issues, the projects could be terminated, which could result in legal liability, harm our reputation and/or impair our ability to participate in future investment and project opportunities, all of which could materially adversely affect our results of operations, cash flows and liquidity. In the past, we have incurred losses from our equity investments. We also could be subject to a write-down of a portion or all of the net investment related to such arrangements. Market or other conditions, such as the inability of an entity in which we have invested to complete certain transactions, could subject us to a loss of some or all of the value of our investment. See Note 14 - Commitments and Contingencies and Note 4 - Fair Value of Financial Instruments in the notes to the audited consolidated financial statements, which are incorporated by reference, for additional information.
We may have additional tax liabilities associated with our domestic and international operations.
We are subject to income taxes in the United States and certain foreign jurisdictions. Management must exercise significant judgment in determining our provision for income taxes due to lack of clear and concise tax laws and regulations in certain jurisdictions. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of laws are issued or applied, and such changes could materially affect our tax provisions. The U.S. enacted tax reform legislation in 2017, referred to as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The provisions of the 2017 Tax Act require significant judgments and estimates to be made, and our interpretations of these provisions could differ from those of the U.S. Treasury Department or the Internal Revenue Service (the “IRS”), as many provisions of the 2017 Tax Act still do not have final guidance. In addition, we are audited by various U.S. and foreign tax authorities, and in the ordinary course of our business, there are many transactions and calculations for which the ultimate tax determination may be uncertain. Although we believe that our tax estimates are reasonable, the final outcome of income tax examinations could be materially different from our expectations and the estimates that are reflected in our consolidated financial statements, which could have a material adverse effect on our results of operations, cash flows and liquidity.
We are self-insured against many potential liabilities.
Although we are effectively self-insured for substantially all claims because most claims against us do not exceed the deductibles under our insurance policies, there can be no assurance that our insurance coverages will be sufficient under all circumstances, or against all claims or liabilities to which we may be subject. We actuarially determine any liabilities for unpaid claims and associated expenses, including losses incurred but not reported, and reflect the present value of those liabilities on our balance sheet. The determination of such claims and expenses and the appropriateness of the related liability is reviewed and updated quarterly. However, insurance liabilities are difficult to assess and estimate due to many factors, the
effects of which are often unknown or difficult to estimate, including the severity of an injury, the determination of our liability in proportion to other parties’ liability, the number of incidents not reported and the effectiveness of our safety programs. If our insurance costs exceed our estimates of insurance liabilities, or if our insurance claims increase, or if our insurance coverage proves to be inadequate or becomes unavailable, we could experience increased exposure to risk and/or a decline in profitability and liquidity.
Changes to renewable portfolio standards and decreased demand for renewable energy projects could negatively affect our results of operations, cash flows and liquidity.
Warranty claims resulting from our services could have a material adverse effect on our business.
We generally warrant the work we perform for a one- to two-year period following substantial completion of a project, subject to further extensions of the warranty period following repairs or replacements. Warranty claims have historically not been material, but such claims could potentially increase. If warranty claims occur, we could be required to repair or replace warrantied items, or, if our customers elect to repair or replace the warrantied item using the services of another provider, we could be required to pay for the cost of the repair or replacement. Additionally, while we generally require that the materials provided to us by suppliers have warranties consistent with those we provide to our customers, if any of these suppliers default on their warranty obligations to us, we could incur costs to repair or replace the defective materials for which we are not reimbursed. The costs associated with such warranties, including any warranty-related legal proceedings, could have a material adverse effect on our results of operations, cash flows and liquidity.
Certain of our businesses have employees who are represented by unions or are subject to collective bargaining agreements. The use of a unionized workforce and any related obligations could adversely affect our operations.
Certain of our employees are represented by labor unions and collective bargaining agreements. Although all such collective bargaining agreements prohibit strikes and work stoppages, we cannot be certain that strikes or work stoppages will not occur despite the terms of these agreements. Strikes or work stoppages could adversely affect our relationships with our customers and cause us to lose business. Additionally, as current agreements expire, the labor unions may not be able to negotiate extensions or replacements on terms favorable to their members, or at all, or avoid strikes, lockouts or other labor actions that could affect their members. Therefore, itwe cannot be assuredassure you that new agreements will be reached with employee labor unions as existing contracts expire, or on desirable terms. Any action against us relating to the union workforce we employ could have a material adverse effect on our liquidity, cash flows and results of operations.
