MasTec, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. MasTec provides infrastructure construction and maintenance services across communications, oil and gas, electrical transmission, clean energy and infrastructure, and other markets. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.569B | $1.939B | $2.986B | $3.457B |
| Net income attributable to MasTec | $57.0M | $119.7M | $93.2M | $162.8M |
| Diluted EPS | $0.78 | $1.58 | $1.26 | $2.15 |
| EBITDA, company-defined non-GAAP | $159.9M | $236.5M | $273.8M | $373.0M |
| EBITDA margin | 10.2% | 12.2% | 9.2% | 10.8% |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $496.5M | $351.5M |
Q2 GAAP net margin was 3.6%, versus 6.2% a year earlier; first-half net margin was 3.1%, versus 4.7%. First-half capital expenditures were $132.8M, making operating cash flow less capital expenditures approximately $363.7M. Operating cash flow benefited from working-capital movements, including increases in accounts payable and accrued expenses and contract liabilities, while net income declined.
- Balance sheet at June 30: Cash was $48.6M; current assets were $2.137B and current liabilities $1.523B, for working capital of approximately $614M. Total assets were $4.990B and total liabilities $3.239B.
- Debt: Debt obligations were $1.253B before deferred financing costs, including $166.8M of revolving loans, a $400M term loan, $400M of 4.875% senior notes and $286.6M of finance lease and other obligations. Revolving availability was $1.043B; reported cash plus revolving availability was approximately $1.092B. The company was in compliance with debt covenants at quarter-end.
- Cash uses: First-half investing cash outflow was $136.7M and financing cash outflow was $383.8M. Financing uses included $120.2M of share repurchases, $50.4M of earn-out payments and $61.6M of finance lease payments.
Material changes versus prior year
- Q2 revenue fell 19% and first-half revenue fell 14%. Oil and Gas was the principal drag: Q2 revenue declined 61% to $368.5M and first-half revenue declined 53% to $727.6M, reflecting lower activity, project mix and regulatory disruptions to pipeline work.
- Growth in Clean Energy and Infrastructure partially offset the decline: Q2 revenue rose 70% to $426.1M and first-half revenue rose 62% to $712.4M, driven mainly by renewable power activity. Electrical Transmission revenue also increased, while Communications was approximately flat in Q2.
- Q2 costs of revenue excluding depreciation and amortization declined less than revenue, and rose to 85.5% of revenue from 84.2%. Management cited project mix, COVID-related effects, reduced productivity and lower revenue. First-half ratio increased to 86.0% from 85.2%.
- Q2 G&A increased 20% to $85.0M; first-half G&A increased 19% to $170.5M. Management cited legal and settlement timing and provisions for potential credit losses, partly offset by lower professional fees and travel costs.
- Q2 segment EBITDA improved in Communications and Clean Energy and Infrastructure, but fell in Oil and Gas; Electrical Transmission recorded negative EBITDA of $3.2M. Companywide Q2 EBITDA margin declined to 10.2% from 12.2%.
Outlook, commentary and risks
- COVID-19: Most construction services were deemed essential and all segments continued operating. Management expected continued negative effects through the remainder of 2020, including permitting delays, reduced crew productivity, higher operating costs, supply-chain or labor disruption, and delayed, shut down or canceled projects. The magnitude and duration were not quantifiable.
- Backlog and contracted work: Estimated 18-month backlog was $8.168B at June 30, compared with $7.770B a year earlier and $8.326B at March 31. Management expected approximately 45% of June backlog to be realized in 2020. About 45% of backlog was under master service agreements, often cancellable on short or no notice and without minimum purchase commitments. Separately, remaining performance obligations were $5.3B; approximately $2.8B was expected to be recognized in 2020, with the balance primarily in 2021. These are expectations, not guaranteed revenue.
- Capital spending and liquidity: Management estimated 2020 capital expenditures of approximately $205M, or $175M net of asset disposals, plus $115M–$135M of equipment purchases under finance leases. It stated that cash, operating cash flows and credit availability were expected to meet liquidity needs for at least the next 12 months.
- Debt refinancing subsequent event: In July, MasTec agreed to issue $600M of 4.50% senior unsecured notes due 2028, with proceeds intended to redeem or repurchase its $400M of 4.875% notes due 2023, pay related costs and repay revolver borrowings. Closing was expected August 4, 2020 and was subject to customary conditions.
- Unusual items: First-half tax expense benefited by approximately $9.6M from release of Canadian deferred-tax valuation allowances. Q2 other income included approximately $6M of equipment-sale gains and $4M of net investment fair-value gains. The prior-year comparison included significant earn-out remeasurement expense and an arbitration-related recovery. The company also recorded $12.3M of credit-loss provisions in the first half, versus $0.9M in the prior-year period.
- Other exposures: Variable consideration for unresolved change orders and claims included approximately $40M in contract transaction prices. Potential earn-out liabilities had an estimated fair value of $132.8M; undiscounted potential payments were estimated at $20M–$206M, with no maximum. Outstanding performance and payment bonds were approximately $692M. The filing also describes ordinary-course litigation, self-insurance, multiemployer plan and joint-venture exposures.
- Concentration and execution risks: AT&T represented 19% of Q2 revenue; the top ten customers represented 66%. Two customers accounted for approximately 17% and 14% of net accounts receivable, respectively. Management also identified oil and gas market volatility, customer spending and financing, project estimates, seasonality, weather and potential goodwill or intangible-asset impairment as risks.
Most important facts for investors to verify
- Whether Oil and Gas project activity and regulatory disruptions improve, and whether renewable and communications growth can offset continued weakness.
- Whether COVID-related productivity, cost, schedule and customer-credit effects persist or worsen.
- Backlog conversion and cancellations, especially the portion under cancellable master service agreements.
- Cash-flow quality and working-capital movements, including collections, contract liabilities and the elevated credit-loss allowance.
- Completion and actual terms of the proposed $600M notes offering and redemption, along with debt, lease and earn-out obligations.
- Resolution of the approximately $40M of claims and change orders, potential earn-out payments, and material legal, bond and self-insurance exposures.