MasTec, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars. MasTec provides infrastructure construction and related services across communications, clean energy and infrastructure, oil and gas, and power delivery, primarily in North America.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $3.257B | $2.513B | $8.716B | $6.770B |
| Net income (loss) attributable to MasTec | $14.3M | $48.9M | $(50.7)M | $30.1M |
| Diluted EPS | $0.18 | $0.65 | $(0.65) | $0.38 |
| EBITDA, non-GAAP | $242.7M | $206.5M | $543.5M | $437.5M |
| Adjusted EBITDA, non-GAAP | $271.1M | $245.6M | $629.0M | $522.8M |
| Adjusted diluted EPS, non-GAAP | $0.95 | $1.34 | $1.31 | $2.02 |
Q3 consolidated EBITDA margin was 7.5%, down from 8.2%; nine-month margin was 6.2%, down from 6.5%. Costs of revenue excluding depreciation and amortization were 87.7% of revenue in Q3 versus 87.0%, and 88.4% for the first nine months versus 87.9%.
- Cash flow: Nine-month operating cash flow was $196.6M, compared with $118.7M. Investing cash use was $171.7M and financing cash use was $181.6M. Cash declined to $214.2M from $370.6M at year-end 2022.
- Liquidity: Working capital was $1.227B, down from $1.363B at year-end. Revolver availability was $945M; management said expected operating cash flow, credit availability and cash should cover anticipated needs for the next 12 months and foreseeable future.
- Debt: Total debt net of financing costs was $3.205B. Revolver borrowings were $890M, the credit-facility term loan was $343M, and IEA-related term loans were $700M. Floating-rate borrowing costs rose; Q3 net interest expense was $62.6M versus $26.9M, and nine-month expense was $174.7M versus $62.3M. The company was in compliance with debt covenants.
- Working capital indicators: Contract assets were $1.967B and contract liabilities $506.5M at September 30. DSO, net of contract liabilities, was 85 days, versus 83 at year-end.
Material changes and operating trends
- Revenue increased 30% in Q3 and 29% for the nine months. Acquisitions contributed $533M and $1.504B, respectively; organic revenue grew about 8% and 7%.
- Clean Energy and Infrastructure revenue rose 95% in Q3 and 94% for the nine months, with IEA representing a substantial portion of the increase. Oil and Gas revenue grew 79% and 37%, respectively. Communications revenue declined 7% in Q3, reflecting lower wireless, wireline and install-to-the-home activity; Power Delivery Q3 revenue fell 3%.
- Profitability was pressured by higher interest costs, inflation and project inefficiencies. Q3 Communications EBITDA fell 33%; Oil and Gas EBITDA nearly doubled. Nine-month Communications EBITDA declined 8%, while Clean Energy and Infrastructure and Oil and Gas EBITDA increased.
- Acquisition and integration costs were $21.1M in Q3 and $60.9M for the nine months. Management expected remaining such costs in Q4 2023. Adjusted results exclude these and other items and are not GAAP measures.
Outlook, risks, contingencies and unusual items
- Work outlook: Estimated 18-month backlog was $12.49B, down from $13.44B at June 30 but up from $11.23B a year earlier. Management estimated 26% would be realized in 2023. The company cautioned that backlog is uncertain: 56% was under master service or similar agreements that generally lack minimum purchase commitments and may be canceled on short or no notice. Remaining performance obligations were $7.6B; the company expected to recognize approximately $2.6B in 2023, with most of the balance in 2024.
- Management commentary: Management expected elevated interest rates, moderating but continuing inflation, possible market volatility, permitting delays and uncertainty in government infrastructure spending to persist. These factors could affect customer demand, project schedules, costs and margins. Estimated 2023 capital expenditures were approximately $175M, net of asset disposals about $100M, plus approximately $150M of equipment purchases through finance leases and other financing.
- Goodwill sensitivity: The IEA reporting unit, with approximately $571M of goodwill, exceeded carrying value by about 7% in the September impairment assessment. Management disclosed sensitivity to lower profitability, higher discount rates and lower terminal growth; adverse changes could lead to future impairment charges.
- Legal matter: In an acquired IEA solar-project case, a jury had awarded substantial compensatory and punitive damages. On October 23, 2023, the court ordered a new damages trial unless plaintiffs accepted reduced awards, including approximately $2.7M in punitive damages against the IEA entities. Plaintiffs sought reconsideration on October 31; the matter remained unresolved in the filing.
- Financial reporting controls: Management concluded disclosure controls were not effective at the reasonable-assurance level because of material weaknesses involving acquired entities’ order-to-cash processes, IEA purchase accounting, period-end review controls and certain IT and business-process controls. Remediation was ongoing; the filing reported no prior-period restatements.
- Other exposure: Outstanding performance and payment bonds were approximately $5.55B; estimated costs to complete the bonded projects were $1.69B. Self-insurance claim liabilities were $201.1M. The company also cited potential multiemployer pension, joint-venture, project, litigation and indemnification exposures.
Important facts for investors to verify
- Whether margin and earnings pressure eases, particularly in Communications and Power Delivery, and whether organic growth translates into improved GAAP profitability.
- Cash conversion, DSO, contract-asset growth and collection of unbilled receivables; nine-month operating cash flow benefited from working-capital timing and receivable financing.
- Debt, floating-rate exposure and refinancing needs. Management estimated a further 100-basis-point rate increase would have added approximately $16M to nine-month interest expense.
- Backlog conversion and cancellation risk, especially the large share under noncommitted master service agreements.
- Outcome and financial impact of the IEA litigation, and the sensitivity of IEA goodwill valuation to operating assumptions.
- Progress in remediating material weaknesses in internal controls and the potential for future impairment, project-cost revisions or contingency changes.