Our participation in multiemployer pension plans may subject us to liabilities that could materially and adversely affect our liquidity, cash flows and results of operations.
Substantially all of our union and collective bargaining agreements require us to participate with other companies in multiemployer pension plans. To the extent that U.S.-registered multiemployer pension plans are underfunded, defined benefit plans, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980 (collectively, “ERISA”), which governs U.S.-registered multiemployer pension plans, subjects employersmay subject us to substantial liabilities in the event of the employer’sa complete or partial withdrawal from, or upon termination of, such plans. Under current law pertaining to employers that are contributors to U.S.-registered multiemployer defined benefit plans, a plan’s termination, an employer’s voluntary withdrawal from, or the mass withdrawal of contributing employers from, an underfunded multiemployer defined benefit plan requires participating employers to make payments to the plan for their proportionate share of the multiemployer plan’s unfunded vested liabilities. These liabilities include an allocable share of the unfunded vested benefits of the plan for all plan participants, not only for benefits payable to participants of the contributing employer. As a result, participating employers may bear a higher proportion of liability for unfunded vested benefits if the other participating employers cease to contribute to, or withdraw from, the plan. The allocable portion of liability to participating employers could be more disproportionate if employers that have withdrawn from the plan are insolvent, or if they otherwise fail to pay their proportionate share of the withdrawal liability. We currently contribute, and in the past have contributed to, plans that are underfunded, and, therefore, could have potential liability associated
with a voluntary or involuntary withdrawal from, or termination of, these plans. In addition, the Pension Protection Act of 2006, as amended, (the “PPA”), requires pension plans that are underfunded to improve their funding ratios within prescribed intervals based on their level of underfunding, under which benefit reductions may apply and/or participating employers could be required to make additional contributions. In addition, if a multiemployer defined benefit plan fails to satisfy certain minimum funding requirements, the Internal Revenue Service (the “IRS”) may impose on the employers contributing to such a planplans a non-deductible excise tax of 5% of the amount of the accumulated funding deficiency.
Based upon the information available to us from plan administrators as of December 31, 2017,2019, several of the multiemployer pension plans in which we participate are underfunded and, as a result, we could be required to increase our contributions, including in the form of a surcharge on future benefit contributions.contributions, or increased contributions on underfunded plans. The amount of additional funds we may be obligated to pay or contribute in the future cannot be estimated, as these amounts are based on future levels of work of the union employees covered by these plans, investment returns and the level of underfunding of such plans.
Our existing operations in international markets, or expanding into additional international markets, may not be successful and could expose us to risks, including failure to comply with the U.S. Foreign Corrupt Practices Act and/or similar anti-bribery laws, which could harm our business and prospects.
We derive a portion of our revenue from international markets, and we may further expand the volume of international services we provide, as well as the foreign geographic territories in which we operate. See Note 13 - Segments and Related Information in the notes to the audited consolidated financial statements, which is incorporated by reference, for foreign revenue information. Our foreign operations are effectively self-insured for substantially all claims because most claims against us do not exceed the deductibles under our insurance policies. We actuarially determine any liabilities for unpaid claims and associated expenses, including losses incurredpresently conducted primarily in Canada, but not reported, and reflect the present value of those liabilitieswe have performed work in our balance sheet asvarious other current and other long-term liabilities, as appropriate. The determination of such claims and expensesforeign countries, and the appropriateness of the related liability is reviewed and updated quarterly. However, insurance liabilities are difficult to assess and estimate due to many factors, the effects of which are often unknownrevenue we derive from, or difficult to estimate, including the severity of an injury, the determination of our liability in proportion to other parties’ liability, the number of incidents not reported and the effectiveness of our safety program. If our insurance costs exceed our estimates of insurance liabilities, or if our insurance claims increase,countries in which we operate, could experience a decline in profitability and liquidity.
The FCPA and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience corruption to some degree, and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with these anti-bribery laws. Further our subcontractors, agents and others who work for us or on our behalf are expected to comply with the ordinary course of our business, there are many transactionsFCPA and calculations for which the ultimate tax determination may be uncertain. Although we believeother anti-bribery laws. There is no assurance that our tax estimatesemployees and agents will comply with the FCPA, or that anti-bribery laws will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and/or intermediaries. If we are reasonable,found to be liable for FCPA violations, either due to our own acts or our inadvertence, or due to the final outcomeacts or inadvertence of income tax examinationsothers, we could be materially different from our expectations and the estimates that are reflected in our consolidated financial statements,incur severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flowsflows. In addition, detecting, investigating and liquidity.resolving actual or alleged FCPA violations is expensive and can consume significant time and attention of our senior management.
