MasTec, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. MasTec provides infrastructure construction and maintenance services across communications, clean energy and infrastructure, oil and gas, and power delivery markets. Comparisons are with Q1 2022 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $2.585 billion | $1.954 billion; up 32% |
| Net loss attributable to MasTec | $80.5 million | $35.0 million |
| Diluted loss per share | $1.05 | $0.47 |
| Net margin | -3.1% | -1.8% |
| EBITDA, company-defined | $76.6 million; 3.0% margin | $78.7 million; 4.0% margin |
| Adjusted EBITDA, non-GAAP | $102.5 million; 4.0% margin | $98.7 million; 5.0% margin |
| Operating cash flow | -$86.4 million | $131.5 million |
| Cash and cash equivalents | $141.6 million | $370.6 million at Dec. 31, 2022 |
| Total debt, net of financing costs | $3.212 billion | $3.224 billion at Dec. 31, 2022 |
| Working capital | $1.278 billion | $1.363 billion at Dec. 31, 2022 |
Costs of revenue excluding depreciation and amortization rose to 91.3% of revenue from 88.7%. The filing attributes margin pressure to project inefficiencies, inflation in labor, fuel and materials, acquisition and integration costs, and project mix. Interest expense increased to $52.7 million from $16.0 million, reflecting higher rates and debt balances. The income tax benefit was $44.7 million; the reported effective tax rate was 35.7% on a pretax loss.
Cash used in investing activities was $89.5 million, including $46.5 million for acquisitions and $63.3 million of capital expenditures, partly offset by asset-sale proceeds. Financing activities used $53.4 million. Net debt, calculated as total debt less cash, was approximately $3.07 billion at quarter-end. The company reported $849.3 million of availability for revolving loans under its credit facility and stated it was in compliance with debt covenants.
Material changes and segment trends
- Revenue growth included approximately $401 million from acquisitions and approximately $230 million of organic growth. The Clean Energy and Infrastructure segment had the largest reported increase, with revenue up 89%, substantially reflecting acquisitions.
- Communications revenue increased 21% and EBITDA margin rose to 6.5% from 6.1%, supported by higher wireless and wireline activity and improved efficiencies.
- Clean Energy and Infrastructure revenue increased 89%, but EBITDA margin declined to 0.6% from 2.5%, primarily due to project inefficiencies, inflation and acquisition costs.
- Oil and Gas revenue increased 22%, while EBITDA margin fell to 5.7% from 10.2%, reflecting lower productivity, regulatory delays affecting large-diameter pipeline work, inflation and project mix.
- Power Delivery revenue increased 9%; EBITDA margin declined to 6.7% from 7.1%, reflecting project mix, inefficiencies and inflation.
- Backlog was $13.892 billion at March 31, up from $12.979 billion at year-end and $10.645 billion a year earlier. Management estimated approximately 62% would be realized in 2023. Separately, remaining performance obligations were $8.4 billion, with about $5.7 billion expected to be recognized in 2023.
Outlook, risks and unusual items
- Outlook: The filing does not provide specific full-year revenue or earnings guidance. Management expects a dynamic 2023 environment, including elevated interest rates, inflation and recession concerns. It estimates 2023 capital expenditures of approximately $150 million, net of asset disposals approximately $100 million, and expects about $150 million of equipment purchases under finance leases. Management believes liquidity sources will meet anticipated needs for the next 12 months and foreseeable future.
- Backlog uncertainty: Approximately 56% of backlog was associated with master service or other service agreements without minimum purchase commitments; many may be canceled on short or no notice. Project timing and conversion may be affected by customer decisions, permitting, supply chains, inflation and other factors.
- Project estimates and claims: Contract-estimate changes reduced revenue by a net $9.6 million in Q1 2023. The company included about $285 million of unresolved change orders and claims in contract transaction prices; final customer approvals could be lower or higher. Three Clean Energy and Infrastructure projects had approximately $8.5 million of margin decreases.
- Acquisition integration: Acquisition and integration costs were $17.1 million in Q1 2023, and the company expects additional costs. Recent acquisitions also increased amortization and debt-service costs.
- Legal contingency after quarter-end: On April 28, a jury found acquired entities IEA and IEAC liable in a legacy solar-project dispute; judgment was entered May 3. The jury awarded compensatory damages, apportioned 70% to IEA and IEAC and 30% to the customer, and punitive damages of $50 million against each IEA entity and $25 million against the customer. IEA and IEAC intend to seek a new trial or reduction and may appeal. An insurance carrier agreed to tender its $10 million policy limit. The filing does not establish the ultimate amount MasTec will owe.
- Controls: Management concluded disclosure controls were not effective as of March 31 because of material weaknesses involving acquired-entity controls, the IEA purchase-price allocation, period-end review controls, IT controls and business-process controls. Remediation is ongoing; management said the weaknesses were not considered remediated. The financial statements were not restated.
- Other exposures: Outstanding performance and payment bonds were approximately $5.374 billion, with estimated costs to complete associated projects of $1.942 billion. The company also disclosed self-insurance liabilities, multiemployer-plan exposure, earn-out obligations and sensitivity to variable interest rates. A 100-basis-point increase in applicable borrowing rates would have increased quarterly interest expense by approximately $5 million.
Important facts for investors to verify
- Subsequent filings and court records regarding the solar-project verdict, appeals, insurance coverage and any loss accrual or payment.
- Whether project productivity and margins improve, especially in Clean Energy and Infrastructure and Oil and Gas, and whether cost inflation can be passed through to customers.
- Backlog conversion, cancellation or delay trends, particularly for non-committed master service agreements, and resolution of the $285 million in change orders and claims.
- Operating cash flow, DSO (94 days versus 83 at year-end), working-capital needs, debt costs and remaining revolver availability.
- Progress in remediating material weaknesses and the effect of integrating acquired businesses on financial reporting and results.