MASTEC INC - 10-Q Summary (Period Ended September 30, 2006)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine months ended on that date. MasTec, Inc. is a leading specialty contractor operating primarily in the United States and Canada, focusing on the building, installation, maintenance, and upgrade of communications and utility infrastructure. The company serves customers in the communications, utilities, and government sectors.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2006 | 9 Months Ended Sep 30, 2006 |
|---|---|---|
| Revenue | $253,870 | $704,722 |
| Net Income (Loss) | $(7,622) | $(35,503) |
| Income from Continuing Operations | $14,248 | $29,931 |
| Loss from Discontinued Operations | $(21,870) | $(65,434) |
| Operating Cash Flow | N/A | $24,089 |
| Cash and Cash Equivalents | $69,962 | $69,962 |
| Total Debt | $129,018 | $129,018 |
| Working Capital | $174,678 | $174,678 |
Note: Working Capital calculated as Total Current Assets ($357,816) minus Total Current Liabilities ($183,138).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 14.9% for the quarter and 12.8% for the nine months compared to the prior year periods. This growth was driven primarily by increased installations for DIRECTV (partially due to the DSSI acquisition) and higher volumes from BellSouth and Verizon.
- Profitability: While income from continuing operations improved significantly (up 32.5% for the quarter and 187% for the nine months), the company reported a net loss due to substantial charges from discontinued operations.
- Discontinued Operations: The loss from discontinued operations widened significantly to $21.9 million for the quarter and $65.4 million for the nine months. This was primarily due to non-cash impairment charges totaling approximately $34.5 million related to the sale of state Department of Transportation (DOT) projects and assets.
- Stock-Based Compensation: General and administrative expenses increased due to the adoption of SFAS 123R (Share-Based Payment) effective January 1, 2006, resulting in approximately $2.2 million in non-cash expense for the quarter and $5.4 million for the nine months.
- Liquidity: Cash and cash equivalents surged from $2.0 million at year-end 2005 to $70.0 million, driven by a $156.5 million public equity offering in January 2006. Proceeds were used to redeem $75.0 million of senior subordinated notes and fund the DSSI acquisition.
Guidance, Outlook, Risks, and Unusual Items
- Discontinued Operations Sale: On November 9, 2006 (subsequent to the period end), the company entered into an agreement to sell substantially all state DOT projects and assets for $6 million cash and a $5 million note. This transaction triggered a $13.7 million impairment charge recorded in the quarter.
- Acquisition: The company completed the acquisition of Digital Satellite Services, Inc. (DSSI) in January 2006 for a total purchase price of approximately $26.2 million, expanding its footprint in the mid-Atlantic and Southeast.
- Legal Proceedings: The company settled purported securities class actions in April 2006 without payment to plaintiffs, though its insurance carrier may seek up to $2.0 million in reimbursement. The company also faces ongoing litigation regarding a Citgo pipeline break and Clean Water Act violations in Oregon.
- Customer Concentration: Revenue is heavily concentrated; for the nine months ended September 30, 2006, two customers (DIRECTV and Verizon) accounted for 46.5% of total revenue.
- Debt Covenants: The company amended its credit facility in May 2006 to reduce interest margins and adjust covenants. As of September 30, 2006, the company was in compliance with all covenants, with net availability of $41.8 million.
Key Facts for Investor Verification
- Impairment Charges: Verify the final sale price and closing costs of the state DOT assets to confirm the accuracy of the $34.5 million total impairment charge recorded in discontinued operations.
- Customer Concentration Risk: Monitor the stability of contracts with DIRECTV and Verizon, which collectively represent nearly half of the company's revenue.
- Legal Contingencies: Track the outcome of the insurance carrier's claim for $2.0 million reimbursement regarding the securities class action settlement and the status of the Citgo pipeline litigation.
- Stock Compensation Impact: Assess the ongoing impact of SFAS 123R on future earnings, with management estimating annual stock compensation expense of approximately $8.0 million for 2006.
- Debt Structure: Confirm the company's ability to maintain compliance with its credit facility covenants, particularly the fixed charge coverage ratio, should net availability fall below $20.0 million.