UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
Form 10-Q
_____________________________________________
(Mark One)
For the quarterly period ended September 30, 2023
OR
For the transition period from __ to __
Commission File Number 001-08106
_____________________________________________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(305 ) 599-1800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ | Accelerated filer | ☐ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☑
As of October 30, 2023, MasTec, Inc. had 78,823,118 shares of common stock outstanding.
MASTEC, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
| Page | ||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MASTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited - in thousands, except per share amounts)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Costs of revenue, excluding depreciation and amortization | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Equity in earnings of unconsolidated affiliates, net | ( | ( | ( | ( | |||||||||||||||||||
| Other (income) expense, net | ( | ( | ( | ||||||||||||||||||||
| Income (loss) before income taxes | $ | $ | $ | ( | $ | ||||||||||||||||||
| (Provision for) benefit from income taxes | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Net income attributable to non-controlling interests | |||||||||||||||||||||||
| Net income (loss) attributable to MasTec, Inc. | $ | $ | $ | ( | $ | ||||||||||||||||||
| Earnings (loss) per share (Note 2): | |||||||||||||||||||||||
| Basic earnings (loss) per share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
MASTEC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited - in thousands)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Foreign currency translation (losses) gains, net of tax | ( | ( | ( | ||||||||||||||||||||
| Unrealized gains on investment activity, net of tax | |||||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Comprehensive income attributable to non-controlling interests | |||||||||||||||||||||||
| Comprehensive income (loss) attributable to MasTec, Inc. | $ | $ | $ | ( | $ | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
MASTEC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited - in thousands, except share information)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net of allowance | |||||||||||
| Contract assets | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | $ | $ | |||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill, net | |||||||||||
| Other intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt, including finance leases | $ | $ | |||||||||
| Current portion of operating lease liabilities | |||||||||||
| Accounts payable | |||||||||||
| Accrued salaries and wages | |||||||||||
| Other accrued expenses | |||||||||||
| Contract liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | $ | $ | |||||||||
| Long-term debt, including finance leases | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
Commitments and contingencies (Note 14) | |||||||||||
| Equity | |||||||||||
Preferred stock, $ | $ | $ | |||||||||
Common stock, $ | |||||||||||
| Capital surplus | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost: | ( | ( | |||||||||
| Total MasTec, Inc. shareholders’ equity | $ | $ | |||||||||
| Non-controlling interests | $ | $ | |||||||||
| Total equity | $ | $ | |||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
MASTEC, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited - in thousands, except shares)
| Common Stock | Treasury Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Loss | Total MasTec, Inc. Shareholders’ Equity | Non-Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-cash stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted shares, net | ( | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes, net of other stock issuances | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-cash stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted shares, net | ( | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes, net of other stock issuances | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
MASTEC, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited - in thousands, except shares)
| Common Stock | Treasury Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Loss | Total MasTec, Inc. Shareholders’ Equity | Non-Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-cash stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted shares, net | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes, net of other stock issuances | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares in connection with acquisition | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of non-controlling interests | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition-related assumption of non-controlling interest | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| For the Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-cash stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted shares, net | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes, net of other stock issuances | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares in connection with acquisition | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of treasury stock, at cost | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | ( | $ | ( | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
| For the Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangible assets | |||||||||||
| Non-cash stock-based compensation expense | |||||||||||
| Benefit from deferred income taxes | ( | ( | |||||||||
| Equity in earnings of unconsolidated affiliates, net | ( | ( | |||||||||
| Gains on sales of assets, net | ( | ( | |||||||||
| Non-cash interest expense, net | |||||||||||
| Other non-cash items, net | |||||||||||
Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Contract assets | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Other assets, current and long-term portion | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Contract liabilities | ( | ||||||||||
| Other liabilities, current and long-term portion | ( | ( | |||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| Cash flows from investing activities: | |||||||||||
| Cash paid for acquisitions, net of cash acquired | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sales of property and equipment | |||||||||||
| Payments for other investments | ( | ( | |||||||||
| Proceeds from other investments | |||||||||||
| Other investing activities, net | |||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from credit facilities | |||||||||||
| Repayments of credit facilities | ( | ( | |||||||||
| Payments of finance lease obligations | ( | ( | |||||||||
| Repurchases of common stock | ( | ||||||||||
| Payments of acquisition-related contingent consideration | ( | ( | |||||||||
| Payments for acquisition-related contingent assets | ( | ||||||||||
| Payments to non-controlling interests, including acquisition of interests and distributions | ( | ||||||||||
| Payments for stock-based awards | ( | ( | |||||||||
| Other financing activities, net | ( | ( | |||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||
| Effect of currency translation on cash | ( | ||||||||||
| Net decrease in cash and cash equivalents | $ | ( | $ | ( | |||||||
| Cash and cash equivalents - beginning of period | $ | $ | |||||||||
| Cash and cash equivalents - end of period | $ | $ | |||||||||
Supplemental cash flow information: | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid, net of refunds | $ | $ | |||||||||
Supplemental disclosure of non-cash information: | |||||||||||
| Additions to property and equipment from finance leases | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Business, Basis of Presentation and Significant Accounting Policies
Nature of the Business
MasTec, Inc. (collectively with its subsidiaries, “MasTec” or the “Company”) is a leading infrastructure construction company operating mainly throughout North America across a range of industries. The Company’s primary activities include the engineering, building, installation, maintenance and upgrade of communications, energy, utility and other infrastructure, such as: power delivery services, including transmission, distribution, environmental planning and compliance; wireless, wireline/fiber and customer fulfillment activities; power generation, primarily from clean energy and renewable sources; pipeline distribution infrastructure, including natural gas, carbon capture sequestration, water and pipeline integrity services; heavy civil; industrial infrastructure; and environmental remediation services. MasTec’s customers are primarily in these industries. MasTec reports its results under five reportable segments: (1) Communications; (2) Clean Energy and Infrastructure; (3) Oil and Gas; (4) Power Delivery and (5) Other.
Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in the annual audited consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying consolidated balance sheet as of December 31, 2022 is derived from the Company’s audited financial statements as of that date. Because certain information and footnote disclosures have been condensed or omitted, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2022 contained in the Company’s 2022 Annual Report on Form 10-K (the “2022 Form 10-K”). In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. When appropriate, prior year amounts are reclassified to conform with the current period presentation. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. The Company believes that the disclosures made in these consolidated financial statements are adequate to make the information not misleading.
