MasTec, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Financial statements are unaudited. Unless noted otherwise, amounts are in U.S. dollars.
Business context
MasTec provides infrastructure construction, installation, maintenance and upgrade services, primarily in North America, across utility, communications, energy, pipeline and government markets. Continuing-operations revenue growth was led by utilities and project-specific construction work. In June, MasTec sold its DirectStar business to Red Ventures for net cash proceeds of $98.9 million; DirectStar is reported as a discontinued operation.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Continuing-operations revenue | $992.2 million | $716.9 million | $1,735.9 million | $1,296.2 million |
| Income from continuing operations | $29.8 million | $41.8 million | $40.6 million | $56.8 million |
| Diluted EPS, continuing operations | $0.36 | $0.48 | $0.49 | $0.67 |
| Net income attributable to MasTec | $30.1 million | $44.5 million | $44.3 million | $65.6 million |
| Operating cash flow | Not stated separately for the quarter | $(19.2) million | $5.4 million |
- Q2 continuing revenue rose 38.4%, including 32.2% organic growth. First-half revenue increased 33.9%, including 21.2% organic growth.
- Costs of revenue, excluding depreciation and amortization, increased to 87.9% of revenue in Q2 from 85.9%; the corresponding first-half figures were 88.1% and 86.2%. This implies gross margin before depreciation and amortization of 12.1% and 14.1% for Q2, respectively.
- Q2 2012 continuing income was up 23.4% against management’s adjusted Q2 2011 continuing income of $24.1 million, which excludes a $17.7 million after-tax EC Source remeasurement gain. Adjusted prior-year diluted EPS was $0.28 versus $0.36 in Q2 2012.
- Management-reported continuing-operations EBITDA was $80.9 million in Q2 2012 versus adjusted EBITDA of $66.5 million in Q2 2011; first-half amounts were $128.8 million and $114.2 million. These are non-GAAP measures; the 2011 figures exclude the EC Source gain.
Balance sheet and liquidity
- At June 30, cash was $16.8 million; working capital was $339.8 million; current assets were $1,059.6 million and current liabilities $719.7 million. The approximate current ratio was 1.47.
- Total debt was $509.9 million, including $42.7 million current maturities and $467.2 million long-term debt, compared with $494.9 million at year-end 2011. Debt less cash was approximately $493.1 million.
- The $600 million revolving credit facility had $63.8 million drawn and $104.0 million of letters of credit outstanding; the filing reports $432.2 million of remaining borrowing capacity. MasTec said it was in compliance with debt covenants and expected liquidity to cover requirements for at least the next 12 months.
- Operating cash flow was negative despite higher earnings, principally reflecting a $246.0 million increase in receivables. Days sales outstanding rose to 80 from 71 a year earlier. Investing cash flow was positive $56.9 million, including $97.7 million of net proceeds from the DirectStar sale; financing cash flow was negative $41.2 million, including $35.1 million of share repurchases.
Material changes, outlook and risks
- Growth reflected strong demand for power generation and industrial, electrical transmission, and shale-basin pipeline and facility work. Long-haul pipeline revenue declined after completion of the Ruby pipeline project. Communications revenue grew more slowly, and wireless work orders were affected by reduced volume.
- Management attributed margin pressure in part to approximately $25 million of estimated losses on two pipeline projects, severe weather effects on certain pipeline work, higher material costs and project mix. G&A and depreciation rose in dollars but declined as a percentage of revenue.
- Management estimated 2012 capital expenditures of approximately $65 million. Estimated 18-month backlog was $3.117 billion, nearly unchanged from $3.114 billion at December 31, 2011; backlog is not a firm measure of future revenue because service agreements may be cancellable and project timing can change. No specific revenue or earnings guidance is provided in the filing.
- MasTec completed its $150 million share-repurchase plan in July 2012, repurchasing an additional 2.0 million shares for $31.2 million after quarter-end.
- A tentative agreement in the Spanish Sintel litigation could dismiss MasTec defendants with prejudice; if completed, the company expected to record an approximately $10 million pretax charge in Q3 2012. Completion was not assured. Other litigation includes MasTec’s claims exceeding $5 million against an insurance broker and claims exceeding $6 million against the City of Marathon and its engineers.
- Several multi-employer pension plans were underfunded or in critical status, potentially requiring higher contributions. Central States disputed the effectiveness/timing of MasTec’s 2011 withdrawal; a later withdrawal date or plan mass withdrawal could increase liability.
- Customer concentration remains material: the top ten customers represented 69% of Q2 continuing revenue. AT&T contributed 17% and DIRECTV 14%; sale of DirectStar is expected to reduce future revenue and profit from DIRECTV-related activity. Other key risks include project execution and cost estimates, weather and seasonality, pricing competition, customer spending, bonding capacity, and working-capital collection timing.
Important facts for investors to verify
- Whether pipeline project losses and weather-related productivity effects persist, and whether project margins recover.
- Receivable aging, subsequent collections and days sales outstanding, given the large working-capital use and increase in DSO.
- Progress and final terms of the Sintel agreement, including whether the expected Q3 charge is recorded.
- Actual capital spending, backlog conversion, and demand after the year-end 2012 wind production-tax-credit deadline.
- Credit-facility availability and covenant headroom, convertible-note cash settlement capacity, and potential pension-plan withdrawal or contribution liabilities.