MasTec, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted. MasTec provides infrastructure construction, installation, maintenance and upgrade services across communications, oil and gas, electrical transmission, power generation and industrial markets.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,016.6 | $1,977.2 | $5,474.0 | $4,991.9 |
| Net income attributable to MasTec | $128.6 | $120.7 | $291.4 | $227.7 |
| Diluted EPS | $1.69 | $1.52 | $3.85 | $2.83 |
| Consolidated EBITDA | $247.9 | $222.8 | $620.8 | $516.1 |
| Adjusted EBITDA | $252.1 | $226.3 | $633.0 | $525.2 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $441.4 | $26.8 |
Q3 revenue rose 2% year over year; MasTec-attributable net income rose about 7% and diluted EPS about 11%. For the nine months, revenue increased about 10%, net income attributable to MasTec about 28%, and diluted EPS about 36%. Net income margin was 6.4% in Q3 versus 6.1% a year earlier, and 5.3% for the nine months versus 4.6%.
Costs of revenue excluding depreciation and amortization declined to 83.8% of revenue in Q3 from 85.0%, and to 84.7% for the nine months from 85.8%. Consolidated EBITDA margin increased to 12.3% from 11.3% in Q3 and to 11.3% from 10.3% for the nine months. These are non-GAAP measures; the filing cautions that its EBITDA definitions differ from debt-covenant definitions.
Cash, debt and liquidity
- Cash and cash equivalents were $43.1 at September 30, 2019, up from $27.4 at December 31, 2018. Working capital was approximately $864, down from $885.
- Nine-month operating cash flow was $441.4, compared with $26.8 in 2018. Management attributed the improvement primarily to working-capital movements. Investing cash use was $143.5; financing cash use was $282.0.
- Debt net of deferred financing costs was $1,320.6, including $400.0 of 4.875% senior notes due 2023. The amended senior secured credit facility totals $1.75 billion, including a $1.35 billion revolver and a $400 million term loan. Revolver availability was $996.7 at quarter-end; letters of credit were also outstanding.
- MasTec reported compliance with debt covenants at quarter-end. It said operating cash flow, facility availability and cash balances should meet anticipated liquidity needs for at least the next twelve months.
Business changes and segment results
- For the nine months, Oil and Gas revenue grew 8% to $2,530.5 and EBITDA rose to $499.6 from $311.5, with improved productivity, project efficiencies and mix. Q3 revenue declined 6% year over year, while EBITDA rose to $212.9 from $155.8.
- Communications revenue increased 2% for the nine months, but EBITDA fell to $154.8 from $230.6; margin declined to 8.0% from 12.1%. Management cited project inefficiencies, lower storm-restoration activity and capacity-expansion costs. Q3 EBITDA margin was 8.4%, down from 11.3%.
- Power Generation and Industrial revenue rose 58% for the nine months, mainly on renewable-power activity, but EBITDA fell to $14.4 from $24.3 and margin to 2.1% from 5.5%. Q3 margin was 0.9% versus 5.4%, with weather-related inefficiencies, project mix and capacity costs cited.
- Electrical Transmission revenue was broadly flat for the nine months; EBITDA improved to $20.3 from $5.0, primarily from project efficiencies, closeouts and mix.
- Acquisitions contributed $116.9 of nine-month revenue. MasTec completed three acquisitions during the period for approximately $89 million cash, net of cash acquired, plus estimated earn-outs. It also disclosed a fourth-quarter acquisition of a telecommunications company for approximately $80 million cash plus contingent consideration.
Outlook, risks and unusual items
- September 30 estimated 18-month backlog was $7.523 billion, down from $7.833 billion a year earlier. Management expected about 20% to be realized in 2019. Approximately 45% was associated with master service or similar agreements that generally have no minimum purchase commitment and may be canceled on short or no notice. Backlog is not a GAAP measure and is not a firm revenue guarantee.
- Remaining performance obligations were $6.0 billion; MasTec expected approximately $1.3 billion to be recognized as revenue during 2019, with most of the remaining balance in 2020. These obligations differ from backlog.
- Management estimated 2019 capital expenditures of approximately $125 million, or $85 million net of asset disposals, and $190–$200 million of equipment purchases under finance leases.
- Q3 included $11.2 million of net expense from changes in estimated acquisition earn-out liabilities. Nine-month other expense included $47.6 million of net earn-out remeasurement expense, partly offset by a $19 million arbitration-award gain. The award was approximately $60 million; $32 million had been collected, while collection of the remainder was uncertain and it was not recognized.
- Potential undiscounted earn-out liabilities were estimated at $48–$225 million, with no maximum payment amount. The carrying value of earn-out liabilities was $151.9 million at quarter-end.
- Material business risks include project execution and cost-to-complete estimates, customer spending and regulatory delays, weather and seasonality, competitive pricing, customer concentration, and collection or approval of change orders and claims. MasTec had included approximately $26 million of unresolved change orders and claims in contract transaction prices, primarily related to Oil and Gas projects.
- Outstanding performance and payment bonds were approximately $430.3 million, compared with $123.6 million at year-end; estimated costs to complete related bonded projects were $178.0 million. The company also disclosed self-insurance, multiemployer-plan, joint-venture and litigation exposures. It adopted lease accounting in 2019, recognizing operating lease assets and liabilities; management said adoption did not materially affect results or cash flows.
Key facts investors should verify
- Whether Communications and Power Generation and Industrial margins recover, and whether the cited expansion costs translate into profitable growth.
- Oil and Gas project schedules and regulatory conditions, given Q3 organic revenue pressure and strong segment earnings.
- Backlog conversion, cancellation exposure under service agreements, and the distinction between backlog and remaining performance obligations.
- Cash-flow sustainability after unusually large working-capital benefits, and liquidity after acquisitions, capital spending, lease commitments and earn-out payments.
- Collection of the remaining arbitration award, resolution of change orders and claims, and changes in earn-out estimates and bonded-project obligations.