Principles of Consolidation
The accompanying consolidated financial statements include MasTec, Inc. and its subsidiaries and include the accounts of all majority owned subsidiaries over which the Company exercises control and, when applicable, entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. Other parties’ interests in entities that MasTec consolidates are reported as non-controlling interests within equity, except for mandatorily redeemable non-controlling interests, which are recorded within other liabilities. Net income or loss attributable to non-controlling interests is reported as a separate line item below net income or loss. Investments in entities for which the Company does not have a controlling financial interest, but over which it has the ability to exert significant influence, are accounted for under the equity method of accounting. For equity investees in which the Company has an undivided interest in the assets, liabilities and profits or losses of an unincorporated entity, but does not exercise control over the entity, the Company consolidates its proportional interest in the accounts of the entity.
Translation of Foreign Currencies
The assets and liabilities of foreign subsidiaries with a functional currency other than the U.S. dollar are translated into U.S. dollars at period-end exchange rates, with resulting translation gains or losses included within other comprehensive income or loss. Revenue and expenses are translated into U.S. dollars at average rates of exchange during the applicable period. Substantially all of the Company’s foreign operations use their local currency as their functional currency. For foreign operations for which the local currency is not the functional currency, the operation’s non-monetary assets are remeasured into U.S. dollars at historical exchange rates. All other accounts are remeasured at current exchange rates. Gains or losses from remeasurement are included in other income or expense, net. Currency gains or losses resulting from transactions executed in currencies other than the functional currency are included in other income or expense, net.
In these consolidated financial statements, “$” means U.S. dollars unless otherwise noted.
Management Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on historical experience and various other assumptions that management believes to be reasonable under the circumstances, including the potential future effects of macroeconomic trends and events, such as inflation and interest rate levels; uncertainty from potential market volatility; other market, industry and regulatory factors, including uncertainty related to the implementation and pace of governmental programs and initiatives and project permitting issues, and other regulatory matters or uncertainty; supply chain disruptions; climate-related matters; global events, such as military conflicts; and public health matters. These estimates form the basis for making judgments about the Company’s operating results and the carrying values of assets and liabilities that are not readily apparent from other sources. While management believes that such estimates are reasonable when considered in conjunction with the Company’s consolidated financial position and results of operations taken as a whole, actual results could differ materially from these estimates.
Key estimates include: the recognition of revenue and project profit or loss, which the Company defines as project revenue less project costs of revenue, including project-related depreciation, in particular, on construction contracts accounted for under the cost-to-cost method, for
9
General Economic, Market and Regulatory Conditions
The Company has experienced, and may continue to experience, direct and indirect negative effects on its business and operations from negative economic, market, and regulatory conditions, including the current level of market interest rates; continuing inflationary effects on the cost of fuel, labor and materials; supply chain disruptions; uncertainty related to the implementation and pace of spending under governmental programs and initiatives related to infrastructure and other industrial investment, delays and uncertainty related to project permitting and other regulatory matters or uncertainty; climate, environmental and sustainability-related matters; public health matters; changes in technology, tax and other incentives; and potential market volatility that could negatively affect demand for future projects, and/or delay existing project timing or cause increased project costs. The extent to which these conditions could affect the Company’s business, operations and financial results is uncertain as it will depend upon numerous evolving factors that management may not be able to accurately predict, and, therefore, any future impacts on the Company’s business, financial condition and/or results of operations cannot be quantified or predicted with specificity, including with respect to the effects of ongoing and recent geopolitical events, such as the political unrest and military conflicts in the Middle East and Ukraine, which could potentially increase volatility and uncertainty in the energy and capital markets.
Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue from contracts with customers when, or as, control of promised services and goods is transferred to customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for the services and goods transferred. The Company primarily recognizes revenue over time utilizing the cost-to-cost measure of progress, which best depicts the continuous transfer of control of goods or services to the customer, and correspondingly, when performance obligations are satisfied for the related contracts.
Contracts. The Company derives revenue primarily from construction projects performed under: (i) master service and other service agreements, which generally provide a menu of available services in a specific geographic territory that are utilized on an as-needed basis, and are typically priced using either a time and materials or a fixed price per unit basis; and (ii) contracts for specific projects requiring the construction and installation of an entire infrastructure system, or specified units within an infrastructure system, which may be subject to one or multiple pricing options, including fixed price, unit price, time and materials, or cost plus a markup. Revenue derived from projects performed under master service and other service agreements totaled 37 % and 52 % of consolidated revenue for the three month periods ended September 30, 2023 and 2022, respectively, and totaled 42 % and 54 % for the nine month periods ended September 30, 2023 and 2022, respectively.
For certain master service and other service agreements, revenue is recognized at a point in time, primarily for install-to-the-home and certain other wireless services in the Company’s Communications segment, and to a lesser extent, certain revenue in the Company’s Clean Energy and Infrastructure and Oil and Gas segments. Point in time revenue is recognized when the work order has been fulfilled, which, for the majority of the Company’s point in time revenue, is the same day it is initiated. Point in time revenue accounted for approximately 2 % and 3 % of consolidated revenue for the three and nine month periods ended September 30, 2023, respectively, and totaled approximately 4
The total contract transaction price and cost estimation processes used for recognizing revenue over time under the cost-to-cost method is primarily based on the professional knowledge and experience of the Company’s project managers, operational and financial professionals, and other professional expertise, as warranted. Management reviews estimates of total contract transaction price and total project costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of the estimated amount and probability of variable consideration are factors that influence estimates of the total contract transaction price, total costs to complete those contracts and the Company’s profit recognition. Changes in these factors could result in revisions to revenue in the period in which the revisions are determined, which revisions could materially affect the Company’s consolidated results of operations for that period. Provisions for losses on uncompleted contracts are recorded in the period in which such losses are expected based on management’s estimates. For the nine month periods ended September 30, 2023 and 2022, project profit was affected by less than 5 0.3 % and 0.5 %, respectively. For both the three and nine month periods ended September 30, 2022, such net changes positively affected revenue by approximately 0.2
Performance Obligations. A performance obligation is a contractual promise to transfer a distinct good or service to a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. The Company’s contracts often require significant services to integrate complex activities and equipment into a single deliverable, and are therefore generally accounted for as a single performance obligation, even when delivering multiple distinct services. The majority of the Company’s performance obligations are completed within one year .
Remaining performance obligations represent the amount of unearned transaction prices under contracts for which work is wholly or partially unperformed, including the Company’s share of unearned transaction prices from its proportionately consolidated non-controlled joint ventures. As of September 30, 2023, the amount of the Company’s remaining performance obligations was $7.6 billion. Based on current
10
expectations, the Company anticipates it will recognize approximately $2.6 billion of its remaining performance obligations as revenue during 2023, with the majority of the remaining balance expected to be recognized in 2024.
