MTZ

Business Context and Reporting Period

Company: MasTec, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
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. Key sectors include electrical transmission, wind farms, natural gas pipelines, and wireless/wireline communications. As of December 31, 2008, the company operated through approximately 200 locations with 8,400 employees.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 33% to $1.38 billion, driven by 19% growth from recent acquisitions (Wanzek, Nsoro, Pumpco, Three Phase) and 14% organic growth in legacy utilities and communications projects.
• Profitability: The company returned to profitability with $65.8 million in net income, compared to a net loss of $7.3 million in 2007. This improvement was aided by the absence of a $38.6 million legacy legal charge recorded in 2007 and improved operating margins.
• Debt Expansion: Total debt increased significantly to $304.3 million from $163.0 million, primarily due to financing acquisitions (including a $55 million convertible note for Wanzek and a $22.5 million equipment loan for Pumpco) and increased draws on the credit facility.
• Acquisitions: Major 2008 acquisitions included Wanzek Construction (wind farm infrastructure), Nsoro (wireless networks), and Pumpco (natural gas pipelines), which expanded service offerings and geographic reach.

Guidance, Outlook, and Risks

Outlook and Management Commentary

Management anticipates significant market opportunities in 2009, particularly in alternative/renewable energy (wind farms), electrical grid upgrades, wireless/fiber network upgrades, and natural gas pipelines. The company expects the American Recovery and Reinvestment Act (Stimulus Act) to provide positive tailwinds through tax incentives and funding for broadband and transmission projects. The 18-month backlog of $1.7 billion is expected to yield approximately 74% of its value in 2009.

Risks and Contingencies

• Auction Rate Securities: The company holds $33.7 million in par value of auction rate securities. Due to market illiquidity, these are valued at $20.6 million, resulting in an unrealized loss of $13.1 million. Management is uncertain when liquidity will improve or if additional impairments will occur.
• Customer Concentration: Revenue is heavily concentrated; the top 10 customers accounted for 71.2% of revenue in 2008. DIRECTV alone accounted for 34.0% of revenue.
• Legal Proceedings: Significant legacy litigation remains, including a dispute with Credit Suisse regarding auction rate securities and ongoing claims related to the Coos County pipeline project. Accrued liabilities for litigation totaled $13.2 million.
• Seasonality: Operations are seasonal, with reduced revenue typically occurring in the first and fourth quarters due to weather and customer budget cycles.

Investor Verification Checklist

• Auction Rate Securities Liquidity: Verify the current status of the $33.7 million auction rate securities portfolio and any potential for further impairment charges.
• Customer Concentration Risk: Assess the stability of contracts with top customers, specifically DIRECTV (34% of revenue) and AT&T (12% of revenue).
• Debt Covenants: Review compliance with the $210 million credit facility covenants, specifically the minimum fixed charge coverage ratio of 1.20 to 1.00.
• Acquisition Integration: Monitor the integration and performance of recent acquisitions (Wanzek, Nsoro, Pumpco) to ensure projected synergies and revenue targets are met.
• Legal Reserves: Track the resolution of outstanding litigation, particularly the Credit Suisse arbitration and Coos County settlement obligations.