Business context and reporting period
MasTec, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The infrastructure construction company operates across Communications, Oil and Gas, Electrical Transmission, Clean Energy and Infrastructure, and Other. The company renamed its Power Generation and Industrial segment Clean Energy and Infrastructure during Q2 2020; segment composition and historical results were unchanged.
Financial performance and liquidity
Amounts below are in millions of U.S. dollars, except per-share data.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,698 | $2,017 | $4,684 | $5,474 |
| Net income attributable to MasTec | $116.5 | $128.6 | $209.7 | $291.4 |
| Diluted EPS | $1.59 | $1.69 | $2.84 | $3.85 |
| Net income margin | 6.9% | 6.4% | 4.5% | 5.3% |
| EBITDA (non-GAAP) | $253.6 | $247.9 | $527.4 | $620.8 |
| Adjusted EBITDA (non-GAAP) | $264.8 | $252.1 | $548.5 | $633.0 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $712.5 | $441.4 |
Q3 costs of revenue, excluding depreciation and amortization, were 81.3% of revenue versus 83.8% a year earlier; the nine-month ratio was 84.3% versus 84.7%. Consolidated EBITDA margin was 14.9% in Q3 versus 12.3%, and 11.3% for both nine-month periods.
At September 30, 2020, cash was $238.2 million and working capital was approximately $820 million. Management reported total liquidity of approximately $1.4 billion, including $1.2 billion of revolving availability. Net debt carrying value was approximately $1.30 billion, compared with $1.43 billion at year-end 2019. The company reported compliance with debt covenants.
Material changes versus comparable periods
- Q3 revenue fell 16% year over year; nine-month revenue fell 14%. Organic revenue declined approximately 19% in Q3 and 18% year to date; acquisitions contributed $69 million and $182 million, respectively.
- Oil and Gas revenue declined 52% in Q3 and 53% year to date, reflecting lower activity and mix, including regulatory disruptions to pipeline work. Clean Energy and Infrastructure revenue increased 79% in Q3 and 68% year to date, driven primarily by renewable power activity. Communications revenue declined 5% in Q3 and was nearly flat year to date; Electrical Transmission revenue increased 25% and 28%, respectively.
- Q3 MasTec-attributable net income and diluted EPS declined, despite higher EBITDA and improved margins. For the nine months, lower earnings reflected sharply lower revenue, led by Oil and Gas.
- Operating cash flow rose by $271 million year over year for the first nine months, primarily due to working-capital movements, including higher accounts payable and contract liabilities; net income was lower. Capital expenditures were $184 million, versus $85 million in the prior-year period.
- In August, MasTec issued $600 million of 4.50% senior notes due 2028, redeemed $400 million of 4.875% notes due 2023, and used remaining proceeds primarily to repay revolving borrowings. It recorded a $5.6 million debt-extinguishment loss. The company repurchased 3.6 million shares for $120.2 million during the first nine months.
Outlook, risks and unusual items
Management expects approximately $230 million of 2020 capital expenditures, net of asset disposals of approximately $190 million, and $130–$150 million of equipment purchases under finance leases. Management said cash, operating cash flow and credit availability should be sufficient to meet anticipated needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
Estimated 18-month backlog was $7.7 billion at September 30, down from $8.2 billion at June 30 and up from $7.5 billion a year earlier. Management expects about 25% to be realized in 2020. Backlog includes estimated work under service agreements that generally do not require customers to buy a minimum amount; 46% was attributable to such agreements, many cancellable on short or no notice. Separately, remaining performance obligations were $5.3 billion.
COVID-19 continued to negatively affect operations and was expected to do so through the remainder of 2020 and into early 2021 at least. Risks include permitting delays, lower crew productivity, workforce or supply disruptions, delayed or cancelled projects, and lower overhead absorption. Management could not quantify future effects. The company deferred approximately $22 million of payroll taxes under the CARES Act.
Other items and exposures include $50 million of change orders and claims included in contract transaction prices, which may ultimately be resolved for more or less; $133 million estimated fair value of acquisition earn-out liabilities, with a disclosed potential undiscounted range of $34–$199 million and no maximum payment; and $640 million of performance and payment bonds outstanding. The company also disclosed ordinary-course litigation and contingent exposures, without predicting outcomes.
Important facts for investors to verify
- Whether the backlog converts to revenue and profit on the expected schedule, particularly the cancellable master service agreement portion.
- Whether Oil and Gas activity remains weak and renewable project growth and segment margin improvements continue.
- Whether COVID-related disruptions, customer credit quality, and the increased credit-loss allowance affect collections, costs, or project estimates; accounts receivable allowance was $22.5 million versus $10.1 million at year-end 2019.
- Whether cash generation remains strong after working-capital timing effects, increased capital spending, debt service, lease payments, buybacks, and earn-out obligations.
- Potential outcomes of the $50 million of unresolved change orders and claims, earn-out liabilities, legal matters, and bonding or self-insurance exposures.