Variable Consideration. Transaction prices for the Company’s contracts may include variable consideration, which comprises items such as change orders, claims and incentives. Management estimates variable consideration for a performance obligation utilizing estimation methods that it believes best predict the amount of consideration to which the Company will be entitled. Management’s estimates of variable consideration and the determination of whether to include estimated amounts in transaction prices are based largely on specific discussions, correspondence or preliminary negotiations and past practices with the customer, engineering studies and legal advice and all other relevant information that is reasonably available at the time of the estimate. To the extent unapproved change orders, claims and other variable consideration reflected in transaction prices are not resolved in the Company’s favor, or to the extent incentives reflected in transaction prices are not earned, there could be reductions in, or reversals of, previously recognized revenue.
As of September 30, 2023 and December 31, 2022, the Company included in its contract transaction prices approximately $296 million and $271 million, respectively, of change orders and/or claims for certain contracts that were in the process of being resolved in the ordinary course of its business, including through negotiation, arbitration and other proceedings. These transaction price adjustments, when earned, are included within contract assets or accounts receivable, net of allowance, as appropriate. As of both September 30, 2023 and December 31, 2022, these change orders and/or claims primarily related to certain projects in the Company’s Clean Energy and Infrastructure and Power Delivery segments. The Company actively engages with its customers to complete the final approval process and generally expects these processes to be completed within one year . Amounts ultimately realized upon final agreement by customers could be higher or lower than such estimated amounts.
Recent Accounting Pronouncements
The discussion below describes the effects of recent accounting pronouncements, as updated from the discussion in the Company’s 2022 Form 10-K.
Accounting Pronouncements Adopted in 2023
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”) in the first quarter of 2023. ASU 2021-08, which was issued to improve consistency for revenue recognition in the post-acquisition period for acquired contracts as compared to contracts entered into subsequent to acquisition, requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, rather than at fair value. The adoption of ASU 2021-08 did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements (“ASU 2023-01”) to improve the guidance for applying Topic 842, Leases, to arrangements between entities under common control. ASU 2023-01 improves current GAAP by clarifying the accounting for leasehold improvements associated with common control leases, thereby reducing diversity in practice. The provisions of this ASU that apply to public companies include a requirement for entities to amortize leasehold improvements associated with common control leases over the useful life of the common control group. ASU 2023-01 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The Company does not expect ASU 2023-01 to have a material effect on the Company’s consolidated financial statements.
In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement (“ASU 2023-05”). ASU 2023-05, which clarifies existing guidance to reduce diversity in practice, addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The provisions of this ASU require that a joint venture initially measure all contributions received upon its formation at fair value, largely consistent with Topic 805, Business Combinations. The amendments in this ASU are not applicable to the formation of proportionally consolidated joint ventures. ASU 2023-05 is effective prospectively for all joint ventures with a formation date on or after January 1, 2025, with early adoption permitted on a retrospective basis for joint ventures formed before January 1, 2025. The Company is currently evaluating the effects of this ASU.
Note 2 – Earnings Per Share
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The following table provides details underlying the Company’s earnings per share calculations for the periods indicated (in thousands):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) attributable to MasTec: | |||||||||||||||||||||||
Net income (loss) - basic (a) | $ | $ | $ | ( | $ | ||||||||||||||||||
Fair value gain related to contingent payments (b) | $ | $ | $ | $ | |||||||||||||||||||
Net income (loss) - diluted (a) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
Weighted average shares outstanding - basic(c) | |||||||||||||||||||||||
Dilutive common stock equivalents (d)(e) | |||||||||||||||||||||||
| Weighted average shares outstanding - diluted | |||||||||||||||||||||||
(a)Basic net income or loss is calculated as total net income or loss, less amounts attributable to non-controlling interests. Diluted net income or loss is calculated as total net income or loss, less amounts attributable to non-controlling interests, adjusted for the fair value gain or loss, if any, related to additional contingent payments to the former owners of an acquired business for which the contingency has been resolved as of the respective period. See Note 3 - Acquisitions, Goodwill and Other Intangible Assets, Net, for additional information.
(b)For the three and nine month periods ended September 30, 2022, represents the fair value gain related to additional contingent payments, which were dilutive as of September 30, 2022. See Note 3 - Acquisitions, Goodwill and Other Intangible Assets, Net, for additional information.
(c)For the three month periods ended September 30, 2023 and 2022, basic shares include approximately 88,000 and 140,000 weighted average shares, respectively, related to additional contingent payments, and for the nine month periods ended September 30, 2023 and 2022, basic shares include approximately 88,000 and 114,000 of such weighted average shares, respectively.
(d)For the three month period ended September 30, 2023, there were no weighted average anti-dilutive common stock equivalents, and for the three month period ended September 30, 2022, weighted average anti-dilutive common stock equivalents totaled approximately 8,000 shares. For the nine month periods ended September 30, 2023 and 2022, such shares totaled approximately 1,091,000 and 135,000 , respectively.
(e)For the three and nine month periods ended September 30, 2023, there were no 11,000 and 37,000 , respectively.
Share repurchases. For the nine month period ended September 30, 2022, the Company repurchased approximately 1,124,000 shares of its common stock, the effect of which on the Company’s weighted average shares outstanding for the related period was a reduction of approximately 598,000 shares. See Note 11 - Equity for details of the Company’s share repurchase transactions.
Shares issued for acquisitions. In the fourth quarter of 2022, the Company issued approximately 2,758,000 shares of its common stock in conjunction with the October 2022 acquisition of Infrastructure and Energy Alternatives, Inc. (“IEA”). In the second quarter of 2022, the Company issued 133,000 shares in connection with the December 2021 acquisition of Henkels & McCoy Holdings, Inc., formerly known as Henkels & McCoy Group, Inc. (“HMG”). See Note 3 - Acquisitions, Goodwill and Other Intangible Assets, Net, for additional information.
Note 3 – Acquisitions, Goodwill and Other Intangible Assets, Net
The following table provides a reconciliation of changes in goodwill by reportable segment for the nine month period ended September 30, 2023 (in millions):
| Communications | Clean Energy and Infrastructure | Oil and Gas | Power Delivery | Total Goodwill | |||||||||||||||||||||||||
Goodwill, gross, as of December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Accumulated impairment loss (a) | ( | ( | |||||||||||||||||||||||||||
Goodwill, net, as of December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Additions from new business combinations | |||||||||||||||||||||||||||||
Measurement period adjustments (b) | ( | ||||||||||||||||||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||||||||||||||
Goodwill, net as of September 30, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(a) Accumulated impairment losses include the effects of currency translation gains and/or losses.
