MTZ

MASTEC, INC. - 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, and the six months ended on that date. MasTec, Inc. is a leading end-to-end infrastructure service provider for telecommunications, broadband, and energy sectors in North America and Brazil. The company designs, builds, installs, and maintains network infrastructure. As of August 8, 2003, there were approximately 48.1 million shares of common stock outstanding.

Key Financial Metrics

Note: Net income for the six months ended June 30, 2002, was a loss of $(22,638) due to a one-time cumulative effect of an accounting change related to goodwill impairment.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 1.8% ($3.9M) for the quarter and 6.5% ($27.1M) for the six months compared to 2002. Management attributes this to the elimination of unprofitable service offerings, severe weather conditions, and reduced capital expenditures by clients.
• Cost Reductions: Costs of revenue decreased as a percentage of revenue (83.8% vs. 85.9% in Q2 2002) due to restructuring efforts initiated in late 2002, which included workforce reductions and facility consolidations.
• Operating Cash Flow: Net cash used in operating activities was $6.5 million for the six months ended June 30, 2003, compared to $41.2 million provided in the prior year period. This shift was driven by seasonal increases in receivables and working capital changes, partially offset by a $27.8 million income tax refund received in February 2003.
• Other Income: Other income turned negative ($(0.6)M) for the quarter compared to $5.0M in the prior year, primarily due to the absence of gains from the disposal of non-core assets recorded in 2002.

Outlook, Risks, and Contingencies

• Liquidity and Debt: The company maintains a $125.0 million revolving credit facility with $30.0 million in net availability as of June 30, 2003. There were no outstanding draws on this facility. The company also holds $200.0 million in 7.75% senior subordinated notes due in 2008. Management stated compliance with all financial covenants.
• Restructuring: Remaining obligations for restructuring (severance and lease cancellations) totaled $1.1 million as of June 30, 2003, with payments expected through 2004.
• Legal Proceedings:
  • Miami-Dade County: Settled litigation in February 2003 with a payment of $2.25 million.
  • Spanish Litigation: A labor union in Spain has initiated an investigative action alleging unlawful transactions involving former directors, potentially seeking damages of approximately $89.4 million. No bond order has been enforced, and MasTec has not been served.
  • Shareholder Derivative Suit: A lawsuit filed by a shareholder alleging mismanagement and breach of fiduciary duty has been administratively dismissed without prejudice to allow a special committee to investigate.
• Risks: Significant risks include dependence on clients in the communications industry (one customer accounted for >12% of Q2 revenue), potential client bankruptcies, foreign currency fluctuations in Brazil, and the collectibility of receivables from clients in bankruptcy reorganization ($17.6 million net of reserves).

Investor Verification Checklist

• Client Concentration: Verify the financial stability of the single customer representing over 12% of Q2 revenue.
• Receivables Quality: Assess the collectibility of the $17.6 million in receivables from clients undergoing bankruptcy reorganization.
• Legal Exposure: Monitor the status of the Spanish litigation and the shareholder derivative suit for potential material charges.
• Cash Flow Sustainability: Review the ability to generate positive operating cash flow given the $6.5 million burn in the first half of 2003 and reliance on tax refunds.
• Covenant Compliance: Confirm continued compliance with the fixed charge coverage ratio and tangible net worth covenants under the credit facility.