SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-3797
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(Exact name of registrant as specified in its charter)
Delaware 59-1259279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3155 N.W. 77th Avenue, Miami, FL 33122-1205
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 599-1800
Former name, former address and former fiscal year, if changed since last report
Not Applicable
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class of Common Stock August 11, 1998
$ 0.10 par value 27,399,999
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
MasTec, Inc.
Index
PART I FINANCIAL INFORMATION
Item 1 - Unaudited Condensed Consolidated Statements of Income
for the Three and Six Month Periods Ended June 30, 1998 and 1997...........................3
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997......................................................................4
Unaudited Consolidated Statement of Shareholders' Equity for
the Six Month Period ended June 30, 1998...................................................5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Month Period Ended June 30, 1998 and 1997......................................6
Notes to Condensed Consolidated
Financial Statements (Unaudited)...........................................................8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition.............................................13
PART II OTHER INFORMATION.........................................................................20
MasTec, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
1998 1997 1998 1997
Revenue $ 246,106 $ 141,499 $ 432,201 $ 271,642
Costs of revenue 186,228 101,824 339,194 195,039
Depreciation and amortization 10,935 4,503 19,164 8,307
General and administrative expenses 28,932 17,558 67,431 35,187
------- ------- ------- -------
Operating income 20,011 17,614 6,412 33,109
Interest expense 7,072 2,582 12,128 5,455
Interest and dividend income 1,956 330 3,389 792
Other income, net 1,171 470 1,414 939
Income (loss) before equity in earnings
of unconsolidated companies,
provision for income taxes and
minority interest 16,066 15,832 (913) 29,385
------- ------- ------- -------
Equity in earnings of unconsolidated companies 333 579 755 1,316
Provision for income taxes 6,113 5,558 803 10,527
Minority interest (892) (27) (1,745) (61)
------- ------- ------- -------
Net income (loss) $ 9,394 $ 10,826 $ (2,706) $ 20,113
======= ======= ======= =======
Basic earnings (loss) per share:
Weighted average common shares outstanding 27,816 25,812 27,746 25,727
Earnings (loss) per share $ .34 $ .42 $ (.10) $ .78
======= ======= ======= =======
Diluted earnings (loss) per share:
Weighted average common shares outstanding 28,157 26,420 27,746 26,244
Earnings (loss) per share $ .33 $ .41 $ (.10) $ .77
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
MasTec, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 39,496 $ 6,063
Accounts receivable-net and unbilled revenue 372,502 346,596
Inventories 13,667 8,746
Other current assets 53,323 32,791
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Total current assets 478,988 394,196
------- -------
Property and equipment-net 127,710 86,109
Investments in unconsolidated companies 50,860 48,160
Other assets 164,064 101,759
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TOTAL ASSETS $ 821,622 $ 630,224
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 59,277 $ 54,562
Accounts payable 176,327 166,596
Other current liabilities 62,958 48,950
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Total current liabilities 298,562 270,108
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Other liabilities 41,428 41,924
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Long-term debt 265,831 94,495
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Common stock 2,759 2,758
Capital surplus 149,280 154,013
Retained earnings 67,686 70,392
Accumulated translation (3,924) (3,466)
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Total shareholders' equity 215,801 223,697
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 821,622 $ 630,224
======= =======
The accompanying notes are an integral part of these financial statements.
MasTec, Inc.
UNAUDITED CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY
(In thousands)
for the six months ended June 30, 1998
Common Stock Accumulated
Issued Capital Retained Translation
Shares Amount Surplus Earnings Adjustment Total
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Balance, December 31, 1997 27,580 $ 2,758 $ 154,013 $ 70,392 $ (3,466) $ 223,697
Net (loss) (2,706) (2,706)
Cumulative effect of translation (458) (458)
Stock issued to employees
from treasury stock 405 41 3,586 3,627
Repurchase of common stock (397) (40) (8,319) (8,359)
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Balance, June 30, 1998 27,588 $ 2,759 $ 149,280 $ 67,686 $ (3,924) $ 215,801
==============================================================================================================
The accompanying notes are an integral part of these financial statements.