(b) Measurement period adjustments represent adjustments, net, to preliminary estimates of fair value within the measurement period of up to one year from the date of acquisition. Measurement period adjustments, net, for the nine month period ended September 30, 2023 were primarily the result of updated valuations and estimated useful lives of certain fixed assets and updated estimates of certain assets and liabilities, including contract assets and contingent liabilities. As a result of the updates to the estimated useful lives of certain fixed assets, depreciation expense decreased by approximately $6 million for the nine month period ended September 30, 2023, and as a result of the measurement period adjustments related to certain contract assets and liabilities, revenue increased by approximately $35 million and costs of revenue, excluding depreciation and amortization, decreased by approximately $8 million. In addition, measurement period adjustments for the nine month period ended September 30, 2023 included a decrease in deferred tax liabilities of approximately $38 million, an increase in contingent liabilities of approximately $29 million, including for insurance, legal and other matters, and fair value increases of approximately $7 million for certain property and equipment.
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The following table provides a reconciliation of changes in other intangible assets, net, for the period indicated (in millions):
| Other Intangible Assets, Net | |||||||||||||||||||||||
| Customer Relationships and Backlog | Trade Names (a) | Other (b) | Total | ||||||||||||||||||||
Other intangible assets, gross, as of December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||
| Accumulated amortization | ( | ( | ( | ( | |||||||||||||||||||
Other intangible assets, net, as of December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||
| Additions from new business combinations | |||||||||||||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||||||||
| Amortization expense | ( | ( | ( | ( | |||||||||||||||||||
Other intangible assets, net, as of September 30, 2023 | $ | $ | $ | $ | |||||||||||||||||||
(a)Includes approximately $34.5
(b)Consists principally of pre-qualifications and non-compete agreements.
Quarterly Assessment for Indicators of Impairment. During the third quarter of 2023, the Company performed a quarterly review for indicators of impairment, which considered its results for the nine month period ended September 30, 2023, together with its expectations of future results, including consideration of the potential effects of shifts in timing for projects, regulatory uncertainty and other matters, and macroeconomic factors, including interest rate levels. In conjunction with this quarterly review, management performed a quantitative assessment of the goodwill associated with two reporting units within the Clean Energy and Infrastructure segment.
For the selected reporting units, management estimated their fair values using a combination of market and income approaches using Level 3 inputs. Under the market approach, fair values were estimated using published market multiples for comparable companies and applying them to revenue and EBITDA. Under the income approach, a discounted cash flow methodology was used, considering: (i) management estimates, such as projections of revenue, operating costs and cash flows, taking into consideration historical and anticipated financial results; (ii) general economic, market and regulatory conditions; and (iii) the impact of planned business and operational strategies. Management believes the assumptions used in its quantitative goodwill impairment tests are reflective of the risks inherent in the business models of the applicable reporting units and within the units’ industry. Estimated discount rates were determined using the weighted average cost of capital for each reporting unit at the time of the analysis, taking into consideration the risks inherent within each reporting unit individually.
Based on the results of these assessments, management determined that, as of September 30, 2023, the estimated fair value of one of these reporting units substantially exceeded its carrying value. The estimated fair value of the second reporting unit, consisting of the IEA component (the “IEA reporting unit”), which had approximately $571 million of goodwill, exceeded its carrying value by approximately 7 % as of September 30, 2023. Significant assumptions used in testing this reporting unit included terminal values based on a terminal growth rate of 3 %, six years of discounted cash flows prior to the terminal value, and a discount rate of 12 %. Significant changes in the assumptions or estimates used in management’s assessment as of September 30, 2023, such as a reduction in profitability and/or cash flows, changes in market, regulatory or other conditions, including decreases in project activity levels and/or the effects of elevated levels of inflation, market interest rates or other market disruptions, including from geopolitical events, could result in non-cash impairment charges to goodwill and indefinite-lived intangible assets in the future.
Recent Acquisitions
The Company seeks to grow and diversify its business both organically and through acquisitions and/or strategic arrangements in order to deepen its market presence and customer base, broaden its geographic reach and expand its service offerings. In 2021, the Company initiated a significant transformation of its end-market business operations to focus on the nation’s transition to low-carbon energy sources and position the Company for expected future opportunities. This transformation has included significant business combination activity, including expansion of the Company’s scale and capacity in renewable energy, power delivery, heavy civil and telecommunications services, which activity has resulted in significant acquisition and integration costs, both in the Company’s existing and recently acquired operations. Acquisitions are funded with cash on hand, borrowings under the Company’s senior unsecured credit facility and other debt financing and, for certain recent acquisitions, with shares of the Company’s common stock, and are generally subject to customary purchase price adjustments.
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2023 Acquisitions. For the nine month period ended September 30, 2023, MasTec acquired certain of the assets of a telecommunications company specializing in wireless services that is included within the Company’s Communications segment, which acquisition was effective in January; and, effective in July, MasTec acquired all of the equity interests of a telecommunications construction company specializing in broadband and fiber-to-the-home initiatives in the New England area, which is included within the Company’s Communications segment. Determination of the estimated fair values of the net assets acquired and consideration transferred for these acquisitions, which have been accounted for as business combinations under ASC 805, “Business Combinations” (“ASC 805”), was preliminary as of September 30, 2023; as a result, further adjustments to these estimates may occur. Additionally, MasTec acquired 68 % and 42 % of the equity interests of two equipment companies, both of which are accounted for as asset acquisitions under ASC 805, and were effective in May and included within the Company’s Oil and Gas segment. Based on an evaluation of the respective entities’ operating agreements, under which the Company has voting control with respect to the entities’ operating management, the Company determined that it has control over these entities, and, therefore, has consolidated these entities within the Company’s results of operations, with the other parties’ interests accounted for as non-controlling interests. The aggregate purchase price of the Company’s 2023 acquisitions was composed of approximately $69 million in cash, net of cash acquired, and an earn-out liability valued at approximately $1 million. As of September 30, 2023, the range of remaining potential undiscounted earn-out liabilities for the 2023 acquisitions was estimated to be up to $3 million; however, there is no maximum payment amount. See Note 4 - Fair Value of Financial Instruments for details pertaining to fair value estimates for the Company’s earn-out arrangements.
The goodwill balances for the respective acquisitions represent the estimated values of the acquired companies’ geographic presence in key markets, assembled workforce, synergies expected to be achieved from the combined operations of each of the acquired companies and MasTec. Approximately $1 million of the goodwill balance related to the 2023 acquisitions is expected to be tax deductible as of September 30, 2023.
2022 Acquisitions. During 2022, MasTec completed five acquisitions, which included all of the equity interests of the following: (i) within the Company’s Clean Energy and Infrastructure segment: IEA, a leading utility-scale infrastructure solutions provider in North America, with expertise in renewable energy and heavy civil projects, as well as rail and environmental remediation services, which acquisition was effective in October; and a company specializing in the production of concrete and aggregate products, which acquisition was effective in August; (ii) within the Company’s Oil and Gas segment: an infrastructure construction company focusing on water, sewer and utility projects and with expertise in excavation and site work, which acquisition was effective in January; (iii) within the Company’s Communications segment: a telecommunications company specializing in wireline services, which acquisition was effective as of the end of May; and (iv) within the Company’s Power Delivery segment: a company specializing in the construction of overhead high voltage transmission lines, which acquisition was effective in July.
