MasTec, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; financial statements are unaudited. MasTec provides infrastructure construction, installation and maintenance services across communications, utilities, energy and government markets.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $750.9 million | $495.1 million | $1,369.4 million | $945.3 million |
| Gross profit (margin) | $107.8 million (14.4%) | $77.8 million (15.7%) | $197.7 million (14.4%) | $139.1 million (14.7%) |
| Net income attributable to MasTec | $44.5 million | $14.6 million | $65.6 million | $22.0 million |
| Diluted EPS | $0.51 | $0.18 | $0.77 | $0.27 |
| Adjusted net income / adjusted diluted EPS | $26.8 million / $0.31 | $14.6 million / $0.18 | $47.9 million / $0.56 | $22.0 million / $0.27 |
| Adjusted EBITDA (margin) | $70.7 million (9.4%) | $46.2 million (9.3%) | $128.3 million (9.4%) | $80.2 million (8.5%) |
- Q2 revenue rose 51.7%; management attributed 85% of the increase to organic growth. First-half revenue rose 44.9%. Growth was driven by wireless, pipeline, install-to-the-home and energy transmission work; acquisitions contributed $37.8 million of revenue in the first half.
- Reported Q2 and first-half earnings include a $29.0 million pretax ($17.7 million after-tax) gain from remeasuring MasTec’s prior 33% EC Source investment when it acquired the remaining interest. Adjusted results exclude this gain.
- Gross margin declined year over year, particularly in Q2, amid pricing discounts on wireless work, higher DIRECTV-related commissions and fuel costs, and project-mix changes. General and administrative expense declined as a share of revenue, reflecting improved scale.
- Operating cash flow was $5.4 million for the first half, down from $28.3 million. Investing cash use was $102.8 million, principally acquisitions, earn-outs and capital expenditures; financing cash use was $1.8 million. Cash and equivalents ended at $78.5 million, including $18.3 million restricted.
- Working capital was $235.3 million. Total debt was $423.6 million, including $23.6 million current maturities; long-term debt was $400.0 million. The company had no revolver borrowings and reported $127.8 million of net availability under its $260 million credit facility after letters of credit.
Material changes and business developments
- MasTec acquired Fabcor (Canadian pipeline services), Cam Communications (telecommunications), Halsted Communications (install-to-the-home), Optima Network Services (wireless) and the remaining 67% of EC Source (high-voltage transmission). Purchase-price allocations and several earn-outs remained preliminary.
- The EC Source acquisition included 5.13 million MasTec shares, assumed debt and an earn-out. Shares issued for the acquisition were valued at $94.2 million. Total acquisition-related contingent consideration on the balance sheet was $82.4 million at June 30, up from $45.0 million at year-end.
- The credit facility’s revolving capacity increased from $210 million to $260 million in May 2011. The company exchanged $202.3 million principal amount of 4.0% and 4.25% convertible notes for new notes with cash-settlement features; $12.7 million of original notes remained. The new notes’ accounting discount raises effective interest expense.
- Estimated 18-month backlog increased to $2.87 billion from $2.35 billion at year-end, excluding approximately $300 million of awarded work subject to financing contingencies. Management cautioned that backlog is not a firm revenue commitment: service agreements can be canceled, and project schedules can shift.
Outlook, risks and contingencies
- Management estimated 2011 capital expenditures of approximately $50 million and expected operating cash generation, available credit and cash to meet anticipated needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management described demand as strong in several served markets but noted competitive and economic pressures, timing-related activity changes, fuel-cost exposure, seasonality and weather-related execution risk. More than 40% of Q2 revenue came from non-recurring project-specific work.
- Customer concentration is significant: the top ten customers generated 72% of Q2 and 75% of first-half revenue. AT&T contributed 24% and 25%, respectively; DIRECTV contributed 20% and 22%; El Paso contributed 12% and 15%.
- Red Ventures may exercise an option to buy DirectStar between March and November 2012. DirectStar supports DIRECTV marketing and sales; exercise would reduce MasTec’s DIRECTV revenue and profit. Without DirectStar revenue, DIRECTV would have represented 16% of Q2 and 17% of first-half revenue.
- Convertible-note settlement has a financing constraint: until the credit facility expires in May 2013, MasTec generally cannot use facility borrowings to settle conversions and cannot use more than $10 million of cash for that purpose without lender consent. Additional funding may be required if conversion obligations arise.
- Contingencies include $526.1 million of performance and payment bonds, $101.0 million of standby letters of credit, self-insurance liabilities and multi-employer pension exposure. Certain pension plans were in critical status; future surcharge amounts were not estimable. A Spanish proceeding alleges damages of approximately €300 million; MasTec says it is vigorously defending the matter, has recorded no loss accrual because potential loss cannot be determined, and reports insurance funding for legal expenses under a reservation of rights.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the EC Source remeasurement gain, and whether margin pressure persists.
- Whether acquisitions deliver expected growth and cash returns, and how final purchase-price allocations and earn-out valuations affect goodwill, liabilities and future results.
- Working-capital conversion and operating cash flow, given receivables and costs/earnings in excess of billings increased while cash declined.
- Availability under the credit facility after letters of credit, compliance with covenants, and the company’s ability to fund convertible-note settlements if required.
- Customer retention, project replacement and the potential effect of Red Ventures exercising its DirectStar option; also confirm progress on the financing-contingent backlog project.
- Developments in the Spanish litigation, critical-status pension plans, bonding obligations and other contingencies.