MTZ

MASTEC INC. - 10-Q Filing Summary

Business Context and Reporting Period

Company: MasTec, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: MasTec is a leading specialty contractor operating primarily in the United States, focusing on the building, installation, maintenance, and upgrade of utility and communications infrastructure. Core activities include electrical utility transmission, wind farm construction, natural gas infrastructure, and wireless/wireline communications. The company serves utilities, communications providers, and government entities.

Key Financial Metrics

(All figures in thousands, except per share data)

Margins (Six Months 2009):
- Gross Margin (Revenue less Cost of Revenue): ~15.2%
- Net Income Margin: ~4.2%

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 27.2% for the quarter and 28.7% for the six-month period compared to the same periods in 2008. This growth was driven primarily by new business activities from acquisitions (notably Wanzek), partially offset by reduced capital expenditures by customers due to the economic downturn.
• Profitability: Net income increased 20.7% for the quarter and 31.5% for the six-month period. Net income margin remained relatively stable at 4.9% for the quarter and 4.2% for the six months.
• Cost Structure: Costs of revenue increased proportionally with revenue but improved as a percentage of revenue (84.8% for six months 2009 vs. 85.8% in 2008), reflecting productivity gains and lower fuel costs.
• Interest Expense: Interest expense increased significantly (up 57.4% for the quarter) due to the issuance of $55 million in 8% convertible notes for the Wanzek acquisition and the subsequent issuance of $115 million in 4% senior convertible notes in June 2009.
• Debt Refinancing: In June 2009, the company issued $115 million of 4% senior convertible notes. Proceeds were used to repay the $55 million 8% Wanzek convertible notes and pay down the revolving credit facility, improving the capital structure and reducing the weighted average interest rate.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates increased capital spending on infrastructure in 2010 and subsequent years, though the full impact of government stimulus initiatives has not yet been realized. The company expects seasonal working capital needs from April through September.
• Auction Rate Securities (ARS): The company holds $33.7 million in par value of auction rate securities with an estimated fair value of $22.8 million, representing an unrealized loss of $10.8 million. Due to market disruptions, these securities are illiquid. Management does not consider the decline other-than-temporary as they intend to hold the securities to maturity and expect to recover the cost basis. However, there is a risk of impairment if default rates on underlying assets exceed 8% to 10.75%.
• Liquidity: The company maintains a $210 million credit facility with $96.4 million in net availability as of June 30, 2009. Management believes cash flows from operations, the credit facility, and cash balances are sufficient to meet obligations for the next 12 months.
• Customer Concentration: Revenue is heavily concentrated. For the six months ended June 30, 2009, DIRECTV accounted for 33% of revenue and AT&T for 13%. The top ten customers accounted for 71% of total revenue.
• Legal Proceedings: The company is involved in various litigation matters, including a judgment in favor of the U.S. Army Corps of Engineers for $1.5 million (under appeal) and an arbitration against Credit Suisse regarding the sale of auction rate securities. Accrued liabilities for litigation were $2 million as of June 30, 2009.

Key Facts for Investor Verification

• Debt Refinancing Impact: Verify the long-term benefit of replacing the 8% Wanzek notes with 4% senior convertible notes on future interest expense and cash flow.
• Auction Rate Securities Liquidity: Monitor the status of the $33.7 million in illiquid auction rate securities and any potential for other-than-temporary impairment charges if market conditions worsen or default rates rise.
• Customer Concentration Risk: Assess the stability of relationships with top customers (DIRECTV, AT&T), which collectively represent nearly half of the company's revenue.
• Acquisition Integration: Evaluate the performance and integration of recent acquisitions (Wanzek, Pumpco, Nsoro) which drove significant revenue growth but also increased depreciation, amortization, and interest costs.
• Working Capital Management: Review the company's ability to manage seasonal working capital needs and maintain compliance with credit facility covenants, particularly the fixed charge coverage ratio.