We are subject to foreign exchange and currency risks that could adversely affect our operations and our ability to reinvest earnings from operations. In addition, our ability to mitigate our foreign exchange risk through hedging transactions may be limited.
We generally attempt to denominate our contracts in U.S. dollars or in the currencies of our costs. We have, incurred restructuring charges, and could in the future may incur additional restructuring charges, which could reduceenter into contracts or service arrangements in foreign locations that are denominated in currencies other than the U.S. dollar, subjecting us to currency risk exposure, particularly when the contract revenue is denominated in a currency different from the contract costs. Certain portions of our profitability.
Our credit facility and senior notes impose restrictions on us that may prevent us from engaging in transactions that might benefit us, including responding to changing business and economic conditions or securing additional financing, if needed.
The terms of our indebtedness contain customary events of default and covenants that prohibit us from taking certain actions without satisfying certain financial tests or obtaining the consent of the lenders. The prohibited actions include,lenders, including, among other things:
making investments and acquisitions in excess of specified amounts;
incurring additional indebtedness in excess of specified amounts;
creating certain liens against our assets;
prepaying subordinated indebtedness;
engaging in certain mergers or combinations;
engaging in transactions that would result in a “change of control,” as defined in the credit facility and the indentures governing our senior notes.
Our senior secured credit facility requires that we comply with a consolidated leverage ratio and a consolidated interest coverage ratio. Should we be unable to comply with the terms and covenants of our credit facility, we would be required to obtain consents from our bank group, further modify our credit facility or secure another source of financing to continue to operate our business, none of which may be available to us on reasonable terms or at all. A default could also result in the acceleration of our obligations under the credit facility or under the indentures relating to our senior notes. In addition, these covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions or securing additional financing, if needed. Our business is capital intensive and to the extent we need additional financing, we may not be able to obtain such financing at all or on favorable terms, which could materially decrease our profitability, cash flows and liquidity.
Regulatory changes and/or reforms, such as the phase-out of the London Inter-bank Offered Rate (“LIBOR”), which is expected to occur by 2021, could lead to additional volatility in interest rates for our variable rate debt and other unpredictable effects. While our material financing arrangements indexed to LIBOR have procedures for determining an alternative base rate, such alternative base rate could perform differently than the current LIBOR-indexed rate and could result in an increase in the cost of our variable rate indebtedness, which could negatively affect our results of operations and cash flows.
We may be unable to obtain sufficient bonding capacity to support certain service offerings, and the need for performance and surety bonds could reduce availability under our credit facility.
Some of our contracts require performance and payment bonds. If we are not able to renew or obtain a sufficient level of bonding capacity in the future, we may be precluded from being able to bid for certain contracts or successfully contract with certain customers. In addition, even if we are able to successfully renew or obtain performance or payment bonds, we may be required to post letters of credit in connection with the bonds, which would reduce availability under our credit facility. Furthermore, under standard terms in the surety market, sureties issue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing or renewing any bonds. If we were to experience an interruption or reduction in the availability of bonding capacity as a result of these or any other reasons, we may be unable to compete for or work on projects that require bonding.
A failure of our internal control over financial reporting could materially affect our business.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, internalInternal control over financial reporting may not prevent or detect misstatements.misstatements due to inherent limitations in internal control systems. Any failure to maintain an effective system of internal controlscontrol over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud, and could expose us to litigation, harm our reputation, and/or adversely affect the market price of our common stock.
Risks Related to Our Company and Our Common Stock
There may be future sales of our common stock or other dilution of our equity that could adversely affect the market price of our common stock. In connection with certain completed acquisitions, we have issued shares of our common stock, and we additionally have the option to issue shares of our common stock instead of cash as consideration for future earn-out obligations. We may agree to issue additional shares in connection with other future acquisition or financing transactions, which, if issued, would dilute your share ownership and could lead to volatility in our common stock price.
We grow our business organically as well as through acquisition. One method of acquiring companies or otherwise funding our corporate activities is through the issuance of equity securities. In connection withFor certain acquisitions, we have the option to issue shares of our common stock instead of paying cash for the related earn-out obligations. Such issuances could have the effect of dilutingdilute our earnings per share as well as our existing shareholders’ individual ownership percentages and could lead to volatility in our common stock price. Our Amended and Restated Articles of Incorporation provide that we may issue up to a total 145,000,000145.0 million shares of common stock, of which 82,802,773approximately 76.6 million shares were outstanding as of December 31, 2017.2019.