MASTEC, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30,
1998 1997
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(Unaudited)
Cash flows from operating activities:
Net (loss) income $ (2,706) $ 20,113
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Minority interest 1,745 61
Depreciation and amortization 19,164 8,307
Equity in earnings of unconsolidated companies (755) (1,316)
(Gain) loss on sale of assets (183) 140
Changes in assets and liabilities net of effect of
acquisitions and divestitures:
Accounts receivable-net and unbilled revenue (15,145) 52,628
Inventories and other current assets 4,118 (4,570)
Other assets (3,290) 457
Accounts payable and accrued expenses 4,054 (42,518)
Income taxes 3,235 (1,194)
Other current liabilities 9,784 (562)
Other liabilities (6,832) (1,748)
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Net cash provided by operating activities 13,189 29,798
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Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (62,540) (11,467)
(Advances) repayment of notes receivable (12,499) 1,297
Capital expenditures (32,680) (8,162)
Investment in unconsolidated companies (2,730) (3,829)
Proceeds from sale of assets 1,190 9,576
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Net cash used in investing activities (109,259) (12,585)
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Cash flows from financing activities:
(Repayment) proceeds from revolving credit facilities (4,875) 24,382
Proceeds from Notes 199,724 0
Financing costs (4,993) (587)
Debt repayments (55,826) (48,160)
Net (payments) proceeds for common stock issued (repurchased) (4,545) 3,767
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Net cash provided by (used in) financing activities 129,485 (20,598)
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Net increase (decrease) in cash and cash equivalents 33,415 (3,385)
Effect of translation on cash 18 (331)
Cash and cash equivalents - beginning of period 6,063 4,754
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Cash and cash equivalents - end of period 39,496 $ 1,038
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 6,711 $ 3,070
Income taxes $ 7,268 $ 8,917
The accompanying notes are an integral part of these financial statements.
MASTEC, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Supplemental disclosure of non-cash investing and financing activities:
SIX MONTHS ENDED
JUNE 30,
1998 1997
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(Unaudited)
Acquisitions:
Fair value of assets acquired:
Accounts receivable $ 31,669 $ 11,764
Inventories 2,378 193
Deferred and refundable income taxes 1,024 0
Other current assets 458 736
Property 25,847 9,848
Other assets 3,029 1,680
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Total non-cash assets 64,405 24,221
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Liabilities 18,160 8,948
Debt 17,746 3,901
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Total liabilities assumed 35,906 12,849
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Net non-cash assets acquired 11,372
Cash acquired 3,756 1,036
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Fair value of net assets acquired 28,499 12,408
Excess over fair value of assets acquired 42,670 15,212
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Purchase price $ 74,925 $ 27,620
======= =======
Note payable issued for acquisitions $ 8,629 $ 130
Cash paid and common stock issued for acquisitions 66,296 18,629
Contingent consideration - 8,861
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Purchase price $ 74,925 $ 27,620
======= =======
Property acquired through financing arrangements $ - $ 413
======= =======
<FN>
In 1997, the Company issued approximately 172,982 shares of Common Stock for
acquisitions. Common Stock was issued from treasury stock at a cost of
approximately $1.4 million.
In 1997, the Company converted a note receivable and accrued interest thereon
totaling $29 million into stock of a company.
In 1998, the Company issued approximately 136,000 shares of stock primarily as
payment for contingent consideration related to 1997 acquisitions. In addition,
the Company issued approximately 40,000 shares as bonuses to certain employees
and fees to directors.
</FN>
The accompanying notes are an integral part of these financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. CONSOLIDATION AND PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of MasTec, Inc. ("MasTec" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. They
do not include all information and notes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1997.
The year end condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally accepted
accounting principles. The financial information furnished reflects all
adjustments, consisting only of normal recurring accruals which are, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. The results of
operations are not necessarily indicative of future results of operations or
financial position of MasTec. Certain prior year amounts have been reclassified
to conform to the current presentation.