As of September 30, 2023, the Company is finalizing certain valuation and contingency-related estimates for the IEA acquisition; as a result, further adjustments to such estimates may occur. The following table summarizes, as of September 30, 2023, the estimated fair values of the consideration paid and net assets acquired, as adjusted, for the Company’s 2022 acquisitions (in millions):
| Acquisition consideration: | IEA | All other | Total | ||||||||||||||
| Cash, net of cash acquired | $ | $ | $ | ||||||||||||||
| Shares transferred | |||||||||||||||||
| Estimated fair value of warrants | |||||||||||||||||
| Estimated fair value of contingent consideration | |||||||||||||||||
| Total consideration | $ | $ | $ | ||||||||||||||
| Identifiable assets acquired and liabilities assumed: | |||||||||||||||||
| Accounts receivable and contract assets | $ | $ | $ | ||||||||||||||
| Current assets | |||||||||||||||||
| Property and equipment | |||||||||||||||||
| Long-term assets, primarily operating lease right-of-use assets | |||||||||||||||||
| Amortizing intangible assets | |||||||||||||||||
| Accounts payable | ( | ( | ( | ||||||||||||||
| Contract liabilities | ( | ( | ( | ||||||||||||||
| Current liabilities, primarily accrued expenses | ( | ( | ( | ||||||||||||||
| Long-term debt, including finance lease obligations | ( | ( | ( | ||||||||||||||
| Long-term liabilities, primarily operating lease liabilities and deferred income taxes | ( | ( | ( | ||||||||||||||
| Total identifiable net assets | $ | $ | $ | ||||||||||||||
| Goodwill | |||||||||||||||||
| Total net assets acquired, including goodwill | $ | $ | $ | ||||||||||||||
Amortizing intangible assets related to the IEA acquisition are primarily composed of customer relationships, and to a lesser extent, trade names and backlog. Customer relationship and trade name intangible assets for IEA, in the aggregate, totaled approximately $321 million, which each had a weighted average life of approximately 14 42 million with a weighted average life of approximately 1 year based on estimated cash flows expected to be derived from future work on acquired contracts with customers. The weighted average life of amortizing intangible assets in the aggregate for the IEA acquisition was 13 years.
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Amortizing intangible assets related to “All other” acquisitions are primarily composed of customer relationships with an aggregate weighted average life of 9 years. Amortizing intangible assets are amortized in a manner consistent with the pattern in which the related benefits are expected to be consumed.
The goodwill balances for each of the respective acquisitions represent the estimated values of each acquired company’s geographic presence in key markets, assembled workforce and synergies expected to be achieved from the combined operations of each of the acquired companies and MasTec and the acquired company’s industry-specific project management expertise. Approximately $37 million of the goodwill balance related to the 2022 acquisitions is expected to be tax deductible as of September 30, 2023.
The shares of MasTec common stock included in consideration transferred for IEA in the table above consist of approximately 2.7 million shares, valued at approximately $174 million based on the market price of MasTec common stock on the date of closing. Total cash paid for acquisitions, net, includes approximately $44 million of cash acquired. Long-term debt in the table above includes $300 million aggregate principal balance of 6.625 % senior unsecured notes that were assumed in connection with the acquisition of IEA. See Note 7 - Debt for additional information.
Consideration transferred for IEA includes the value of certain warrants that were originally issued by IEA, for which the remaining outstanding warrants as of December 31, 2022 had an estimated fair value of $3.1 million. Under the terms of the IEA merger agreement, holders of the IEA warrants became entitled to receive an amount in cash and shares of MasTec common stock upon exercise of the IEA warrants. The number of MasTec shares issued in connection with exercises of such IEA warrants in the first quarter of 2023 was de minimis, and all remaining IEA warrants expired unexercised on March 26, 2023. Fair value gains related primarily to the expired warrants totaled approximately $2.6 million for the nine month period ended September 30, 2023, which amount is reflected in other income.
Contingent consideration included in the table above is composed of earn-out liabilities, which generally equal a portion of the acquired companies’ earnings before interest, taxes, depreciation and amortization (“EBITDA”) in excess of thresholds agreed upon with the sellers, if applicable. The earn-out arrangements for the 2022 acquisitions are payable annually and have five -year terms, as set forth in the respective purchase agreements, and were valued at approximately $3 million in the aggregate. Earn-outs are recorded within other current and other long-term liabilities, as appropriate, in the consolidated balance sheets. See Note 4 - Fair Value of Financial Instruments for details pertaining to fair value estimates for the Company’s earn-out arrangements. As of September 30, 2023, the range of remaining potential undiscounted earn-out liabilities for the 2022 acquisitions was estimated to be up to $2 million; however, there is no maximum payment amount. Current liabilities reflected in the table above also include operating lease liabilities and contingent liabilities for insurance, legal and other matters.
HMG Additional Payments. The HMG purchase agreement, for which the subject acquisition was effective in December 2021, provides for certain additional payments to be made to the sellers if certain acquired receivables are collected by the Company (the “Additional Payments”). Pursuant to the terms of the purchase agreement, a portion of the Additional Payments will be made in cash, with the remainder due in shares of MasTec common stock. The estimated number of potential shares that could be issued related to such Additional Payments will be based on the amounts ultimately collected and the share price as defined within the purchase agreement. Changes in the estimated fair value of potential shares that could be issued, which result from changes in MasTec’s share price as compared with the share price as defined within the purchase agreement, are reflected within other income or expense, as appropriate. For the three and nine month periods ended September 30, 2023, unrealized fair value measurement activity related to the contingent shares totaled gains of approximately $7.4 million and $2.1 million, respectively, and for the three and nine month periods ended September 30, 2022, such activity totaled gains of approximately $1.3 million and $4.5 million, respectively. An Additional Payment of approximately $29.4 million was made in May 2022, which payment was composed of approximately $18 million in cash and 133,157 shares of MasTec common stock, and for which a realized gain of approximately $1 million was recognized within other income, net, in the related period.
