Business Context and Reporting Period
Company: MasTec, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: MasTec is a leading end-to-end infrastructure service provider for telecommunications, broadband, energy, and intelligent traffic systems in North America and Brazil. The company operates as a single reportable segment, providing engineering, construction, and maintenance services.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2003 |
9 Months Ended Sept 30, 2003 |
9 Months Ended Sept 30, 2002 |
|---|---|---|---|
| Revenue | $248,373 | $638,050 | $648,581 |
| Net Income (Loss) | $6,250 | $7,427 | $(20,275) |
| Diluted EPS | $0.13 | $0.15 | $(0.42) |
| Gross Margin % | 14.3% | 15.2% | 16.1% |
| Operating Cash Flow | N/A | $(4,484) | $55,687 |
| Cash & Equivalents | $15,183 | $15,183 | $11,516 |
| Total Debt | $200,517 | $200,517 | $198,642 |
| Current Ratio | 2.5x | 2.5x | 2.1x |
Note: 2002 Net Loss included a one-time cumulative effect of accounting change (SFAS 142) of $25.7 million related to goodwill impairment.
Material Changes vs. Prior Period
- Revenue: For the three months ended Sept 30, 2003, revenue increased 7.2% to $248.4 million, driven by growth in broadband upgrade construction and residential installations. For the nine-month period, revenue decreased 1.6% to $638.1 million due to the elimination of unprofitable service offerings, severe weather impacts, and reduced capital expenditures by clients.
- Profitability: Net income for the nine months ended Sept 30, 2003, was $7.4 million, a significant improvement from the $20.3 million loss in the prior year. The prior year loss was heavily influenced by the $25.7 million non-cash goodwill impairment charge. Excluding this charge, the company returned to profitability.
- Expenses: General and administrative expenses decreased significantly (23.6% for the quarter, 19.9% for the nine months) due to a restructuring plan implemented in late 2002 involving employee terminations and facility consolidations.
- Cash Flow: Operating cash flow turned negative ($4.5 million used) for the nine months ended Sept 30, 2003, compared to $55.7 million provided in 2002. This was primarily due to seasonal increases in receivables and working capital changes, partially offset by a $27.9 million income tax refund received in 2003.
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus on streamlining operations and improving margins through the restructuring plan. The company anticipates that a large power contract negotiated in Brazil will result in significant margin improvements. Capital expenditures by clients are expected to remain at low levels similar to the prior two years.
Liquidity and Debt:
- The company maintains a $125.0 million revolving credit facility with $49.6 million in net availability as of Sept 30, 2003. There were no outstanding draws on this facility.
- Long-term debt consists primarily of $200.0 million in 7.75% senior subordinated notes due in February 2008.
- The company is in compliance with all financial covenants under its credit facility.
Risks and Contingencies:
- Client Concentration: Two customers accounted for more than 10% of revenues during the three and nine months ended Sept 30, 2003.
- Bankruptcy Exposure: Receivables from clients undergoing bankruptcy reorganization totaled $17.2 million (net of $10.6 million reserves) as of Sept 30, 2003.
- Legal Proceedings: The company is involved in a shareholder derivative lawsuit alleging mismanagement and breach of fiduciary duty, which has been administratively dismissed pending investigation. Additionally, there is an ongoing investigative action in Spain regarding a former subsidiary (Sintel) alleging damages of approximately $90.6 million; no bond order has been enforced to date.
- Foreign Operations: Operations in Brazil are subject to political, currency, and economic instability risks.
Investor Verification Checklist
- Goodwill Impairment: Verify the impact of the $25.7 million SFAS 142 charge in 2002 to understand the true operating trend versus reported net income.
- Receivables Quality: Review the $17.2 million in receivables from clients in bankruptcy and the adequacy of the $22.9 million total allowance for doubtful accounts.
- Cash Flow Sustainability: Analyze the shift from positive to negative operating cash flow and the reliance on tax refunds ($27.9 million) to fund operations in the first nine months of 2003.
- Legal Exposure: Monitor the status of the Spanish Sintel litigation and the shareholder derivative suit for potential material liabilities.
- Client Concentration: Assess the risk associated with the two customers representing over 10% of revenue each.