MasTec, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited interim results. MasTec provides infrastructure construction and maintenance services across communications, oil and gas, electrical transmission, and power generation and industrial markets, primarily in North America.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,104.6 million | $977.6 million | $2,068.6 million | $1,896.3 million |
| Net income attributable to MasTec | $32.1 million | $34.9 million | $48.1 million | $53.3 million |
| Diluted EPS | $0.37 | $0.41 | $0.56 | $0.63 |
| EBITDA, continuing operations | $101.5 million | $102.7 million | $173.1 million | $176.2 million |
| Operating cash flow | Not separately reported for the quarter | $55.3 million | $22.9 million |
- Q2 revenue grew 13%, but net income attributable to MasTec declined about 8% and diluted EPS declined about 10%. For the first half, revenue rose about 9%, while attributable net income fell about 10%.
- Margins weakened: costs of revenue excluding depreciation and amortization were 86.1% of revenue in Q2 versus 84.1% a year ago, and 86.6% versus 85.1% for the first half. Consolidated EBITDA margin was 9.2% in Q2 versus 10.5%; first-half margin was 8.4% versus 9.3%.
- Management attributed margin pressure principally to lower productivity, higher indirect overhead, pricing pressure, and project-startup inefficiencies. Q2 EBITDA declined in Communications and Oil and Gas; Electrical Transmission and Power Generation and Industrial improved.
- First-half operating cash flow increased to $55.3 million. The company reported a positive $37 million impact from net changes in assets and liabilities, while investing activities used $221.1 million, including $162.9 million for acquisitions and $67.6 million of capital expenditures.
Financial position, debt and liquidity
- At June 30, cash was $15.9 million; working capital was $621 million. Accounts receivable was $1.289 billion and inventory was $115.6 million. Management said receivables increased largely due to acquisitions and inventory growth reflected wireless project materials; it expected wireless inventory to decline in the second half.
- Total debt was $1.166 billion, up from $816.8 million at year-end 2013. Long-term debt was $1.089 billion; current maturities were $76.9 million. The increase reflects, among other factors, higher credit-facility borrowings and equipment financing.
- The credit facility was expanded from $750 million to $1 billion in June. At quarter-end, revolving loans were $398.4 million, letters of credit were $132.8 million, and stated remaining borrowing capacity was $469.2 million. The company reported compliance with debt covenants and expected liquidity to meet needs for at least 12 months, while noting dependence on credit-facility availability.
- In June, $115 million principal amount of 4.0% convertible notes matured: MasTec paid $105.3 million cash and issued 4.2 million shares. A further $100 million principal amount of 4.25% convertible notes was due in December 2014; MasTec intended to settle principal in cash and premium value in shares, subject to financing restrictions and available funding.
Business developments and outlook
- Q2 revenue growth included $89 million from acquisitions and $38 million of organic growth. For the first half, acquisitions added $209 million, while organic revenue declined $37 million, reflecting project delays, including weather-related disruption in Q1.
- Segment trends: Q2 Oil and Gas revenue rose 23%, Communications rose 6%, and Power Generation and Industrial rose 49%; Electrical Transmission fell 3%. First-half Oil and Gas and Communications revenue grew 21% and 6%, respectively, while Electrical Transmission and Power Generation and Industrial declined 4% and 2%.
- MasTec acquired Pacer, a Canadian civil construction contractor serving oil and gas and other infrastructure markets, effective June 1, for estimated consideration of $150.8 million, including $126.5 million cash and a $24.3 million earn-out liability. The earn-out has potential undiscounted payments from $0 to $63 million, with no maximum stated. Pacer also has substantial joint-venture guarantees.
- Estimated 18-month backlog was $3.937 billion, down from $4.143 billion a year earlier and $4.218 billion at March 31. Management cautioned that backlog is uncertain: many service agreements have no minimum purchase commitment and may be canceled on short or no notice.
- Management estimated 2014 capital expenditures of $85–$95 million and approximately $80 million of equipment purchases under leases or other financing. No specific revenue or earnings guidance was provided in the filing.
Risks, contingencies and unusual items
- Customer concentration is significant: AT&T, DIRECTV and Enbridge represented 24%, 13% and 11% of first-half revenue, respectively; the top ten customers represented 69%. About 48% of first-half revenue came from project-specific work, and many customer agreements can be canceled with little notice.
- SunLight solar-project disputes were in arbitration, with an award anticipated in Q3 2014. MasTec’s approximately $50 million in municipal and construction liens had been challenged; the New Jersey Supreme Court agreed in July to review an adverse appellate ruling. Outcomes and recoveries remain uncertain.
- Central States pension fund asserted an $11 million withdrawal liability. MasTec disputed the demand; $4.8 million remained outstanding on its previously established $6.4 million liability. Several other multi-employer plans were underfunded and could require higher contributions.
- Other exposures include performance and payment bonds, letters of credit, self-insurance claims, joint-venture obligations, litigation, and project-estimate uncertainty. Change orders and claims included in contract price adjustments were approximately $68 million at June 30, subject to negotiation and collection risk.
- Q2 2013 included a roughly $3 million Sintel legal settlement charge; first-half 2013 included $5.6 million of debt-extinguishment costs. These items make comparisons less comparable. The filing also identifies seasonality, weather, pricing competition, project delays, variable-rate debt, foreign currency, and potential share dilution as risks.
Investor verification priorities
- Track whether revenue growth converts into improved segment and consolidated margins, particularly in Communications and Oil and Gas.
- Verify collection of receivables and change orders, reduction of wireless inventory, and sustainability of operating cash flow.
- Monitor debt and borrowing capacity, December 2014 convertible-note settlement, covenant headroom, and the potential dilution from conversion shares.
- Assess acquisition integration, Pacer’s performance and earn-out exposure, and the joint-venture guarantees it brings.
- Follow backlog conversion and customer spending, especially AT&T and other concentrated customers, and the outcomes of SunLight and Central States matters.