As of September 30, 2023 and December 31, 2022, the estimated fair value of remaining Additional Payments totaled approximately $33 million and $37 million, respectively, which amounts are included within other current liabilities in the consolidated balance sheet. For the nine month period ended September 30, 2023, the estimated fair value of remaining Additional Payments included the effect of unrealized fair value gains related to the contingent shares of approximately $2.1 million and a reduction of approximately $2.4 million from changes in collections attributed to acquired balances. The estimated number of shares that would be paid in connection with the remaining Additional Payment liability totaled approximately 160,000 and 170,000 shares as of September 30, 2023 and December 31, 2022, respectively. Of the total remaining Additional Payments as of September 30, 2023, the amount due to the sellers, based on amounts collected as of September 30, 2023, totaled approximately $19.4 million, of which the amount due in shares totaled approximately $6.3 million, or 87,900 shares. See Note 2 - Earnings Per Share for the effect of the above referenced shares on the Company’s earnings per share calculations.
Pro forma results. For the three month periods ended September 30, 2023 and 2022, unaudited supplemental pro forma revenue totaled approximately $3.2 billion and $3.3 billion, respectively, and unaudited supplemental pro forma net income totaled approximately $2.3 million and $40.0 million, respectively. For the nine month periods ended September 30, 2023 and 2022, unaudited supplemental pro forma revenue totaled approximately $8.7 billion and $8.6 billion, respectively, and unaudited supplemental pro forma net loss totaled approximately $65.6 million and $6.9 million, respectively. Supplemental pro forma information for the Company’s first quarter 2023 acquisition has not been presented for the pre-acquisition periods due to the impracticability of obtaining accurate or reliable historical financial information for the assets of the entity that was acquired.
Acquisition-related results. For the three and nine month periods ended September 30, 2023, the Company’s consolidated results of operations included acquisition-related revenue of approximately $533.2 million and $1,503.5 million, respectively, including a total of approximately $483.9 million and $1,374.6 million, respectively, for IEA. For the three and nine month periods ended September 30, 2022, the Company’s consolidated results of operations included acquisition-related revenue of approximately $569.7 million and $1,876.6 million, respectively, including approximately $429.3 million for HMG for the three month period ended September 30, 2022, and $1,457.7 million in the aggregate for HMG and INTREN, LLC for the nine month period ended September 30, 2022. For the three and nine month periods ended September 30, 2023, the Company’s consolidated results of operations included acquisition-related net losses of approximately $2.8 million and
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$42.7 million, respectively, based on the Company’s consolidated effective tax rates, and for the three and nine month periods ended September 30, 2022, the Company’s consolidated results of operations included acquisition-related net income of approximately $18.4 million and $37.7 million, respectively, based on the Company’s consolidated effective tax rates. These acquisition-related results include amortization of acquired intangible assets and certain acquisition integration costs, and exclude the effects of interest expense associated with consideration paid for the related acquisitions.
Acquisition and integration costs. The Company has incurred certain acquisition and integration costs in connection with its recent acquisitions, which costs are included within general and administrative expenses, costs of revenue, excluding depreciation and amortization, and other expense, as appropriate. Acquisition and integration costs include: i) the costs of integrating acquired entities, such as: employee termination expenses, including employee compensation relating to the elimination of certain positions that were determined to be redundant, and other integration-type costs, including operating cost redundancies, facility consolidation expenses, lease termination expenses, losses on disposal of identified assets, system migration expenses, training and other integration costs; and ii) legal, professional and other fees associated with the consummation of these acquisitions, including fees paid in connection with certain transaction-related financing commitments, including, in the second half of 2022, bridge financing related to the IEA acquisition. These integration efforts are ongoing and the Company expects to incur any remaining acquisition and integration expenses in the fourth quarter of 2023. For the three and nine month periods ended September 30, 2023, such acquisition and integration costs totaled approximately $21.1 million and $60.9 million, respectively, of which $18.3 million and $53.3 million, respectively, was included within general and administrative expenses, and of which $2.8 million and $7.6 million, respectively, was included within costs of revenue, excluding depreciation and amortization. Acquisition and integration costs for the three and nine month periods ended September 30, 2022 totaled approximately $33.3 million and $59.4 million, respectively, of which $9.2 million and $35.3 million, respectively, was included within general and administrative expenses, and of which $21.4 2.7 6.7 million and $5.5 million, respectively, was included within current liabilities within the consolidated balance sheets related to such costs.
Note 4 – Fair Value of Financial Instruments
The Company’s financial instruments are primarily composed of cash and cash equivalents, accounts and notes receivable, cash collateral deposited with insurance carriers, life insurance assets, equity investments, certain other assets and investments, deferred compensation plan assets and liabilities, accounts payable and other current liabilities, acquisition-related contingent consideration and other liabilities, and debt obligations.
Fair value is the price that would be received to sell an asset or the amount paid to transfer a liability, also referred to as the “exit price,” in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value guidance establishes a valuation hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs that may be used are: (i) Level 1 - quoted market prices in active markets for identical assets or liabilities; (ii) Level 2 - observable market-based inputs or other observable inputs; and (iii) Level 3 - significant unobservable inputs that cannot be corroborated by observable market data, which are generally determined using valuation models incorporating management estimates of market participant assumptions.
Acquisition-Related Contingent Consideration and Other Liabilities
Acquisition-related contingent consideration and other liabilities is composed of earn-outs, which represent the estimated fair value of future amounts payable for businesses, including for mandatorily redeemable non-controlling interests (together, “Earn-outs”), that are contingent upon the acquired business achieving certain levels of earnings in the future. As of September 30, 2023 and December 31, 2022, the estimated fair value of the Company’s Earn-out liabilities totaled $83.0 million and $127.4 million, respectively. As of September 30, 2023, there were no estimated liabilities related to the mandatorily redeemable non-controlling interests, and as of December 31, 2022, the fair value of such liabilities totaled $13.9 million. Earn-out liabilities included within other current liabilities totaled approximately $29.5 million and $37.7 million as of September 30, 2023 and December 31, 2022, respectively. The fair values of the Company’s Earn-out liabilities are estimated using income approaches such as discounted cash flows or option pricing models, both of which incorporate significant inputs not observable in the market (Level 3 inputs), including management’s estimates and entity-specific assumptions, and are evaluated on an ongoing basis. Key assumptions include the discount rate, which was 14.0 % as of September 30, 2023, and probability-weighted projections of earnings before interest, taxes, depreciation and amortization (“EBITDA”). Significant changes in any of these assumptions could result in significantly higher or lower potential Earn-out liabilities. The ultimate payment amounts for the Company’s Earn-out liabilities will be determined based on the actual results achieved by the acquired businesses. As of September 30, 2023, the range of potential undiscounted Earn-out liabilities was estimated to be between $12 million and $98 million; however, there is no maximum payment amount.
