Business Context and Reporting Period
Company: MasTec, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: MasTec is a leading specialty contractor operating primarily in the United States, providing infrastructure services for communications, utilities, and government sectors. The company operates through approximately 200 locations with 9,260 employees. Key customers include DIRECTV, Verizon, and BellSouth (now AT&T).
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Revenue | $945.8 million | $848.0 million |
| Cost of Revenue | $813.4 million (86.0% of revenue) | $731.5 million (86.3% of revenue) |
| Income from Continuing Operations | $38.9 million | $18.6 million |
| Loss from Discontinued Operations | ($89.3 million) | ($33.2 million) |
| Net Loss | ($50.3 million) | ($14.6 million) |
| Diluted EPS (Total) | ($0.77) | ($0.29) |
| Working Capital | $164.0 million | $135.1 million |
| Total Debt | $130.2 million | $200.4 million |
| Cash and Cash Equivalents | $89.0 million | $2.0 million |
| Backlog (18-month) | $1.1 billion | $955.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 11.5% to $945.8 million, driven primarily by an $83.5 million increase from DIRECTV and higher utility/government activity. This was partially offset by a $9.6 million decrease from Verizon due to work order timing.
- Discontinued Operations Impact: The company recorded a significant loss of $89.3 million from discontinued operations, primarily due to a $44.5 million non-cash impairment charge related to the sale of State Department of Transportation (DOT) projects and assets. This contrasts with a $33.2 million loss in 2005.
- Continuing Operations Profitability: Income from continuing operations more than doubled to $38.9 million, reflecting improved operating margins (cost of revenue decreased as a percentage of revenue) and reduced interest expense.
- Stock-Based Compensation: General and administrative expenses increased by $10.3 million, largely due to the adoption of SFAS 123R, which resulted in $7.4 million of non-cash stock compensation expense in 2006 compared to $0.6 million in 2005.
- Liquidity Improvement: Cash and cash equivalents surged from $2.0 million to $89.0 million, fueled by a $156.4 million public equity offering in early 2006 and improved operating cash flows.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management anticipates growth opportunities in 2007 in five key areas: Fiber to the Home (FTTH), satellite installations, federal telecommunications upgrades, local electrical grid maintenance, and RBOC maintenance agreements. The company expects to realize approximately 69.5% of its 2006 backlog in 2007.
Recent Developments (Post-Period)
- DOT Asset Sale: Sold State DOT projects for $1.0 million cash plus a potential $12.0 million earn-out (effective Feb 1, 2007).
- Debt Refinancing: Issued $150 million in 7.625% senior notes (due 2017) in January 2007 and used proceeds to redeem all outstanding 7.75% senior subordinated notes.
- Acquisition: Acquired the remaining 51% equity interest in a previously 49%-owned entity in February 2007, consolidating its operations.
Risks and Contingencies
- Customer Concentration: The top 10 customers accounted for 75.0% of 2006 revenue. DIRECTV alone represented 37.3% of revenue.
- Contract Cancellations: Most contracts are cancelable on short notice and do not guarantee minimum work levels.
- Legal Proceedings: Significant litigation includes a dispute with Coos County, Oregon (uncollected receivables of $6.3 million plus claims), a Citgo pipeline judgment appeal, and a Spanish court action regarding a former subsidiary (Sintel) with alleged damages of $103.2 million.
- Insurance and Bonding: The company is self-insured up to high deductibles ($2M-$3M per claim). Increases in insurance premiums or collateral requirements could reduce liquidity.
Investor Verification Checklist
- Discontinued Operations: Verify the final settlement terms and earn-out potential of the State DOT asset sale to assess the full impact of the $44.5 million impairment charge.
- Customer Concentration: Monitor the stability of the DIRECTV relationship, which drives over one-third of total revenue.
- Legal Exposure: Track the status of the Coos County, Oregon litigation and the Citgo pipeline appeal, as outcomes could materially affect cash flows.
- Debt Covenants: Confirm compliance with the fixed charge coverage ratio and net availability requirements under the $150 million revolving credit facility.
- Stock Compensation: Assess the ongoing impact of SFAS 123R on future operating margins as stock option grants continue.