MASTEC INC quarterly report, Q2 FY2015

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MasTec, Inc. — Q2 2015 Form 10-Q

Reporting period: Three and six months ended June 30, 2015. MasTec provides infrastructure construction, installation and maintenance services across communications, oil and gas, electrical transmission, power generation and industrial markets. 2014 comparison periods were restated.

Financial results and position

  • Q2 revenue: $1.067 billion, down 4% year over year. GAAP net loss attributable to MasTec was $3.7 million, or $0.05 per diluted share, versus income of $33.7 million, or $0.39 per diluted share, in restated Q2 2014.
  • First-half revenue: $2.070 billion, up 0.2%. GAAP net loss attributable to MasTec was $10.0 million, or $0.12 per diluted share, versus income of $45.8 million, or $0.53 per diluted share, in restated 2014.
  • Profitability: Costs of revenue excluding depreciation and amortization were 88.7% of revenue in Q2 (85.9% in 2014) and 88.5% for the first half (86.8% in 2014). Consolidated EBITDA was $53.8 million in Q2 versus $104.2 million, and $96.6 million for the first half versus $169.5 million. Adjusted EBITDA, a non-GAAP measure, was $71.0 million and $134.7 million, respectively, versus $108.4 million and $176.9 million.
  • Cash flow: First-half operating cash flow was $165.9 million, up from $55.3 million. The company attributed a $175 million positive cash impact to net working-capital changes, including receivables and inventory. Investing used $114.2 million; financing used $70.4 million. Cash fell by $19.3 million to $4.8 million.
  • Liquidity and debt: Working capital was $501 million. Total debt was $1.215 billion, including $78.4 million of current maturities; debt was $1.135 billion at year-end 2014. Revolver availability was $468.2 million for loans, or up to $274.2 million for new letters of credit. Management said it expected available liquidity, operating cash flow and borrowing capacity to meet needs for at least 12 months. The company reported compliance with debt covenants.
  • Backlog: Estimated 18-month backlog was $4.070 billion at June 30, versus $3.940 billion a year earlier and $4.210 billion at March 31. Management expected to realize about 45% during 2015.

Material changes and management commentary

  • Acquisitions added approximately $112 million of Q2 revenue and $232 million for the first half, but organic revenue declined by $152 million and $227 million, respectively.
  • Communications revenue fell 11% in Q2, primarily from lower wireless work, customer spending changes and weather. Electrical Transmission revenue fell 33% in Q2; the segment recorded EBITDA losses of $21.4 million in Q2 and $23.9 million for the first half, citing weather, project inefficiencies, lower utilization and management distraction from the investigation.
  • Oil and Gas revenue rose 12% in Q2 but declined 1% for the first half; the first-half comparison reflected completion of a large pipeline project, lower oil prices and foreign exchange effects. Power Generation and Industrial benefited from renewable project activity, but first-half EBITDA included a $16.0 million Canadian wind-project loss. Other segment first-half EBITDA included a $5.5 million Canadian joint-venture loss.
  • Q2 and first-half results included WesTower integration costs of $7.8 million and $16.6 million, and Audit Committee investigation costs of $6.7 million and $9.7 million. Q2 also included $2.8 million of tax expense from an Alberta tax-law change. Adjusted results exclude selected costs and should not be treated as GAAP results.
  • Capital expenditure outlook was approximately $70 million for 2015, or $60 million net of asset disposals; expected equipment purchases under leases or other financing were $40 million to $50 million. The filing gives no specific revenue or earnings guidance.

Risks, contingencies and unusual items

  • The company restated 2014 interim financial statements following an Audit Committee investigation. It identified a material weakness in controls over documentation supporting cost-to-complete estimates for percentage-of-completion projects; management concluded disclosure controls were ineffective at June 30, 2015 and described remediation steps.
  • A shareholder securities class action related to the accounting matters was filed in May 2015; MasTec said it would vigorously defend the case. The SEC had requested information concerning the investigation, and the company said it was cooperating.
  • Customer concentration remains significant: AT&T and DIRECTV together represented 31% of first-half 2015 revenue; AT&T acquired DIRECTV in July 2015. The top ten customers accounted for 57% of first-half revenue. Many master-service agreements are cancellable on short or no notice, and backlog is not a GAAP measure or a guarantee of future revenue.
  • Backlog and results are exposed to customer spending changes, oil-market volatility, project delays, weather, competition and cost-estimate uncertainty. The filing also describes approximately $82 million of unresolved change orders and claims, whose ultimate collection could be higher or lower than estimated.
  • Other exposures include a PPL contract dispute seeking more than $40 million, multi-employer pension withdrawal-liability uncertainty, performance guarantees associated with Canadian ventures, and self-insurance obligations. A receivership-related investee financing commitment was up to approximately $62.4 million; about $28.3 million had been funded by June 30 and $37.2 million by August 12.

Important facts for investors to verify

  • Progress and effectiveness of remediation of the material weakness, and any further investigation findings, restatements or regulatory developments.
  • Whether Electrical Transmission project execution and new-award activity improve, and whether the Canadian wind and joint-venture losses create further exposure.
  • Cash conversion quality: operating cash flow benefited substantially from working-capital releases, while cash ended the period at $4.8 million and debt increased.
  • Backlog conversion and cancellations, especially under cancellable master-service agreements, as well as customer concentration following AT&T’s acquisition of DIRECTV.
  • Resolution and recoverability of claims, guarantees, contingent consideration and receivership advances, and continued compliance with debt covenants.