MasTec, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. MasTec provides infrastructure construction and maintenance services across communications, oil and gas, electrical transmission, power generation and industrial markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.890 billion | $1.232 billion | $3.048 billion | $2.207 billion |
| Net income attributable to MasTec | $81.7 million | $24.1 million | $122.6 million | $21.4 million |
| Diluted EPS | $0.99 | $0.30 | $1.49 | $0.26 |
| EBITDA (non-GAAP) | $198.9 million; 10.5% margin | $95.3 million; 7.7% margin | $322.4 million; 10.6% margin | $141.5 million; 6.4% margin |
| Operating cash flow | Not presented separately for the quarter | $(88.0) million | $28.5 million |
Q2 pretax income was $138.8 million and net income was $83.3 million. Q2 adjusted EBITDA was $202.3 million and adjusted diluted EPS was $1.03; these are non-GAAP measures.
At June 30, cash was $18.2 million; current assets were $1.791 billion and current liabilities $928.7 million, with reported working capital of $862 million. Debt, net of deferred financing costs, was $1.389 billion, including $75.4 million current and $1.314 billion long-term. The company reported $379.8 million of total credit-facility availability, including $229.8 million available for revolving loans or new letters of credit. It was in compliance with debt covenants.
Changes and operating drivers
- Q2 revenue rose 53%; six-month revenue rose 38%. Oil and Gas was the main driver, with revenue up 168% in Q2 and 122% year to date, largely from multiple large long-haul pipeline projects.
- Communications revenue was flat in Q2 and up 4% for six months. Q2 acquisition revenue was offset by lower organic activity, including reduced home-security and customer phone-delivery work. Six-month organic growth reflected wireline/fiber and wireless activity.
- Power Generation and Industrial revenue declined 49% in Q2 and 47% for six months, primarily due to lower renewable power project activity and timing.
- Management cited improved productivity and project efficiencies. Costs of revenue as a share of revenue declined to 86.0% from 86.7% in Q2 and to 85.2% from 88.5% for six months. Communications EBITDA margin weakened year to date, while Oil and Gas and Electrical Transmission improved substantially.
- Operating cash flow turned negative despite higher earnings, mainly because of increased working-capital needs as projects ramped up. Accounts receivable increased to $1.569 billion from $1.156 billion at year-end; DSO, net of billings in excess of costs and earnings, was 71 days.
Outlook, risks and unusual items
- Management expected to realize approximately 50% of the June 30 estimated 18-month backlog of $5.265 billion during 2017. About 60% of backlog was under master service or similar agreements that generally do not require customers to purchase minimum amounts and may be canceled on short or no notice. Backlog timing and conversion are uncertain.
- Management said available operating cash, credit-facility borrowings and cash balances should meet liquidity needs for at least 12 months. 2017 capital expenditure was estimated at approximately $105 million, net of asset disposals at approximately $90 million; equipment purchases under capital leases or other financing arrangements were expected to be approximately $155 million. No specific revenue or earnings guidance was provided in the supplied filing text.
- The February 2017 credit-facility amendment increased commitments to approximately $1.5 billion and extended maturity to 2022. An additional $150 million of term loans was drawn in July, after the reporting date. Variable-rate borrowing creates interest-rate exposure; a 100-basis-point increase would have added approximately $3.1 million to first-half interest expense.
- Customer concentration is material: Energy Transfer affiliates represented 47% of Q2 revenue and AT&T 22%; for the first half, they represented 35% and 27%, respectively. The top ten customers generated 79% of first-half revenue. One customer represented approximately 48% of net receivables at June 30.
- Q2 other expense included approximately $12 million of charges for lower expected recoveries on an investment in liquidation and a long-term note affected by bankruptcy proceedings, partly offset by approximately $9 million of income from lower estimated acquisition earn-outs. The remaining liquidation-related investment carrying value was $14.3 million.
- A non-controlled Canadian joint venture recorded $7 million of first-half project losses after delays; MasTec expected substantial completion in the latter half of 2017. Management also reported that Electrical Transmission goodwill fair value exceeded carrying value by only approximately 5%, making it sensitive to adverse changes in assumptions.
- Other disclosed exposures include unresolved contract change orders and claims of approximately $19 million, self-insurance liabilities of $94.2 million, potential multiemployer pension plan contributions, litigation, letters of credit and performance/payment bonds. Management noted that adverse outcomes in legal matters could materially affect results.
- MasTec acquired a wireline/fiber contractor in April for approximately $38.2 million cash plus a five-year earn-out valued at $25 million. Two additional acquisitions were completed in July for approximately $80 million cash plus contingent consideration. The filing also discloses significant related-party purchases, subcontracting and lease arrangements.
Important facts for investors to verify
- Whether the large Oil and Gas project workload and backlog convert to revenue and cash on schedule, given customer concentration and non-guaranteed master service agreements.
- Whether receivables, unbilled work and working-capital requirements improve; operating cash flow was negative $88 million for the first half.
- Debt, credit-facility availability and interest costs after the July $150 million term-loan draw, as well as continued covenant compliance.
- Project execution and margin trends in Communications, Power Generation and Industrial, and the delayed Canadian joint venture.
- Recoverability of the liquidation-related investment and note receivable, earn-out estimates, contract claims and goodwill valuations.
- Acquisition performance, contingent payments, and the terms and oversight of disclosed related-party transactions.