MASTEC INC - Form 10-Q Summary (Period Ended September 30, 2010)
Business Context and Reporting Period
MASTEC, INC. is a leading national infrastructure construction company operating primarily in the United States. The company provides engineering, building, installation, maintenance, and upgrade services for energy, communication, and utility infrastructure. This report covers the quarterly period ended September 30, 2010.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Revenue | $631.9 million | $1,577.3 million |
| Net Income (Attributable to MasTec) | $30.0 million | $52.0 million |
| Diluted EPS | $0.35 | $0.62 |
| EBITDA | $72.8 million | $153.0 million |
| Operating Cash Flow (9 Months) | $100.7 million | |
| Total Debt | $417.8 million (Current: $20.5M; Long-term: $397.3M) | |
| Cash and Cash Equivalents | $119.8 million (includes $18.0M restricted) | |
| Working Capital | $219.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 59.1% for the quarter and 39.9% for the nine-month period compared to 2009. Growth was driven by acquisitions (approx. $80.5M in Q3, $238.9M in YTD) and organic growth (approx. $154.2M in Q3, $211.2M in YTD) in wireless, pipeline, and renewables sectors.
- Net Income Decline: Despite revenue growth, net income for the nine months decreased slightly ($0.5M) compared to 2009. This was primarily due to a significant increase in the income tax provision (effective tax rate rose from 1.9% in 2009 to 40.9% in 2010 following the release of valuation allowances in the prior year) and higher depreciation/amortization expenses.
- EPS Dilution: Diluted EPS decreased by 8.8% for the nine-month period due to lower net income and an increase in average diluted shares outstanding resulting from higher convertible debt balances.
- Cost of Revenue: Costs of revenue as a percentage of revenue improved slightly (decreased 80 basis points in Q3 and 10 basis points YTD) due to increased leverage and resource utilization.
Outlook, Risks, and Contingencies
- Customer Concentration: The top ten customers accounted for 74% of revenue in Q3 2010. DIRECTV (25%) and AT&T (22%) were the largest single customers. The company notes that loss of these customers or reduction in demand could materially impact financial performance.
- DirectStar Sale Option: In July 2010, MasTec entered an agreement granting Red Ventures an option to acquire DirectStar TV LLC (which supports DIRECTV installation services) between Jan 1, 2011, and Sep 30, 2011. Execution of this option would reduce MasTec's revenues from DIRECTV.
- Auction Rate Securities: The company holds $24.4 million in auction rate securities (par value $33.7M) classified as long-term assets due to liquidity issues. Cumulative other-than-temporary impairment charges of $6.9 million have been recognized, with $0.8 million recorded in 2010. Remaining unrealized losses of $2.3 million are in other comprehensive income.
- Legal Proceedings: MasTec is involved in legacy litigation, including a claim by a Spanish labor union against former officers and the company regarding a 2000 bankruptcy of a former subsidiary (Sintel). The company believes claims are frivolous and is vigorously defending them.
- Multi-Employer Pension Plans: Certain union plans are in "critical" status, potentially requiring additional contributions (surcharges) that cannot be currently estimated.
- Liquidity: The company maintains a $210 million credit facility with $135.6 million available as of September 30, 2010. Management believes cash flows and credit facility availability are sufficient to meet obligations for the next 12 months.
Investor Verification Checklist
- Verify the impact of the potential sale of DirectStar TV LLC on future revenue streams, specifically regarding the DIRECTV relationship.
- Monitor the liquidity status and potential for further impairment charges on the $24.4 million portfolio of auction rate securities.
- Assess the risk associated with high customer concentration (74% from top 10 customers) and the stability of contracts with DIRECTV and AT&T.
- Review the status of the Spanish litigation (Sintel) and potential exposure to the company or its officers.
- Track the company's ability to maintain compliance with credit facility covenants, specifically the fixed charge coverage ratio, amidst potential economic downturns.