MasTec, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. MasTec provides infrastructure construction, installation and maintenance services across communications, oil and gas, electrical transmission, and power generation and industrial markets, primarily in North America. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.939 billion | $1.618 billion | $3.457 billion | $3.015 billion |
| Net income attributable to MasTec | $119.7 million | $80.5 million | $162.8 million | $107.1 million |
| Diluted EPS | $1.58 | $1.01 | $2.15 | $1.32 |
| Consolidated EBITDA | $236.5 million | $188.7 million | $373.0 million | $293.2 million |
| EBITDA margin | 12.2% | 11.7% | 10.8% | 9.7% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $351.5 million | $23.2 million |
Q2 revenue increased 20% year over year; first-half revenue increased 15%. First-half growth included approximately $75 million from acquisitions, with organic revenue up about 12%. Q2 costs of revenue excluding depreciation and amortization were 84.2% of sales versus 84.5%; for the first half they were 85.2% versus 86.4%. GAAP net margin was 6.2% in Q2 versus 5.0%, and 4.7% for the first half versus 3.5%.
Operating cash flow improved substantially year over year, primarily because of working-capital changes. Net receivables were $1.842 billion at June 30, down from $1.924 billion at year-end; days sales outstanding, net of billings in excess of costs and earnings, improved to 77 from 81. Cash was $59.2 million, and working capital was approximately $736 million, down from $885 million at December 31, 2018.
Debt, net of deferred financing costs, was $1.358 billion at June 30, compared with $1.407 billion at year-end. The company had $654.2 million of revolving-loan availability. Operating lease liabilities recognized following adoption of the new lease standard totaled approximately $246.3 million. MasTec reported compliance with debt covenants. Management said available cash, operating cash flow and credit-facility availability should be sufficient for anticipated needs for at least the next 12 months.
Material changes and segment trends
- Oil and Gas: Q2 revenue rose 22% to $936.8 million and EBITDA rose 46% to $179.3 million; first-half revenue rose 19% and EBITDA rose 84%. Management cited pipeline demand, project mix and productivity improvements, partly offset by regulatory disruptions on selected long-haul work.
- Power Generation and Industrial: Q2 revenue grew 71% to $250.2 million, primarily from renewable-power activity, but EBITDA fell to $8.9 million from $9.8 million and margin declined to 3.5% from 6.7%. First-half revenue grew 67%, while EBITDA declined to $12.1 million from $14.6 million.
- Communications: Q2 revenue increased 5% to $652.6 million, but EBITDA fell to $52.4 million from $73.7 million and margin to 8.0% from 11.9%. First-half EBITDA declined to $97.8 million from $155.8 million. Management cited project inefficiencies, mix, lower storm-restoration work in the first half, and costs to expand capacity.
- Electrical Transmission: Q2 EBITDA improved to $8.7 million from a $2.7 million loss, primarily on project efficiencies and mix. First-half revenue declined 2%, while EBITDA increased to $12.4 million from $1.9 million.
Reported results also reflected $36.5 million of first-half expense from increases in estimated acquisition earn-out liabilities, including $29.2 million in Q2. MasTec recorded approximately $19 million of income associated with an arbitration award in Q2. Diluted weighted-average shares fell to 75.7 million in Q2 from 80.1 million.
Outlook, risks and contingencies
The filing does not provide earnings or revenue guidance. Management estimated 18-month backlog of $7.77 billion at June 30, 2019, expected to realize approximately 50% during 2019. It also expected to recognize approximately $3.5 billion of $5.3 billion in remaining performance obligations during 2019, with most of the balance primarily in 2020. Backlog is not a GAAP measure: about 45% was under service agreements without minimum purchase commitments, many cancellable on short or no notice, and management cautioned that customer, regulatory and project changes can defer or eliminate work.
Management estimated 2019 capital expenditures of approximately $120 million, or $80 million net of asset disposals, and expected approximately $180 million of equipment purchases under finance leases. The company completed three acquisitions in the first half; acquisition-related earn-outs are subject to performance estimates and may have no maximum payment amount. Total estimated fair value of earn-out liabilities was $140.7 million at June 30, with potential undiscounted payments estimated in a range of $31 million to $217 million.
A Canadian acquisition-related arbitration award was finalized at approximately $60 million. MasTec collected $32 million in Q2; collection of the remaining amount is uncertain and it was not recognized in the financial statements. Other risks include contract-estimate and variable-consideration uncertainty, customer concentration, seasonal and cyclical demand, project execution and labor costs, regulatory delays, self-insurance and litigation exposure, and interest-rate changes. AT&T represented 18% of Q2 revenue; EQT and Energy Transfer affiliates represented 12% and 8%, respectively. A 100-basis-point increase in applicable variable rates would have increased first-half interest expense by approximately $5 million.
The company adopted lease accounting Topic 842 in Q1 2019, recognizing approximately $230 million of operating lease assets and liabilities at adoption; it reported no material effect on earnings or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether stronger Oil and Gas results and operating cash flow persist, and how much of the cash-flow improvement reflects working-capital timing.
- Whether Communications and Power Generation and Industrial margins recover after reported inefficiencies and capacity-expansion costs.
- The conversion, timing and cancellation risk of backlog and remaining performance obligations, particularly service-agreement work without minimum commitments.
- Whether the uncollected arbitration-award balance is recovered, and how earn-out revaluations and payments affect future earnings and cash.
- Debt and liquidity trends, including variable-rate exposure, finance and operating lease commitments, and acquisition funding needs.
- Customer concentration and the effect of regulatory disruptions, seasonality, project execution and cost-estimation changes on results.