Business Context and Reporting Period
Company: MasTec, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: MasTec is a leading specialty contractor operating in the U.S. and Canada, providing building, installation, maintenance, and upgrade services for communications, utility, and transportation infrastructure. Primary customers include satellite/cable television providers, utilities, and government entities.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2005 | 9 Months Ended Sep 30, 2005 |
|---|---|---|
| Revenue | $243,548 | $697,427 |
| Costs of Revenue (excl. depreciation) | $207,373 | $621,560 |
| Gross Margin % | 14.9% | 10.9% |
| Net Income (Loss) | $7,749 | $(3,149) |
| Net Income (Loss) from Continuing Ops | $7,894 | $(1,558) |
| Diluted EPS (Total) | $0.15 | $(0.06) |
| Cash and Cash Equivalents | $2,894 | $2,894 |
| Working Capital | $132,000 | $132,000 |
| Total Debt | $196,238 | $196,238 |
| Net Cash Used in Operating Activities | N/A | $(17,299) |
Material Changes vs. Prior Period
- Revenue: For the three months ended September 30, 2005, revenue decreased 1.2% to $243.5 million compared to $246.6 million in 2004. This was driven by the completion of Comcast upgrade projects and a reduction in transportation projects, partially offset by increased revenue from DirecTV and Verizon. For the nine months, revenue increased 4.6% to $697.4 million.
- Profitability: The company reported a net income of $7.7 million for the quarter, compared to $4.2 million in the prior year quarter. However, for the nine-month period, the company reported a net loss of $3.1 million, a significant improvement from the $42.6 million loss in the prior year period. The prior year loss included significant write-offs related to discontinued operations in Brazil.
- Discontinued Operations: The company ceased operations in Brazil in 2004 and sold its network services operations in May 2005. The nine-month 2004 loss included a $12.3 million goodwill write-off and a $6.8 million net investment write-off related to Brazil. The 2005 nine-month loss from discontinued operations was $1.6 million, primarily due to the winding down of network services.
- Liquidity: Cash and cash equivalents decreased from $19.5 million at December 31, 2004, to $2.9 million at September 30, 2005. This decrease was primarily due to $13.5 million in cash collateral payments for insurance programs and a $7.6 million interest payment on senior subordinated notes.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management projects compliance with credit facility terms for 2005 and 2006. The company expects to continue selling older equipment to generate proceeds and anticipates increased lease payments as it shifts from purchasing to leasing vehicles.
- Capital Resources: The company has a $150 million revolving credit facility with $46.9 million in net availability as of September 30, 2005. No borrowings were outstanding under this facility at period end. The company expects to spend $10.0 to $15.0 million annually on capital expenditures.
- Legal Proceedings:
- Securities Class Action: Plaintiffs allege financial statement misstatements in 2003. The company's motion to dismiss was denied on September 30, 2005. Potential loss is indeterminable.
- Coos County Pipeline: A dispute over $6.3 million in unpaid invoices and additional claims. Mitigation costs totaled $1.4 million. A potential loss of $193,000 has been accrued.
- Citgo Pipeline: A $1.7 million judgment is being appealed. The company posted a $2.3 million bond. Estimated uninsured loss ranges from $100,000 to $2.1 million.
- Internal Controls: Management concluded that disclosure controls and procedures were ineffective as of September 30, 2005, due to a material weakness in inventory controls (pricing and tracking). Remediation steps include physical counts, enhanced Oracle system functionality, and hiring additional accounting staff.
- Accounting Changes: The company is evaluating the impact of SFAS 123R (Share-Based Payment), which is expected to have a material negative impact on profitability upon adoption in 2006. The company accelerated the vesting of certain stock options to mitigate future expense.
Investor Verification Checklist
- Inventory Controls: Verify the effectiveness of remediation steps for the material weakness in inventory pricing and tracking, given the history of reporting issues.
- Liquidity Position: Monitor cash levels and the ability to meet the $13.5 million+ insurance collateral requirements and debt service obligations without drawing on the credit facility.
- Legal Exposure: Track the status of the securities class action lawsuit and the Coos County/Citgo pipeline disputes for potential future charges.
- Customer Concentration: Note that 28.4% of Q3 2005 revenue came from a single customer, and 37.9% of YTD 2005 revenue came from two customers.
- Discontinued Operations: Confirm the finalization of the Brazil subsidiary liquidation and the collection of the promissory note from the network services sale.