Business Context and Reporting Period
Company: MasTec, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: MasTec is a leading national infrastructure construction company operating primarily in the United States. It provides engineering, building, installation, maintenance, and upgrade services for energy, communication, and utility infrastructure. Key sectors include electrical transmission, renewable energy (wind/solar), natural gas pipelines, and wireless communications. As of December 31, 2010, the company operated through over 260 locations with approximately 9,400 employees.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $2,308.0 million | $1,623.5 million | +42.2% |
| Net Income (Attributable to MasTec) | $90.5 million | $70.7 million | +28.0% |
| Diluted EPS | $1.05 | $0.90 | +16.7% |
| Gross Margin | 16.0% | 15.2% | +80 bps |
| EBITDA | $241.1 million | $153.4 million | +57.2% |
| Total Debt | $412.6 million | $438.4 million | -5.9% |
| Working Capital | $235.1 million | $202.5 million | +16.1% |
| Cash & Equivalents | $177.6 million | $88.5 million | +100.7% |
| Backlog (18-month) | $2.4 billion | $2.1 billion | +14.3% |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased by $685 million (42.2%). This was driven by 24% organic growth (primarily from wireless, renewables, pipeline, and install-to-the-home sectors) and 18% growth from acquisitions.
- Profitability: Net income rose significantly, aided by improved gross margins (16.0% vs. 15.2%) and better leverage of fixed costs. However, the effective tax rate increased sharply to 41.3% in 2010 from 10.6% in 2009, as the prior year benefited from the release of valuation allowances on deferred tax assets.
- Customer Concentration: The top ten customers accounted for 72% of revenue in both 2010 and 2009. DIRECTV remained the largest customer at 24% of revenue (down from 30% in 2009), while AT&T increased to 20% (up from 16%).
- Acquisitions: Significant activity included the acquisition of Precision Pipeline (2009) and a strategic investment in EC Source Services (2010). The company also amended the Nsoro purchase agreement in late 2010, paying $40 million cash and issuing stock to reduce future earn-out obligations.
Guidance, Outlook, and Risks
2011 Outlook: Management anticipates significant market opportunities in five key areas: Natural Gas Pipelines, Alternative/Renewable Energy Projects, Wireless/Fiber Network Upgrades, Electrical Grid Upgrades (Smart Grid), and Install-to-the-Home services. Capital expenditures for 2011 are estimated at approximately $40 million.
Key Risks and Contingencies:
- Customer Concentration: Heavy reliance on a few major customers (DIRECTV, AT&T) creates risk if these customers reduce spending or terminate contracts.
- Contract Cancellations: Most contracts are cancelable on short or no notice and do not obligate customers to undertake specific projects.
- Debt Covenants: The company has $412.6 million in debt. While currently in compliance, covenants restrict additional indebtedness, dividends, and acquisitions. A debt exchange offer in January 2011 modified convertible notes to include cash settlement features, potentially reducing future dilution but increasing interest expense.
- Auction Rate Securities: The company holds $19.0 million in auction rate securities (par value $22.5 million) with cumulative credit losses of $6.9 million recognized. Liquidity for these assets remains uncertain.
- Legal Proceedings: Ongoing legacy litigation includes a Spanish federal court case involving a former subsidiary (Sintel) with alleged damages of ~$398 million, which the company vigorously contests. Additionally, the buyer of the company's former DOT assets filed for bankruptcy, increasing the likelihood MasTec must assume certain bonded obligations.
Investor Verification Checklist
- Tax Rate Normalization: Verify the sustainability of the 41.3% effective tax rate in 2010 compared to the anomalously low 10.6% rate in 2009.
- Convertible Note Settlement: Confirm the impact of the January 2011 debt exchange on future interest expense (effective rate ~6.7%) and diluted share count.
- DirectStar Option: Monitor the Red Ventures purchase option for the DirectStar business (exercisable March 2012–Nov 2012), which could reduce DIRECTV-related revenue by ~5% of total consolidated revenue.
- Backlog Realization: Assess the risk that the $2.4 billion backlog may not translate to revenue due to cancellations or financing contingencies.
- Union Pension Liabilities: Review potential exposure to underfunded multi-employer pension plans, specifically those in "critical" status requiring surcharges.