During the second quarter of 1998, the Company's management applied
purchase accounting to two 1997 acquisitions previously accounted for using
pooling-of-interests. The change occurred due to transactions with management of
the acquired companies which occurred in the second quarter of 1998 and future
compensation arrangements currently under consideration that may have required
the use of purchase accounting. The change in accounting resulted in an increase
to capital surplus and intangible assets of $53 million. No other significant
changes to previously reported balance sheet amounts were recorded. The
resulting goodwill will be amortized over 40 years. As a result, second quarter
and first half results in 1998 include amortization expense of $333,000 and
$667,000, respectively, related to additional amortization expense from the
change in accounting method. As a result of the application of purchase
accounting, the Company's 1997 results by quarter were:
First Quarter Second Quarter Third Quarter Fourth Quarter Total
Revenue $ 130,143 $ 141,499 $ 184,562 $ 203,235 $ 659,439
Operating income 15,495 17,614 16,772 7,602 57,483
Net income 9,287 10,826 8,498 6,053 34,664
Basic earnings per share:
Weighted average common
shares outstanding 25,641 25,812 26,825 27,563 26,460
Basic earnings per share $ 0.36 $ 0.42 $ 0.32 $ 0.22 $ 1.31
Diluted earnings per share:
Weighted average common
shares outstanding 26,068 26,421 27,552 28,036 27,019
Diluted earnings per share $ 0.36 $ 0.41 $ 0.31 $ 0.22 $ 1.28
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share data does not equal the
total computed for the year due to changes in the weighted average number of
common shares outstanding.
2. COMPREHENSIVE INCOME
The Company has adopted the Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in
general purpose financial statements for the year ended December 31, 1998. The
table below sets forth "comprehensive income" as defined by SFAS No. 130 for the
three and six month period ended June 30:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
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Net income (loss) $ 9,394 $ 10,826 $ (2,706) $ 20,113
Other comprehensive income:
Unrealized translation gain (loss) 846 (1,061) (458) (1,606)
------- ------ ------ ------
Comprehensive income (loss) $ 10,240 $ 9,765 $ (3,164) $ 18,507
======= ======= ====== ======
3. ACQUISITIONS
During the six months ended June 30, 1998, the Company completed certain
acquisitions which have been accounted for under the purchase method of
accounting and which results of operations have been included in the Company's
condensed consolidated financial statements from the respective acquisition
dates. If the acquisitions had been made at the beginning of 1998 or 1997, pro
forma results of operations would not have differed materially from actual
results. Acquisitions made in 1998 were M.E. Hunter, Inc. of Atlanta, Georgia, C
& S Directional Boring, Inc. of Purcell, Oklahoma, Office Communications
Systems, Inc. of Inglewood, California, Phasecom Systems, Inc. of Toronto,
Canada, P&E Electric Company, Inc. of Nashville, Tennessee, Lessard-Nyren
Utilities, Inc. of Hugo, Minnesota, Electronic Equipment Analyzers, Inc. of
Raleigh, North Carolina, Cotton and Taylor of Las Vegas, Nevada, and Stackhouse,
Inc. of Goldsboro, North Carolina, nine telecommunications infrastructure and
utility contractors with operations primarily in the western, northern and
southeastern United States as well as Canada. Additionally, the Company made
three international acquisitions of telecommunications infrastructure
contractors: CIDE Engenharia Ltda. of Brazil, Acietel Mexicana, S.A. of Mexico
and Artcom Services, Inc. of Puerto Rico.
DEBT
Debt is comprised of the following (in thousands):
June 30, December 31,
1998 1997
---- ----
Revolving Credit Facility, at LIBOR plus 1.50% (6.68% at June 30, 1998
and 6.96% at December 31, 1997) $ 54,320 $ 83,010
Revolving Credit Facility, at MIBOR plus 0.30 (5.60% at December 31, 1997) 0 10,894
Other bank facilities, denominated in Spanish pesetas, at interest rates from
4.9% to 6.75% at June 30, 1998 and 5.65% to 6.75% at December 31, 1997
due in 1999 23,213 17,438
Other bank facilities denominated in Brazilian reals at a weighted average
rate of 27.7% at June 30, 1998 6,144 0
Other bank facility at LIBOR plus 1.25% (6.43 at June 30, 1998) 2,590 0
Notes payable for equipment, at interest rates from 7.5% to 8.5% due in
installments through the year 2000 8,814 14,500
Notes payable for acquisitions, at interest rates from 7% to 8% due in
installments through February 2000 30,291 23,215
Senior subordinated notes, 7.75% due 2008 199,736 0
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Total debt 325,108 149,057
Less current maturities 59,277 54,562
------- -------
Long-term debt $ 265,831 $ 94,495
======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
The Company has a $125.0 million revolving credit facility, as amended
(the "Credit Facility") from a group of financial institutions led by
BankBoston, N.A. maturing on June 9, 2000. The Credit Facility is collateralized
by the stock of the Company's principal domestic subsidiaries and a portion of
the stock of Sintel, S.A., the Company's Spanish subsidiary ("Sintel"). In 1998,
the Credit Facility was amended to adjust certain of the financial covenants.
