MASTEC INC - 10-Q Summary (Period Ended September 30, 2008)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine months ended on that date. MasTec, Inc. is a leading specialty contractor operating primarily in the United States, focusing on the construction, installation, maintenance, and upgrade of utility and communications infrastructure. Core activities include electrical utility transmission, wind farms, natural gas infrastructure, and wireless/wireline communications. The company serves customers in the utilities, communications, and government sectors.
Key Financial Metrics
| Metric | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2007 |
|---|---|---|---|
| Revenue | $397.8 million | $964.8 million | $764.1 million |
| Net Income (Loss) | $24.1 million | $47.6 million | ($14.6 million) |
| Diluted EPS | $0.35 | $0.70 | ($0.22) |
| Operating Cash Flow (9mo) | Net cash provided: $42.7 million (2008) vs $44.1 million (2007) | ||
| Total Debt | $199.9 million (Sep 30, 2008) vs $163.0 million (Dec 31, 2007) | ||
| Cash & Equivalents | $45.1 million (Sep 30, 2008) vs $74.3 million (Dec 31, 2007) | ||
| Working Capital | $117.3 million (Sep 30, 2008) vs $163.8 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 49% year-over-year for the quarter and 26% for the nine-month period. This growth was driven by recent acquisitions (Nsoro, Pumpco, Power Partners, Three Phase Line Construction) and organic growth in wireless, gas pipeline, and wind farm projects.
- Profitability Turnaround: The company reported a net income of $24.1 million for the quarter, a significant improvement from a net loss of $32.2 million in the same period in 2007. The 2007 loss included a $38.4 million charge for legacy legal cases and discontinued operations losses.
- Cost Structure: Costs of revenue as a percentage of revenue decreased to 84.4% (Q3 2008) from 86.5% (Q3 2007), attributed to productivity gains and labor savings, partially offset by rising fuel costs (up 57% Q3 2008 vs 2007).
- Acquisitions: Significant cash outflows occurred for acquisitions ($80.8 million in the first nine months of 2008), impacting cash balances and working capital.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition of Wanzek: On October 4, 2008, MasTec agreed to acquire Wanzek Construction, Inc. for $200 million in cash plus assumption of $15 million in debt. The company lacks sufficient cash on hand and must secure financing (debt or equity) to close. Failure to close requires a break-up fee of approximately $15 million.
- Auction Rate Securities (ARS): The company holds $33.7 million in par value of ARS. Due to credit market disruptions, these securities are illiquid. They are carried at a fair value of $25.4 million, reflecting an unrealized loss of $8.3 million. Management classifies them as long-term assets due to uncertainty regarding liquidity.
- Liquidity and Debt: The company relies on a $210 million Senior Secured Credit Facility. As of September 30, 2008, net availability was $80.6 million. The company is currently in compliance with covenants, including a minimum fixed charge coverage ratio of 1.20 to 1.00.
- Customer Concentration: Revenue is concentrated among a few major customers. In Q3 2008, two customers accounted for 45% of total revenue (30% and 15% respectively).
- Legal Contingencies: Accrued liabilities for legal matters totaled $13.6 million. Notable items include a settled FLSA collective action ($8.0 million paid) and ongoing disputes related to the Coos County pipeline project and insurance coverage disputes.
Investor Verification Checklist
- Financing for Wanzek: Verify the status of financing arrangements required to close the $200 million Wanzek acquisition and the potential dilution or leverage impact.
- ARS Liquidity: Monitor the valuation and liquidity status of the $33.7 million auction rate securities portfolio and potential for further impairment charges.
- Customer Concentration: Assess the stability of relationships with top customers (DIRECTV, AT&T, Verizon), which collectively represent a significant portion of revenue.
- Credit Facility Compliance: Confirm continued compliance with the Credit Facility's fixed charge coverage ratio and borrowing base availability, especially given the seasonal nature of the business.
- Legal Reserves: Review updates on the Coos County pipeline litigation and the outcome of the Corps of Engineers trial, which could impact the $4.35 million settlement accrual.