Earn-out activity consists primarily of additions from new business combinations; changes in the expected fair value of future payment obligations; and payments. For both the three and nine month periods ended September 30, 2023, additions from new business combinations totaled approximately $1.4 2.1 million and $3.8 million, respectively. There were no no measurement period adjustments for the three month period ended September 30, 2022, and for the nine month period ended September 30, 2022, measurement period adjustments totaled an increase, net, of approximately $1.5 million and related to a net increase in the Company’s Oil and Gas segment, partially offset by a decrease in its Communications segment. For the three month period ended September 30, 2023, fair value adjustments 4.9 million and related to net decreases primarily within the Company’s Communications and Oil and Gas segments. For the nine month period ended September 30, 2023, fair value adjustments totaled a decrease, net, of approximately $7.0 million and related to a net decrease in the Company’s Communications segment, partially offset by a net increase, primarily within the Company’s Clean Energy and Infrastructure and Oil and Gas segments. The decrease in the Communications segment for the nine month period ended September 30, 2023 included a reduction of approximately $12.3 million related to mandatorily redeemable non-controlling interests. For the three and nine month periods ended September 30, 2022, fair value adjustments totaled an increase of approximately $0.1 million and a
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decrease, net, of approximately $1.2 million, respectively, and for both periods, related primarily to the Company’s Communications segment. For the three and nine month periods ended September 30, 2023, Earn-out payments totaled approximately $12.7 million and $38.8 million, respectively, which included approximately $1.7 million related to mandatorily redeemable non-controlling interests for the nine month period ended September 30, 2023. For the three and nine month periods ended September 30, 2022, Earn-out payments totaled approximately $11.0 million and $37.8 million, respectively.
Equity Investments
The Company’s equity investments as of September 30, 2023 include: (i) the Company’s 33 % equity interests in Trans-Pecos Pipeline, LLC (“TPP”) and Comanche Trail Pipeline, LLC (“CTP,” and together with TPP, the “Waha JVs”); (ii) a 15 % equity interest in Cross Country Infrastructure Services, Inc. (“CCI”); (iii) the Company’s 50 % equity interests in each of FM Technology Holdings, LLC, FM USA Holdings, LLC and All Communications Solutions Holdings, LLC, collectively “FM Tech”; (iv) the Company’s interests in certain proportionately consolidated non-controlled contractual joint ventures; and (v) certain other equity investments.
Investment Arrangements. From time to time, the Company may participate in selected investment or strategic arrangements, including equity interests in various business entities and participation in contractual joint ventures, some of which may involve the extension of loans or other types of financing arrangements. The Company has determined that certain of its investment arrangements are variable interest entities (“VIEs”). As of September 30, 2023, except for one individually insignificant VIE, the Company does not have the power to direct the primary activities that most significantly impact the economic performance of its VIEs, nor is it the primary beneficiary. Accordingly, except for the previously mentioned VIE, the Company’s VIEs are not consolidated. The carrying values of the Company’s VIEs totaled approximately $23 million and $24 million as of September 30, 2023 and December 31, 2022, respectively, which amounts are recorded within other long-term assets in the consolidated balance sheets. Management believes that the Company’s maximum exposure to loss for its VIEs, inclusive of additional financing commitments, approximated $35 million and $37 million as of September 30, 2023 and December 31, 2022, respectively.
Equity investments, other than those accounted for as equity method investments or those that are proportionately consolidated, are measured at fair value if their fair values are readily determinable. Equity investments that do not have readily determinable fair values are measured at cost, adjusted for changes from observable market transactions, if any, less impairment, which is referred to as the “adjusted cost basis.” As of September 30, 2023 and December 31, 2022, the aggregate carrying value of the Company’s equity investments, including equity investments measured on an adjusted cost basis, totaled approximately $325 million and $306 million, respectively. As of September 30, 2023 and December 31, 2022, equity investments measured on an adjusted cost basis, including the Company’s $15 18 million and $20 million, respectively. Except for one investment for which the Company recorded an impairment loss totaling approximately $3 no
The Waha JVs. The Waha JVs own and operate certain pipeline infrastructure that transports natural gas to the Mexican border for export. The Company’s investments in the Waha JVs are accounted for as equity method investments. Equity in earnings related to the Company’s proportionate share of income from the Waha JVs, which is included within the Company’s Other segment, totaled approximately $7.7 million and $23.1 million for the three and nine month periods ended September 30, 2023, respectively, and totaled approximately $5.8 million and $20.8 million for the three and nine month periods ended September 30, 2022, respectively. Distributions of earnings from the Waha JVs, which are included within operating cash flows, totaled approximately $4.7 million and $10.5 million for the three and nine month periods ended September 30, 2023, respectively, and totaled approximately $4.4 million and $12.1 million for the three and nine month periods ended September 30, 2022, respectively. Cumulative undistributed earnings from the Waha JVs, which represents cumulative equity in earnings for the Waha JVs less distributions of earnings, totaled $123.3 million as of September 30, 2023. The Company’s net investment in the Waha JVs, which differs from its proportionate share of the net assets of the Waha JVs due primarily to equity method goodwill associated with capitalized investment costs, totaled approximately $280 million and $263 million as of September 30, 2023 and December 31, 2022, respectively.
The Waha JVs are party to separate non-recourse financing facilities, each of which are secured by pledges of the equity interests in the respective entities, as well as a first lien security interest over virtually all of their assets. The Waha JVs are also party to certain interest rate swaps (the “Waha JV swaps”), which are accounted for as qualifying cash flow hedges. The Company reflects its proportionate share of any unrealized fair market value gains or losses from fluctuations in interest rates associated with these swaps within other comprehensive income or loss, as appropriate. For the three and nine month periods ended September 30, 2023, the Company’s proportionate share of unrecognized unrealized activity on the Waha JV swaps totaled gains of approximately $4.9 million and $5.4 million, respectively, or $3.7 million and $4.0 million, net of tax, respectively. For the three and nine month periods ended September 30, 2022, unrecognized unrealized activity related to the Waha JV swaps totaled gains of approximately $13.4 million and $42.0 million, respectively, or $10.1 million and $31.7 million, net of tax, respectively.
Other Investments. The Company has equity interests in certain telecommunications entities that are accounted for as equity method investments. As of both September 30, 2023 and December 31, 2022, the Company had an aggregate investment of approximately $21 18 no no equity contributions related to its investments in these telecommunications entities, and for the nine month period ended September 30, 2022, equity contributions related to these entities totaled approximately $1.1 million. The Company’s proportionate share of results from these telecommunications entities totaled equity in losses, net, of approximately $0.7 million for the three month period ended September 30, 2023, and for the nine month period ended September 30, 2023, totaled equity in earnings, net, of approximately $0.3 million. For the three month period ended September 30, 2022, the Company’s proportionate share of results from these entities totaled equity in earnings, net, of approximately $0.4 million, and for the nine month period ended September 30, 2022, totaled equity in losses, net, of approximately $0.5 million.