Additionally, the Company has several credit facilities denominated in
Spanish Pesetas. At June 30, 1998 and December 31, 1997, the Company had $45.3
million (7.0 billion Pesetas) and $50.6 million (7.7 billion Pesetas),
respectively, of debt denominated in Pesetas, including $22.1 million and $22.3
million, respectively, remaining under the acquisition debt incurred to acquire
Sintel. The Company has paid a portion of the December 31, 1997 installment of
the acquisition debt, with the remaining amount to be paid pending resolution of
the offsetting amounts between the Company and Telefonica, S.A. ("Telefonica"),
the previous owner.
On January 30, 1998, the Company sold $200.0 million, 7.75% senior
subordinated notes (the "Notes") due in 2008 with interest due semi-annually.
The Credit Facility and Notes contain certain covenants that, among
other things, restrict the payment of dividends and limit the Company's ability
to incur additional debt, create liens, dispose of assets, merge or consolidate
with another entity or make other investments or acquisitions. These covenants
also require the Company to maintain minimum amounts of stockholders' equity and
to meet certain financial ratio coverages, among others, minimum ratios at the
end of each fiscal quarter of debt to earnings and earnings to interest expense.
5. OPERATIONS BY GEOGRAPHIC AREAS
The Company's principal source of revenue is the provision of
telecommunications infrastructure construction services in North America, Spain
and the Caribbean and Latin American region (CALA), primarily Brazil.
Significant CALA operations commenced on August 1, 1997 with the acquisition of
MasTec Inepar.
As of June 30,
1998 1997
-------------------------
Revenue
North America $ 275,476 $ 160,434
Spain 91,820 111,208
CALA 64,905 0
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Total $ 432,201 $ 271,642
======= =======
Operating income (loss)
North America (1) $ 10,466 $ 22,021
Spain (2) (9,265) 11,088
CALA 5,211 0
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Total $ 6,412 $ 33,109
======= =======
Identifiable assets
North America $ 377,112 $ 128,177
Spain 129,242 168,911
CALA 90,655 0
Corporate 224,613 144,154
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Total $ 821,622 $ 441,242
======= =======
(1) North American operations were impacted by several factors
including special charges of $4.0 million in the first quarter of
1998.
(2) Operating loss in 1998 is due to severance charges totaling
$13.4 million recorded in the first quarter of 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
There are no material transfers between geographic areas. Operating income
consists of revenue less operating expenses, and does not include interest
expense, interest and other income, equity in earnings of unconsolidated
companies, minority interest and income taxes. Domestic operating income is net
of corporate general and administrative expenses. Identifiable assets of
geographic areas are those assets used in the Company's operations in each area.
Corporate assets include cash and cash equivalents, investments in
unconsolidated companies, real estate held for sale, notes receivable and
goodwill of $128.6 million which is included in other assets. The Company
expects to broaden its segment disclosure to provide additional information on
product lines pursuant to FASB Statement No. 131 Disclosures about Segments of
an Enterprise and Related Information.
6. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company derives a substantial portion of its revenue from the
provision of telecommunications infrastructure services to Telefonica, BellSouth
Telecommunications Corp. ("BellSouth") and the operating companies of
Telecomunicacoes Brasileiras S.A. ("Telebras"). For the six months ended June
30, 1998, approximately 18%, 8% and 15% of the Company's revenue was derived
from services performed for Telefonica, BellSouth and Telebras, respectively.
During the six months ended June 30, 1997, the Company derived 33% and 11% of
its revenue from Telefonica and BellSouth. Although the Company's strategic plan
envisions diversification of its customer base, the Company anticipates that it
will continue to derive a significant portion of its revenue in the future from
these customers.
7. COMMITMENTS AND CONTINGENCIES
In December 1990, Albert H. Kahn, a stockholder of the Company, filed a
purported class action and derivative suit in Delaware state court against the
Company, the then-members of its Board of Directors, and National Beverage
Corporation ("NBC"), the Company's then-largest stockholder. The complaint
alleges, among other things, that the Company's Board of Directors and NBC
breached their respective fiduciary duties in approving certain transactions.