We are not restricted from issuing additional common stock. The issuance of additional shares of our common stock in connection with future acquisitions, convertible securities or other issuances of our common stock, including restricted stock awards, restricted stock units and/or options, or otherwise, will dilute the ownership interest of our common shareholders. Sales of a substantial number of shares of our common stock or other equity-related securities in the public market could depress the market price of our common stock and impair our ability to raise capital through the sale of
additional equity or equity-linked securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock.
We have a significant amount of debt. Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations.
We have a significant amount of debt and substantial debt service requirements. This level of debt could have significant consequences on our future operations, including:
making it more difficult for us to meet our payment and other obligations;
our failure to comply with the financial and other restrictive covenants contained in our debt agreements, which could trigger events of default that could result in all of our debt becoming immediately due and payable;
reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions or strategic investments and other general corporate requirements, and limiting our ability to obtain additional financing for these purposes;
limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to changes in our business, the industry in which we operate and the general economy;
placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and
preventing us from paying dividends.
Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations. Our ability to meet our payment and other obligations under our debt instruments depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under our credit facility in an amount sufficient to enable us to meet our payment obligations and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital, and some of these activities may be on terms that are unfavorable or highly dilutive. Our
ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations.
The market price of our common stock has been, and may continue to be, highly volatile.
The market price of our common stock on the New York Stock Exchange has been volatile in recent years. We may continue to experience significant volatility in the market price of our common stock. Numerous factors could have a significant effect on the price of our common stock, including:
announcements of fluctuations in our operating results or the operating results of one of our competitors;
market conditions in our customers' industries;
capital spending plans of our significant customers;
global and domestic energy and fuel prices;
announcements by us or one of our competitors of new or terminated customers or new, amended or terminated contracts;
announcements of acquisitions by us or one of our competitors;
changes in recommendations or earnings estimates by securities analysts;
In addition, the stock market has experienced significant price and volume fluctuations in recent years, which have sometimes been unrelated or disproportionate to operating performance. Volatility in the market price of our common stock could cause shareholders to lose some or all of their investment in our common stock.
A small number of our existing shareholders have the ability to influence major corporate decisions.
Jorge Mas, our Chairman, and José R. Mas, our Chief Executive Officer, beneficially owned approximately 20%23% of the outstanding shares of our common stock as of December 31, 2017.2019. Accordingly, they are in a position to influence:
the vote of most matters submitted to our shareholders, including any merger, consolidation or sale of all or substantially all of our assets;
the nomination of individuals to our Board of Directors; and
a change in our control.
These factors may discourage, delay or prevent a takeover attempt that shareholders might consider in their best interests or that might result in shareholders receiving a premium for their common stock.
Our articles of incorporation and certain provisions of Florida law contain anti-takeover provisions that may make it more difficult to effect a change in our control.
Certain provisions of our articles of incorporation, by-laws and the Florida Business Corporation Act could delay or prevent an acquisition or change in control and the replacement of our incumbent directors and management, even if doing so might be beneficial to our shareholders by providing them with the opportunity to sell their shares possibly at a premium over the then market price of our common stock. For example, our Board of Directors is divided into three classes. At any annual meeting of our shareholders, our shareholders only have the right to appoint approximately one-third of the directors on our Board of Directors. Consequently, it will take at least two annual shareholder meetings to effect a change in control of our Board of Directors, which may discourage hostile takeover bids. In addition, our articles of incorporation authorize our Board of Directors, without further shareholder approval, to issue preferred stock. The issuance of preferred stock could also dilute the voting power of holders of our common stock, including the granting of voting control to others, which could delay or prevent an acquisition or change in control.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
Our corporate headquarters, located in Coral Gables, Florida, is a leased facility approximating 38,000 square feet. As of December 31, 2017, our operations wereare conducted from approximately 400different locations, primarily within the United States and Canada, and to a lesser extent,including our corporate headquarters located in Mexico. NoneCoral Gables, Florida. Substantially all of these properties, including our corporate headquarters, are leased facilities, none of which is material to our operations because mostoperations. We believe that our existing facilities are adequate for our current and planned levels of our services are performed on customers’ premises or on public rights of way and suitable alternative locations are available in substantially all areas where we currently conduct business. We also own property and equipment that had a net book value of approximately $707 million as of December 31, 2017. This property and equipment includes land, buildings, vans, trucks, tractors, trailers, bucket trucks, forklifts, backhoes, sidebooms, bulldozers, excavators, trenchers, graders, loaders, scrapers, drilling machines, directional boring machines, digger derricks, pile drivers, cranes, computers, computer software and office and building equipment, including furniture and fixtures. Substantially all of our equipment is obtained from third-party vendors. A portion of our equipment is acquired under capital lease or other financing arrangements. We are not dependent upon any single vendor and did not experience significant difficulties in obtaining desired equipment in 2017.operation.
