Business Context and Reporting Period
Company: MasTec, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: MasTec is a leading specialty contractor operating primarily in the United States, providing building, installation, maintenance, and upgrade services for utility and communications infrastructure. Core sectors include electrical transmission, renewable energy (wind/solar), natural gas pipelines, and wireless/wireline communications. As of December 31, 2009, the company operated through approximately 200 locations with 8,600 employees.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $1,623.5 million | $1,378.7 million |
| Net Income (Attributable to MasTec) | $70.7 million | $65.8 million |
| Diluted EPS | $0.90 | $0.96 |
| Operating Cash Flow | $124.1 million | $58.2 million |
| Total Debt | $438.4 million | $304.3 million |
| Working Capital | $203.0 million | $105.3 million |
| Backlog (18-month) | $2.1 billion | $1.7 billion |
Margins: Gross margin (Revenue less Costs of Revenue excluding depreciation) improved to 15.2% in 2009 from 14.5% in 2008. Net income margin was 4.4% in 2009 compared to 4.8% in 2008.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 17.8% year-over-year, driven primarily by acquisitions (Precision Pipeline, Wanzek, Pumpco, Nsoro) which contributed approximately $400 million. Organic growth was negatively impacted by the economic downturn and delayed customer capital expenditures.
- Acquisitions: In November 2009, MasTec acquired Precision Pipeline, LLC for approximately $132 million in cash, assumption of $34 million debt, and a contingent earn-out. This expanded capabilities in large-diameter pipeline construction.
- Debt Structure: Total debt increased significantly due to the issuance of $215 million in senior convertible notes (4% and 4.25%) in 2009 to fund acquisitions and refinance higher-cost debt. The company repaid the $55 million 8% convertible notes issued for the Wanzek acquisition.
- Investment Impairment: The company recorded a $6.1 million other-than-temporary impairment charge on structured finance auction rate securities due to credit quality deterioration. Total unrealized losses on these securities were $9.1 million.
- Liquidity: Working capital nearly doubled to $203.0 million, supported by strong cash collections and higher earnings, despite increased debt levels.
Guidance, Outlook, and Risks
Management Outlook: Management anticipates growth in 2010 driven by five key areas: Alternative/Renewable Energy (wind/solar), Electrical Grid Upgrades, Wireless/Fiber Communications, Natural Gas Pipelines, and "Install to the Home" services. The company expects the American Recovery and Reinvestment Act (Stimulus Act) to eventually benefit wind, transmission, and broadband sectors, though the timing of impact remains uncertain.
Key Risks and Contingencies:
- Customer Concentration: The top 10 customers accounted for 72% of revenue in 2009. DIRECTV (30%) and AT&T (16%) were the largest individual customers. Contracts are often cancelable on short notice.
- Economic Sensitivity: Demand is cyclical and tied to capital expenditures in the utilities and communications sectors, which have been constrained by the credit crisis and economic downturn.
- Legal Proceedings: Significant legacy litigation includes a Spanish federal court case regarding the 2000 bankruptcy of former subsidiary Sintel (alleged damages ~$430 million), though MasTec believes claims are frivolous. The company also faces potential liabilities from the bankruptcy of the buyer of its former state Department of Transportation assets.
- Debt Covenants: The company must maintain a minimum fixed charge coverage ratio of 1.2 to 1.0 under its credit facility. Failure to comply could restrict operations or trigger acceleration of debt.
Investor Verification Checklist
- Customer Concentration: Verify the stability of contracts with DIRECTV and AT&T, which together represent 46% of revenue.
- Acquisition Integration: Assess the financial performance and integration progress of the November 2009 Precision Pipeline acquisition.
- Auction Rate Securities: Monitor the liquidity and fair value of the $24.5 million portfolio of auction rate securities, which remain illiquid and carry unrealized losses.
- Debt Service: Confirm compliance with the 1.2:1 fixed charge coverage ratio covenant given the increased debt load from 2009 convertible note issuances.
- Stimulus Act Impact: Evaluate the actual realization of revenue from government stimulus programs in renewable energy and broadband sectors for 2010.