In November 1993, Mr. Kahn filed a class action and derivative
complaint against the Company, the then members of its Board of Directors, and
Jorge L. Mas, Jorge Mas and Juan Carlos Mas, the principal shareholders of the
Company. The 1993 lawsuit alleges, among other things, that the Company's Board
of Directors and NBC breached their respective fiduciary duties by approving the
terms of the acquisition of the Company by the Mas family, and that the Mas
family had knowledge of the fiduciary duties owed by NBC and the Company's Board
of Directors and knowingly and substantially participated in the breach of these
duties. The lawsuit also claims derivatively that each member of the Company's
Board of Directors engaged in mismanagement, waste and breach of fiduciary
duties in managing the Company's affairs prior to the acquisition by the Mas
family.
There has been no activity in either of these lawsuits in more than a
year. The Company believes that the allegations in each of the lawsuits are
without merit and intends to defend these lawsuits vigorously.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
In November 1997, Church & Tower, Inc. a subsidiary of the Company
("Church and Tower") filed a lawsuit against Miami-Dade County (the "County") in
Florida state court alleging breach of contract and seeking damages exceeding
$3.0 million in connection with the County's refusal to pay amounts due to
Church & Tower under a multi-year agreement to perform road restoration work for
the Miami-Dade Water and Sewer Department ("MWSD"), a department of the County,
and the County's wrongful termination of the agreement. The County has refused
to pay amounts due to Church & Tower under the agreement until alleged
overpayments under the agreement have been resolved, and has counterclaimed
against the Company seeking damages that the Company believes will not exceed
$2.1 million. The County also has refused to award a new road restoration
agreement for MWSD to Church & Tower, which was the low bidder for the new
agreement. The Company believes that any amounts due to the County under the
existing agreement are not material and may be recoverable in whole or in part
from Church & Tower subcontractors who actually performed the work and whose
bills were submitted directly to the County.
The Company is a party to other pending legal proceedings arising in the
normal course of business, none of which the Company believes is material to the
Company's financial position or results of operations.
The Company, from time to time, may provide customer financing in
connection with the provision of its services. As of June 30, 1998, the Company
had entered into one such financing agreement to provide up to $50 million of
financing to one customer. As of June 30, 1998, the Company had $7.5 million
outstanding under this agreement. Additionally, the Company has commitments to
purchase approximately $27.0 million of telecommunications equipment over a
three year period for a PCS wireless network in Paraguay.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Certain statements in this Quarterly Report are forward-looking, such
as statements regarding the Company's future growth and profitability. These
forward looking statements are based on the Company 's current expectations and
are subject to a number of risks and uncertainties that could cause actual
results in the future to significantly differ from results expressed or implied
in any forward-looking statements included in this Quarterly Report. These risks
and uncertainties include, but are not limited to, the Company's relationship
with key customers, implementation of the Company's growth strategy, and
seasonality. These and other risks are detailed in this Quarterly Report and in
other documents filed by the Company with the Securities and Exchange
Commission.
Overview
MasTec is one of the world's largest contractors specializing in the
build-out of telecommunications and other utilities infrastructure. The
Company's business consists of the design, installation and maintenance of the
outside physical plant for telephone and cable television communications systems
and of integrated voice, data and video local and wide area networks inside
buildings, and the installation of central office telecommunications equipment.
The Company also provides infrastructure construction services to the electric
power industry and other public utilities.
During the six months ended June 30, 1998, the Company's North American
operations were affected by a number of factors including severe weather
conditions experienced during the first quarter of 1998, among other things, and
performance issues in two divisions related to pricing on a certain contracts
some of which are currently being negotiated.
In March 1998, Sintel entered into an agreement with its unions to resolve
its pending labor dispute. As a result of the agreement reached, the Company
recorded a severance charge related to operational personnel and administrative
personnel of $1.9 million and $11.5 million, respectively. The total charge of
$13.4 million negatively impacted the Company's operating margins in the first
quarter of 1998. While management anticipates a reduction in ongoing operating
costs to result from these measures, the Company recognizes that it services an
increasingly competitive telephony industry in the Spanish market and a
substantial portion of any savings may be offset by more competitive prices to
Telefonica and other customers. As of June 30, 1998, the Company had terminated
131 workers at a cost of $6.9 million.