| ITEM 3. | LEGAL PROCEEDINGS |
The information set forth in Note 14 –- Commitments and Contingencies in the notes to the audited consolidated financial statements in Item 8 of this Form 10-K is incorporated by reference.
24
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “MTZ.” The following table sets forth the high and low reported sales prices per share of our common stock for the quarters indicated:
| For the Years Ended December 31, | |||||||||||||||
| 2017 | 2016 | ||||||||||||||
| High | Low | High | Low | ||||||||||||
| First Quarter | $ | 41.90 | $ | 34.33 | $ | 20.85 | $ | 12.44 | |||||||
| Second Quarter | $ | 47.90 | $ | 38.33 | $ | 24.67 | $ | 19.13 | |||||||
| Third Quarter | $ | 49.50 | $ | 38.40 | $ | 31.15 | $ | 22.03 | |||||||
| Fourth Quarter | $ | 51.20 | $ | 39.83 | $ | 40.90 | $ | 27.10 | |||||||
Holders.As of February 21, 2018,24, 2020, there were 1,4981,704 holders of record of our common stock. In calculating the number of shareholders, we consider clearing agencies and security position listings as one shareholder for each agency or listing.
Dividends.We have neverhistorically not paid cash dividends and do not currently anticipate paying anya cash dividends in the foreseeable future.dividend. We intend to retain future earnings for reinvestment. Our Board of Directors will make any future determination as to the payment of dividends at its discretion, and this
determination will depend upon our operating results, financial condition and capital requirements, general business conditions and such other factors that the Board of Directors considers relevant. In addition, our credit agreements prohibit us from paying cash dividends or making other distributions of our common stock without prior consent of the lender. The indenture governing our senior notes also contains covenants that restrict our ability to make certain payments including the payment of dividends. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources.”
Issuer Purchases of Equity Securities. On February 25, 2016, our BoardDuring the year ended December 31, 2019, we repurchased a total of Directors authorized the repurchase of up to $100 million15,100 shares of our common stock under aour share repurchase program, under which 38,807 shares were repurchased during the year ended December 31, 2017.programs. See Note 11 - Equity, in the notes to the audited consolidated financial statements, which is incorporated by reference.reference, for additional information pertaining to our share repurchase programs.
The following table provides information about repurchases of our common stock during the three month period ended December 31, 2017:2019:
| Total Number of Shares Purchased (a) (b) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (c) | Approximate Dollar Value of Shares that May Yet be Purchased under the Program | Total Number of Shares Purchased (a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased under the Programs (b) | |||||||||||||||||||||
| October 1 through October 31 | — | $ | — | — | $ | 100,000,000 | — | $ | — | — | $ | 128,846,586 | ||||||||||||||||
| November 1 through November 30 | 39,270 | $ | 39.99 | 38,807 | $ | 98,448,190 | 156 | $ | 71.96 | — | $ | 128,846,586 | ||||||||||||||||
| December 1 through December 31 | 99,193 | $ | 46.90 | — | $ | 98,448,190 | — | $ | — | — | $ | 128,846,586 | ||||||||||||||||
| Total | 138,463 | 38,807 | 156 | — | ||||||||||||||||||||||||
| (a) |
| (b) |
Performance Graph
The performance graph below compares the cumulative five year total return for our common stock with the cumulative total return (including reinvestment of dividends) of the Standard and Poor’s 500 Composite Stock Index (“S&P 500”), and with that of our peer group, which is composed of Quanta Services, Inc., MYR Group, Inc., Dycom Industries, Inc., Jacobs Engineering Group Inc. and Primoris Services Corporation. For the year ended December 31, 2017, we added Primoris Services Corporation and removed Willbros Group, Inc. from our peer group comparison to enhance comparability. The graph assumes that the value of the investment in our common stock, as well as that of the S&P 500 and our peer group, was $100 on December 31, 20122014 and tracks it through December 31, 2017.2019. The comparisons in the graph are based upon historical data and are not intended to forecast or be indicative of possible future performance of our common stock.
