MasTec, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. MasTec provides infrastructure construction, installation and maintenance services across communications, oil and gas, electrical transmission, power generation and industrial markets, primarily in North America. Amounts below are U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $1,617.8 million | $1,890.2 million | $3,014.6 million | $3,048.4 million |
| Income before taxes | $116.2 million | $138.8 million | $153.8 million | $206.8 million |
| Net income attributable to MasTec | $80.5 million | $81.7 million | $107.1 million | $122.6 million |
| Diluted EPS | $1.01 | $0.99 | $1.32 | $1.49 |
| EBITDA, non-GAAP | $188.7 million | $198.9 million | $293.2 million | $322.4 million |
| Adjusted EBITDA, non-GAAP | $191.1 million | $202.3 million | $298.8 million | $337.1 million |
Q2 net income margin was 5.0%, versus 4.4% a year earlier; first-half margin was 3.5%, versus 4.1%. EBITDA margin was 11.7% in Q2 (10.5% prior year) and 9.7% for the first half (10.6% prior year). The company reported first-half operating cash flow of $23.2 million, compared with cash used of $100.2 million in 2017. Capital expenditures were $88.0 million, implying operating cash flow less capital expenditures of negative $64.8 million.
Balance sheet and liquidity
- At June 30, cash was $20.7 million; current assets were $2.282 billion and current liabilities $1.253 billion, resulting in working capital of approximately $1.029 billion.
- Total debt, net of deferred financing costs, was $1.617 billion, up from $1.369 billion at year-end 2017. Cash-adjusted debt was approximately $1.597 billion.
- Revolver availability was $327.2 million, after outstanding borrowings and letters of credit. The company reported compliance with debt covenants.
- Accounts receivable, including contract assets, rose to $2.078 billion from $1.598 billion at year-end. Days sales outstanding, net of billings in excess of costs and earnings, increased to 103 from 81.
Changes versus the comparable period
- Q2 revenue fell 14%, mainly because Oil and Gas revenue declined 33% amid timing of large pipeline projects. Communications revenue rose 4%, and Power Generation and Industrial revenue rose 141%, including acquisition contributions.
- First-half revenue declined 1%; organic revenue fell approximately 5%, partly offset by $123 million of acquisition-related revenue. Oil and Gas revenue fell 18%, while Communications grew 8% and Power Generation and Industrial grew 146%.
- Q2 adjusted cost of revenue improved as a share of sales to 84.5% from 86.0%, reflecting productivity and segment mix. For the first half, it worsened to 86.4% from 85.2%, driven by Oil and Gas project efficiencies, closeouts and mix.
- First-half interest expense increased to $37.9 million from $27.4 million, reflecting higher average borrowings and rates, as well as higher receivables-financing charges.
- The effective tax rate fell to 30.5% for the first half from 40.0%, primarily following the 2017 Tax Act’s reduction in the U.S. corporate tax rate to 21%.
Outlook, risks and notable items
- Management expected approximately $120 million of 2018 capital expenditures, net of asset disposals approximately $100 million, and $110–$130 million of equipment purchases through capital leases or other financing. Management stated available operating cash flow, credit-facility capacity and cash were expected to meet needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Estimated 18-month backlog was $7.719 billion, with almost 50% expected to be realized in 2018. About half was tied to master/service agreements without minimum purchase commitments; backlog may be delayed, reduced or canceled and is not a U.S. GAAP measure. Remaining performance obligations were $5.1 billion, a distinct measure.
- Approximately $190 million of change orders and claims remained under resolution, primarily associated with large Oil and Gas pipeline projects; final recoveries may differ from estimates. Contract estimates, variable consideration and project costs are significant sources of judgment.
- Customer concentration was substantial: AT&T represented 25% of Q2 revenue; Energy Transfer affiliates 15%; and EQT 19%. Three customers represented approximately 39%, 18% and 12% of net receivables, respectively.
- Other exposures include project timing and weather, customer spending and commodity-market conditions, self-insurance, multiemployer pension plans, legal disputes, letters of credit and bonds. Oil and Gas goodwill and an indefinite-lived intangible asset had fair values only about 8% and 10% above carrying values, respectively, in the cited impairment assessments.
- MasTec repurchased 2.7 million shares for $128.3 million during the first half and had approximately $70 million remaining under its current $100 million repurchase authorization. It also made $25 million of first-half contributions to the Waha joint ventures and invested $10 million in LifeShield during Q2.
Important facts for investors to verify
- Whether pipeline-project timing, contract closeouts and the elevated receivable/contract-asset balance translate into collections and improved operating cash flow.
- Whether Oil and Gas project margins recover, and whether growth in Communications and Power Generation and Industrial can offset lower pipeline activity.
- The resolution and collectability of the approximately $190 million in pipeline-related claims and change orders, and the associated customer concentration.
- Debt, interest costs, revolver headroom and cash requirements for capital spending, leases, earn-outs, investments and share repurchases.
- Whether backlog converts as expected, given the nonbinding nature of many service-agreement estimates and the potential for customer or project delays.