In July 1998, the Brazilian government privatized its wireline and wireless
telephone companies. As a result of the privatization, the Company anticipates
that it will increase its sales in the CALA region. However, global deregulation
and consolidation within the telecommunications industry may delay or depress
capital spending among telecommunications providers as they assess their new
business plans and strategies and focus on administrative and operational issues
associated with their acquisitions or alliances.
Results of Operations
Revenue is generated primarily from telecommunications and other utilities
infrastructure services. Infrastructure services are provided to telephone
companies, public utilities, cable television operators, other
telecommunications providers, governmental agencies and private businesses.
Costs of revenue includes subcontractor costs and expenses, materials not
supplied by the customer, fuel, equipment rental, insurance, operations payroll
and employee benefits. General and administrative expenses include management
salaries and benefits, rent, travel, telephone and utilities, professional fees
and clerical and administrative overhead.
The following table sets forth certain supplemental information by
geographic region for the three and six months ended June 30, 1998 (in thousands
unless otherwise indicated):
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
Revenue by region
North America $ 165,074 67.1% $ 86,000 60.8% $ 275,476 63.7% $ 160,434 59.1%
Spain 45,877 18.6% 55,499 39.2% 91,820 21.3% 111,208 40.9%
CALA (1) 35,155 14.3% - 0.0% 64,905 15.0% - 0.0%
------- ----- ------- ----- ------- ----- ------- -----
$ 246,106 100.0% $ 141,499 100.0% $ 432,201 100.0% $ 271,642 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Operating Income/(loss) (2)
by region
North America (3) $ 13,534 8.2% $ 11,887 13.8% $ 14,466 5.3% $ 22,021 13.7%
Spain (4) 3,296 7.2% 5,727 10.3% 4,135 4.5% 11,088 10.0%
CALA (5) 3,181 9.0% - 5,211 8.0% -
------- ---- ------- ----- ------- ---- -------
$ 20,011 8.1% $ 17,614 12.4% $ 23,812 5.5% $ 33,109 12.2%
======= ==== ======= ===== ======= ==== ======= =====
Sales in Local Currencies
Spanish Peseta (Millions) 6,984 8,040 14,068 15,840
Brazilian Real (Thousands) 38,740 - 72,275 -
Average Exchange Rate
Spanish Peseta 152.23 144.89 153.21 142.4
Brazilian Real 1.16 - 1.14 -
<FN>
(1) Includes consolidated operations in the Caribbean and Latin American
regions - primarily Brazil which commenced August 1997.
(2) Percentages expressed relative to regional revenue amount
(3) Excludes restructuring charges of $4.0 million recorded in the first
quarter of 1998.
(4) Excludes restructuring charges of $13.4 million recorded in the first
quarter of 1998.
(5) Amount is before minority interest of $934 thousand and $1.79 million
respectively for the three and six months ended June 30, 1998.
</FN>
Three Months Ended June 30, 1998 compared to Three Months Ended June 30, 1997
The following table sets forth certain historical consolidated
financial data as a percentage of revenue for the three months ended June 30,
1998 and 1997.
1998 1997
---- ----
Revenue 100.0% 100.0%
Costs of revenue 75.7% 72.0%
Depreciation and amortization 4.4% 3.2%
General and administrative expenses 11.8% 12.4%
Operating margin 8.1% 12.4%
Interest expense 2.9% 1.8%
Interest and dividend income and other income, net,
equity in unconsolidated companies and minority interest 1.1% 1.0%
Income from operations before
provision for income taxes 6.3% 11.6%
Provision for income taxes 2.5% 3.9%
Net income 3.8% 7.7%
Revenue increased $104.6 or 73.9% to $246.1 million in 1998 as compared to
$141.5 million in 1997. Revenue from North American operations increased $79.1
million, or 92%, to $165.1 million in 1998 as compared to $86.0 million in 1997.
North American revenue growth was primarily generated by acquisitions completed
in the latter part of 1997 and during 1998. Revenue generated by international
operations increased $25.5 million, or 46%, to $81 million in 1998 as compared
to $55.5 million in 1997 due primarily to the inclusion of the Company's
Brazilian operations, which contributed $33.8 million to 1998 results. In
Spanish Pesetas, revenue declined 13.1% as a result of less spending by
Telefonica in Spain during the quarter as it has shifted its investment priority
to Latin America, specifically, Brazil. As a result of the reduced spending by
Telefonica in Spain, the Company is seeking to diversity its Spanish customer
base.