Certain of these telecommunications entities provide services to MasTec. Expense recognized in connection with services provided by these entities totaled approximately $0.4 million and $1.3 million for the three and nine month periods ended September 30, 2023, respectively, and totaled approximately $2.6 million and $5.1 million for the three and nine month periods ended September 30, 2022, respectively. As of both
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September 30, 2023 and December 31, 2022, related amounts payable to these entities totaled approximately $0.2 0.2 million and $0.7 million, respectively, and for both the three and nine month periods ended September 30, 2022, such advances totaled approximately $2.0 4.2 million and $3.8 million, respectively.
The Company has 49 3 0.2 million and $0.1 million, respectively, and for the three and nine month periods ended September 30, 2022, equity in losses, net, totaled approximately $0.1 million and $0.4 million, respectively. The above described entities provide construction services to MasTec. Expense recognized in connection with construction services provided by these entities totaled approximately $0.2 million and $0.8 million for the three and nine month periods ended September 30, 2023, respectively, and totaled approximately $0.8 million and $5.8 million for the three and nine month periods ended September 30, 2022, respectively. As of both September 30, 2023 and December 31, 2022, related amounts payable were de minimis. In addition, the Company provides line of credit arrangements to these entities, which, as of September 30, 2023 and December 31, 2022, provide for up to $3.0 million and $4.5 million, respectively, of borrowing availability. There were no borrowings as of September 30, 2023, and as of December 31, 2022, $0.6 million was drawn, which amount was included within other current assets in the consolidated balance sheets.
The Company has a 75 % equity interest in Confluence Networks, LLC (“Confluence”), an undersea fiber-optic communications systems developer and VIE, which is accounted for as an equity method investment. As of September 30, 2023, a total of $2.1 million of the $2.5 million initial commitment had been funded, of which $0.2 0.1 million and $0.3 million, respectively.
The Company also has certain equity investments in American Virtual Cloud Technologies, Inc. (“AVCT”), in which the Company has no active involvement. AVCT filed for bankruptcy in the first quarter of 2023, during which period the Company wrote-off its remaining $0.2 million investment.
Senior Notes
As of both September 30, 2023 and December 31, 2022, the gross carrying amount of the Company’s 4.50 % senior notes due August 15, 2028 (the “4.50 % Senior Notes”) totaled $600.0 539.5 million and $534.0 million for the respective periods. As of September 30, 2023 and December 31, 2022, the gross carrying amount of the Company’s 6.625 % senior notes due August 15, 2029 totaled $283.5 million and $281.2 million, respectively, which notes are composed of $225.1 million aggregate principal amount of 6.625 % IEA senior notes (the “6.625 % IEA Senior Notes”) and $74.9 million aggregate principal amount of 6.625 % MasTec senior notes (the “6.625 % MasTec Senior Notes”), collectively, the “6.625 % Senior Notes”). The estimated fair value of the 6.625 % Senior Notes totaled approximately $268.3 million and $280.5 million as of September 30, 2023 and December 31, 2022, respectively. The estimated fair values of the Company’s 4.50 % Senior Notes and 6.625 % Senior Notes were determined based on an exit price approach using Level 1 inputs.
Note 5 – Accounts Receivable, Net of Allowance, and Contract Assets and Liabilities
The following table provides details of accounts receivable, net of allowance, and contract assets (together, “accounts receivable, net”) as of the dates indicated (in millions):
| September 30, 2023 | December 31, 2022 | ||||||||||
Contract billings | $ | $ | |||||||||
Less allowance | ( | ( | |||||||||
| Accounts receivable, net of allowance | $ | $ | |||||||||
Retainage | |||||||||||
Unbilled receivables | |||||||||||
Contract assets | $ | $ | |||||||||
Contract billings represent the amount of performance obligations that have been billed but not yet collected, whereas contract assets consist of unbilled receivables and retainage. Unbilled receivables represent the estimated value of unbilled work for projects with performance obligations recognized over time. Unbilled receivables, which are included in contract assets, include amounts for work performed for which the Company has an unconditional right to receive payment and that are not subject to the completion of any other specific task, other than the billing itself. Retainage represents a portion of the contract amount that has been billed, but for which the contract allows the customer to retain a portion of the billed amount until final contract settlement, which is generally, from 5 % to 10 % of contract billings. The increase in unbilled receivables as of September 30, 2023 was driven, in large part, by ordinary course project activity associated with higher levels of revenue in the Company’s Oil and Gas segment, as well as timing of billings across the Company’s segments. For the nine month period ended September 30, 2023, provisions for credit losses totaled a recovery of approximately $0.1 million, and for the nine month period ended September 30, 2022, provisions for credit losses totaled approximately $0.7 million. Impairment losses on contract assets were not material in either period.
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Contract liabilities consist primarily of deferred revenue. Under certain contracts, the Company may be entitled to invoice the customer and receive payments in advance of performing the related contract work. In those instances, the Company recognizes a liability for advance billings in excess of revenue recognized, which is referred to as deferred revenue. Contract liabilities also include the amount of any accrued project losses. Total contract liabilities, including accrued project losses, totaled approximately $506.5 million and $406.2 million as of September 30, 2023 and December 31, 2022, respectively, of which deferred revenue comprised approximately $496.0 million and $390.3 million, respectively. The increase in contract liabilities as of September 30, 2023 was driven primarily by ordinary course project activity, including in connection with new project starts within the Company’s Clean Energy and Infrastructure segment. For the nine month period ended September 30, 2023, the Company recognized revenue of approximately $355.3 million related to amounts that were included in deferred revenue as of December 31, 2022, resulting primarily from the advancement of physical progress on the related projects during the period, including amounts from recently acquired businesses.
The Company is party to non-recourse financing arrangements in the ordinary course of business, under which certain receivables are sold to a financial institution in return for a nominal fee. In certain instances, the Company continues to service the transferred receivable, for which the corresponding servicing assets or liabilities are not material. For the nine month period ended September 30, 2023, the Company sold approximately $50 million of receivables under this program, and as of September 30, 2023, the Company had approximately $47 million of outstanding sold receivables, which are excluded from Accounts Receivable, net of Allowance, in the consolidated balance sheets. The servicing of such receivables is not considered to constitute significant continuing involvement and the receivables are correspondingly accounted for as sales under ASC Topic 860, “Transfers and Servicing.” Cash collections from such financing arrangements are reflected within operating activities in the consolidated statements of cash flows. The Company is also party to an arrangement with a customer, which allows for early collection of receivables for a nominal fee, at the Company’s option. Discount charges related to these arrangements, which are included within interest expense, net, totaled approximately $3.8 million and $2.4 million for the three month periods ended September 30, 2023 and 2022, respectively, and totaled $11.8 million and $4.9 million, respectively, for the nine month periods ended September 30, 2023 and 2022.
Note 6 – Pro