The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among MasTec, Inc., the S&P 500 Index, and a Peer Group
*$100 invested on 12/31/1214 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 20182020 Standard & Poor’s, a division of S&P Global. All rights reserved.
| As of December 31, | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||||||||||
| MasTec, Inc. | $ | 100.00 | $ | 131.25 | $ | 90.69 | $ | 69.72 | $ | 153.43 | $ | 196.35 | $ | 100.00 | $ | 76.87 | $ | 169.17 | $ | 216.50 | $ | 179.39 | $ | 283.77 | ||||||||||||||||||||||
| S&P 500 | $ | 100.00 | $ | 132.39 | $ | 150.51 | $ | 152.59 | $ | 170.84 | $ | 208.14 | $ | 100.00 | $ | 101.38 | $ | 113.51 | $ | 138.29 | $ | 132.23 | $ | 173.86 | ||||||||||||||||||||||
| 2016 Peer Group | $ | 100.00 | $ | 131.71 | $ | 108.80 | $ | 99.27 | $ | 144.29 | $ | 169.06 | ||||||||||||||||||||||||||||||||||
| 2017 Peer Group | $ | 100.00 | $ | 135.21 | $ | 111.36 | $ | 103.16 | $ | 146.58 | $ | 173.43 | ||||||||||||||||||||||||||||||||||
| Peer Group | $ | 100.00 | $ | 92.64 | $ | 131.63 | $ | 155.74 | $ | 120.78 | $ | 167.87 | ||||||||||||||||||||||||||||||||||
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data has been derived from our audited consolidated financial statements and should be read together with our audited consolidated financial statements and notes thereto, as well as Item 7. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.”Operations (“MD&A”) in this Form 10-K. Our consolidated results of operations are not necessarily comparable from year to year due to the effect of acquisitions and certain other items, which are further described within Item 7. below.MD&A.
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | 2019 (a) | 2018 (b) | 2017 (c) | 2016 | 2015 (d) | |||||||||||||||||||||||||||||
| (in millions, except per share amounts) | (in millions, except per share amounts) | |||||||||||||||||||||||||||||||||||||
| Statement of Operations Data | ||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 6,607.0 | $ | 5,134.7 | $ | 4,208.3 | $ | 4,611.8 | $ | 4,324.8 | $ | 7,183.2 | $ | 6,909.4 | $ | 6,607.0 | $ | 5,134.7 | $ | 4,208.3 | ||||||||||||||||||
| Costs of revenue, excluding depreciation and amortization | $ | 5,745.3 | $ | 4,442.1 | $ | 3,721.3 | $ | 3,978.0 | $ | 3,682.4 | $ | 6,070.2 | $ | 5,939.3 | $ | 5,745.3 | $ | 4,442.1 | $ | 3,721.3 | ||||||||||||||||||
| Net income (loss) from continuing operations | $ | 348.9 | $ | 134.0 | $ | (79.7 | ) | $ | 122.0 | $ | 147.7 | $ | 394.1 | $ | 259.2 | $ | 348.9 | $ | 134.0 | $ | (79.7 | ) | ||||||||||||||||
| Net income (loss) attributable to MasTec, Inc. | $ | 347.2 | $ | 131.3 | $ | (79.1 | ) | $ | 115.9 | $ | 140.9 | $ | 392.3 | $ | 259.7 | $ | 347.2 | $ | 131.3 | $ | (79.1 | ) | ||||||||||||||||
| Earnings (loss) per share from continuing operations: | ||||||||||||||||||||||||||||||||||||||
| Basic | $ | 4.29 | $ | 1.63 | $ | (0.98 | ) | $ | 1.53 | $ | 1.92 | $ | 5.22 | $ | 3.30 | $ | 4.29 | $ | 1.63 | $ | (0.98 | ) | ||||||||||||||||
| Diluted | $ | 4.22 | $ | 1.61 | $ | (0.98 | ) | $ | 1.42 | $ | 1.74 | $ | 5.17 | $ | 3.26 | $ | 4.22 | $ | 1.61 | $ | (0.98 | ) | ||||||||||||||||