Gross profit (revenue less cost of revenue), excluding depreciation and
amortization, increased $20.2 million, or 50.9%, to $59.9 million, or 24.3% of
revenue in 1998 as compared to $39.7 million, or 28.0% of revenue in 1997. North
American gross margins (gross profit as a percentage of revenue) decreased to
25.7% in 1998 from 28% in 1997. The decline in gross margins was related to,
among other things, pricing on certain contracts, some of which are currently
being negotiated. In addition, 1997 results were favorably impacted by certain
short-term projects with attractive pricing. International gross margins
decreased to 21.6% in 1998 as compared to 28.2% in 1997 primarily due to the
increase in labor costs associated with a new labor agreement in Spain.
Additionally, the Company's newly formed Brazilian operations reflected lower
margins of 15.5% due to the fact that it operates primarily through
subcontractors.
Depreciation and amortization increased $6.4 million, or 142.2%, to $10.9
million in 1998 from $4.5 million in 1997. The increase in depreciation and
amortization was a result of increased amortization associated with
acquisitions, as well as increased capital expenditures from the latter part of
1997 through the second quarter of 1998. As a percentage of revenue,
depreciation and amortization was 4.4% and 3.2% of revenue for 1998 and 1997,
respectively.
General and administrative expenses increased $11.3 million, or 64.2%, to
$28.9 million, or 11.8% of revenue for 1998 from $17.6 million, or 12.4% of
revenue for 1997. The increase in dollar amount is primarily due to North
American general and administrative expenses which were $19.2 million, or 11.6%
of North American revenue in 1998, compared to $8.3 million, or 9.7% of domestic
revenue for 1997. The increase in dollar amount of domestic general and
administrative expenses is due primarily to acquisitions, and an increase in the
allowance for doubtful accounts of $1.0 million in connection with management's
ongoing evaluation of the collectability of its receivables. International
general and administrative expenses increased $0.6 million, or 6.5%, to $9.8
million, or 12.1% of international revenue in 1998 from $9.2 million, or 16.6%
of international revenue for 1997. General and administrative expenses for the
Company's CALA region were approximately $1.8 million. The Company did not
operate in this region until August 1997.
The Company generated operating income of $20 million or 8.1% of revenue
for 1998 compared to $17.6 million or 12.4% of revenue for 1997. Favorably
impacting 1997 operating income were short-term projects with attractive pricing
and terms as well as higher volume and margins for its Spanish operations during
1997.
Interest expense increased $4.5 million or 173.1%, to $7.1 million for 1998
from $2.6 in 1997 primarily due to the Company's $200.0 million bond offering
completed in February 1998. Offsetting the increase was lower interest rates on
Spanish borrowings. See -"Financial Condition, Liquidity and Capital Resources."
Interest income and other income, net equity in unconsolidated companies
and minority interest remained basically unchanged in the aggregate when
compared to the 1997 period, however interest income increased significantly due
to temporary short-term investments offset by an increase in minority interest
attributable to the Company's Brazilian operations.
Provision for income taxes was $6.1 million, or 38.0% of income from
continuing operations before equity in earnings of unconsolidated companies,
taxes and minority interests in 1998, compared to a provision of $5.6 million,
or 35.1% of income from continuing operations before equity in earnings of
unconsolidated companies, taxes and minority interests in 1997. The increase in
the effective tax rate was primarily due to 58% of pre-tax earnings for 1998
having been derived from North American operations, which are subject to a
higher effective tax rate.
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
The following table sets forth certain historical consolidated
financial data as a percentage of revenue for the six months ended June 30, 1998
and 1997.
