Business Context and Reporting Period
Company: MasTec, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: MasTec is a leading specialty contractor providing infrastructure services for communications, utilities, and government sectors. Core activities include building, installing, maintaining, and upgrading networks for voice, video, data, and energy delivery. The company operates through approximately 200 locations with 8,240 employees as of year-end 2007.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Revenue | $1,037.8 million | $940.4 million |
| Costs of Revenue | $891.6 million (85.9% of revenue) | $808.1 million (85.9% of revenue) |
| Gross Margin | 14.1% | 14.1% |
| Income from Continuing Operations | $6.3 million | $40.1 million |
| Loss from Discontinued Operations | ($13.6 million) | ($90.4 million) |
| Net Loss | ($7.3 million) | ($50.3 million) |
| Net Cash Provided by Operating Activities | $68.7 million | $46.4 million |
| Working Capital | $159.5 million | $164.0 million |
| Total Debt | $163.0 million | $130.2 million |
| Cash and Cash Equivalents | $74.3 million | $35.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 10.4% to $1.038 billion, driven primarily by a $104.5 million increase from DIRECTV (due to subscriber activations and work order volume) and a $16.8 million increase from Verizon. This was partially offset by a $25.6 million decrease from AT&T.
- Operating Expenses: General and administrative expenses rose significantly to $114.7 million (11.1% of revenue) from $73.4 million in 2006. This $41.3 million increase was primarily due to $38.6 million in charges related to the settlement of legacy legal cases and disputes.
- Discontinued Operations: Loss from discontinued operations improved significantly to $13.6 million from $90.4 million in 2006. This improvement reflects the sale of state Department of Transportation projects in February 2007 and the sale of Canadian operations in April 2007.
- Debt Structure: The company issued $150.0 million of 7.625% senior notes due 2017 and used proceeds to redeem $121.0 million of senior subordinated notes due 2008.
Guidance, Outlook, and Risks
Outlook and Strategy
Management identifies five key growth areas for 2008: Fiber Deployment, Satellite Install-to-the-Home, Federal Market for Telecommunications Upgrades, Local Maintenance Work for Electrical Grid Upgrades, and Alternative Energy Projects (specifically wind farm infrastructure). The company expects to realize approximately 70.3% of its $1.3 billion 18-month backlog in 2008.
Material Risks and Contingencies
- Litigation and Settlements: The company recorded $39.1 million in charges in 2007 for actual or anticipated settlements of legacy legal disputes (2001-2005). Significant ongoing matters include a tentative settlement with Coos County, Oregon (pipeline dispute), a pending verdict from the U.S. Army Corps of Engineers, and a potential $12.6 million settlement for an FLSA overtime lawsuit.
- Auction Rate Securities: Approximately $16.2 million of auction rate securities experienced failed auctions, resulting in a $4.8 million unrealized loss. An additional $33.0 million of these securities are held, with liquidity concerns regarding their ability to be sold at par value.
- Customer Concentration: Revenue is highly concentrated; the top three customers (DIRECTV, Verizon, AT&T) accounted for 59.7% of total revenue in 2007. The top ten customers accounted for 76.7% of revenue.
- Liquidity and Credit Facility: The company has a $150 million revolving credit facility with $44.0 million in net availability as of year-end 2007. Availability is constrained by $86.4 million in outstanding letters of credit, primarily for insurance collateral.
Investor Verification Checklist
- Legal Settlement Finality: Verify the finalization of the Coos County, Oregon settlement and the outcome of the U.S. Army Corps of Engineers trial, as these impact the $39.1 million charge and future liabilities.
- Auction Rate Securities Liquidity: Monitor the status of the $33.0 million in auction rate securities to assess potential further impairment or liquidity constraints.
- Customer Concentration Risk: Assess the stability of contracts with DIRECTV, Verizon, and AT&T, which represent nearly 60% of revenue.
- Credit Facility Covenants: Confirm compliance with the minimum fixed charge coverage ratio and net availability requirements of the revolving credit facility, particularly given the high level of letters of credit.
- Backlog Realization: Track the realization rate of the $1.3 billion backlog, noting that 85.3% is derived from master service agreements that are cancelable on short notice.