MASTEC INC quarterly report, Q2 FY2013

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MasTec, Inc. — Q2 2013 Form 10-Q

Business context and reporting period

Quarter ended June 30, 2013; filed August 1, 2013. MasTec provides infrastructure engineering, construction, installation and maintenance services, principally across North American communications, oil and gas, electrical transmission, and power generation and industrial markets. Financial statements are unaudited.

Financial results and liquidity

  • Q2 revenue: $977.6 million, down 1% from $988.9 million. First-half revenue: $1.896 billion, up 9.8% from $1.727 billion.
  • Q2 earnings: Income from continuing operations was $35.5 million versus $31.2 million; diluted continuing-operations EPS was $0.42 versus $0.38. Net income attributable to MasTec was $34.9 million versus $30.1 million. First-half income from continuing operations was $54.9 million versus $42.9 million; diluted continuing-operations EPS was $0.65 versus $0.52.
  • Margins: Costs of revenue excluding depreciation and amortization were 84.1% of Q2 revenue versus 87.8%; first-half, 85.1% versus 88.1%. Q2 EBITDA, a non-GAAP measure, was $102.7 million (10.5% margin) versus $82.4 million (8.3%). First-half EBITDA was $176.2 million (9.3%) versus $131.5 million (7.6%).
  • Cash flow, first half: Operating cash flow was $14.6 million, versus $4.2 million used in the prior-year period. Investing used $180.9 million, principally for acquisitions and capital expenditures; financing provided $153.4 million. Continuing-operations cash was $13.3 million at June 30, down from $26.4 million at year-end.
  • Working capital and collections: Working capital was approximately $474 million, up from $334 million at year-end. Accounts receivable increased to $1.116 billion from $877 million. Adjusted DSO rose to 102 days from 83 (90 days net of billings in excess of costs and earnings, versus 71). Management attributed the increase partly to billing timing and temporary Calgary flood-related payment delays and said it did not anticipate material collection issues.
  • Debt and liquidity: Total debt was $856.4 million, up from $598.9 million at year-end; long-term debt was $806.5 million. MasTec issued $400 million of 4.875% senior notes due 2023 and retired $150 million of 7.625% notes, recording a $5.6 million extinguishment loss. Revolver borrowings were $70.6 million, with $409.8 million of remaining borrowing capacity; the company reported compliance with debt covenants.

Material changes versus comparable periods

  • Q2 organic revenue declined 10%; acquisitions contributed $86.6 million of Q2 revenue. First-half growth was substantially acquisition-driven: acquired businesses contributed $129.6 million of the $169.1 million increase.
  • Communications and oil and gas grew, and electrical transmission revenue increased. Oil and gas profitability improved markedly, helped by higher-margin long-haul work, better pricing and execution, and the absence of approximately $25 million of losses on two projects recorded in the prior-year period.
  • Power Generation and Industrial revenue fell 68% in Q2 and 52% for the first half, mainly because wind and solar work declined following delayed renewal of federal wind production tax credits. The segment reported negative EBITDA of $8.0 million in Q2 and $8.2 million for the first half.
  • Electrical Transmission revenue increased, but segment EBITDA margins fell, reflecting project startups and higher costs. Depreciation and amortization and G&A also rose, driven by acquisitions, equipment investment, and higher compensation and administrative costs.
  • Estimated 18-month backlog was $4.143 billion at June 30, up from $3.090 billion a year earlier. Backlog includes cancellable service-agreement work and is not a firm guarantee of future revenue.

Outlook, commentary, risks and unusual items

  • No specific revenue or earnings guidance is stated in the provided filing text. Management estimated 2013 capital expenditures of approximately $120 million and an additional $80–$100 million of equipment purchases through leases or other financing. It expected operating funds, revolver availability and cash to cover needs for at least 12 months.
  • Management maintained Power Generation and Industrial overhead in anticipation of wind-project growth in the second half of 2013 and 2014; projects must have started in 2013 to qualify for the renewed tax credits.
  • Q2 included a $2.8 million pre-tax charge to resolve legacy Sintel litigation; the resolution dismissed claims against MasTec and related defendants. First-half results also included the $5.6 million debt-extinguishment loss. Management’s adjusted earnings and EBITDA exclude specified items and are non-GAAP measures.
  • Big Country was acquired effective May 1 for approximately $103.5 million cash, a contingent earn-out initially valued at $22.8 million, and assumed debt of $24.4 million. The earn-out has no maximum payment; estimated undiscounted payments ranged from $0.3 million to $55.3 million. Data Cell was also acquired in 2013.
  • Globetec remained classified as discontinued operations and held for sale. MasTec recorded an additional $0.3 million impairment in Q2 and warned that further losses could result if sale proceeds are below current estimates.
  • Key exposures include customer concentration (top ten customers represented 68% of first-half continuing revenue; AT&T 20%, DIRECTV 15%, Enbridge 10%), project timing and cost estimates, weather and seasonality, competitive pricing, and dependence on non-recurring projects. Several multi-employer pension plans were underfunded or in critical status. Central States demanded $10.8 million in withdrawal liability versus $6.0 million recorded; MasTec disputed the demand. Solar-project arbitrations and a claim against the City of Marathon were ongoing.
  • Disclosure controls were reported effective as of June 30, 2013, with no material change in internal control over financial reporting identified.

Important facts for investors to verify

  • Whether elevated DSO and accounts receivable convert to cash as management expects, particularly after the temporary Calgary-related delays.
  • Progress on margins and project execution in electrical transmission and the loss-making Power Generation and Industrial segment; confirm whether anticipated wind work materializes.
  • Acquisition performance, provisional purchase-price allocations, and the potentially uncapped Big Country earn-out and other contingent consideration.
  • Ability to service increased debt while funding capital expenditures, equipment financing, earn-outs and working-capital needs; monitor revolver availability and covenant headroom.
  • Resolution and potential financial impact of the Central States pension dispute, SunLight solar arbitrations, Marathon claim, and Globetec sale.
  • Customer retention, contract renewals and backlog conversion, noting that many service agreements can be terminated on short or no notice.