1998 1997
---- ----
Revenue 100.0% 100.0%
Costs of revenue 78.5% 71.8%
Depreciation and amortization 4.4% 3.1%
General and administrative expenses 15.6% 13.0%
Operating margin 1.5% 12.1%
Interest expense 2.8% 2.0%
Interest and dividend income and other income, net,
equity in unconsolidated companies and minority
interest 0.9% 1.1%
(Loss) income from operations before
provision for income taxes (0.4)% 11.2%
Provision for income taxes 0.2% 3.8%
Net (loss) income (0.6)% 7.4%
Revenue increased $160.6 million, or 59.1%, to $432.2 million in 1998 as
compared to $271.6 million in 1997. North American revenue increased $115.1
million, or 71.8% from $160.4 million to $275.5 million. The increase in North
American revenue was primarily generated by acquisitions completed in the latter
part of 1997 and 1998. Revenue generated by international operations increased
$45.5 million, or 40.9%, to $156.7 million in 1998 as compared to $111.2 million
in 1997 due primarily to the inclusion of the Company's Brazilian operations
which contributed $63.5 million to 1998 results. The Company's Spanish revenue
was negatively impacted in 1998 by a reduction in the volume of work by its
major customer, Telefonica whose investment focus has shifted to Latin America,
specifically Brazil. As a result of the reduced spending by Telefonica in Spain,
the Company is seeking to diversify its Spanish customer base.
Gross profit (revenue less cost of revenue), excluding depreciation and
amortization, increased $16.4 million, or 21.4%, to $93 million, or 21.5% of
revenue in 1998 as compared to $76.6 million, or 28.2% of revenue in 1997. The
decrease in gross profit as a percentage of revenue was due primarily to lower
productivity due to severe weather conditions experienced in the first quarter
of 1998 by the Company's North American operations. North American gross margins
(gross profit as a percentage of revenue) decreased to 22.7% in 1998 from 28.0%
in 1997 and the completion of certain higher margin domestic jobs during 1997.
The decline in gross margins was related to, among other things, pricing on
certain contracts, some of which are currently being negotiated. In addition,
1997 results were favorably impacted by certain short-term projects with
attractive pricing. International gross margins decreased to 19.4% in 1998 as
compared to 28.5% in 1997 primarily due to the increase in labor costs
associated with its new labor agreement in Spain and a $1.9 million charge for
severance for direct labor personnel. Additionally, the Company's newly formed
Brazilian operations have lower margins of 15.7% due to the fact that it
operates primarily through subcontractors.
Depreciation and amortization increased $10.9 million, or 131.3%, to $19.2
million in 1998 from $8.3 million in 1997. The increase in depreciation and
amortization was a result of increased capital expenditures in the latter part
of 1997 and the first quarter of 1998, as well as depreciation and amortization
associated with acquisitions. As a percentage of revenue, depreciation and
amortization was 4.4% and 3.1% of revenue for 1998 and 1997, respectively.
General and administrative expenses increased $32.2 million, or 91.5%, to
$67.4 million, or 15.6% of revenue for 1998 from $35.2 million, or 13.0% of
revenue for 1997. The increase is primarily due to North American general and
administrative expenses which were $35.1 million, or 12.8% of domestic revenue
in 1998, compared to $16.0 million, or 10.0% of domestic revenue for 1997. The
increase in dollar amount of domestic general and administrative expenses is due
primarily to acquisitions. International general and administrative expenses
increased $13.1 million, or 68.2%, to $32.3 million, or 20.6% of international
revenue in 1998 from $19.2 million, or 17.2% of international revenue for 1997.
The increase in Spain's general and administrative expenses was primarily due to
severance charges of $12.9 million associated with the agreement reached with
the union to reduce administrative personnel in excess of 200 people. General
and administrative expenses for the Company's CALA region were approximately
$4.2 million. The Company did not operate in this region until August 1997.
The Company generated operating income of $6.4 million or 1.5% of revenue
for 1998 compared to $33.1 million or 12.1% of revenue for 1997. Favorably
impacting 1997 operating income were short-term projects with attractive pricing
and terms.
Interest expense increased $6.6 million or 120%, to $12.1 million for 1998
from $5.5 in 1997 primarily due to the Company's $200.0 million bond offering
completed in February 1998. See - "Financial Condition, Liquidity and Capital
Resources."
Interest income and other income, net equity in unconsolidated companies
and minority interest remained basically unchanged in the aggregate when
compared to the 1997 period, however, interest income increased significantly
due to temporary short-term investments offset by an increase in minority
interest attributable to the Company's Brazilian operations.
Financial Condition, Liquidity and Capital Resources
The Company's primary liquidity needs are for working capital, to finance
acquisitions and capital expenditures and to service the Company's indebtedness.
The Company's primary sources of liquidity have been cash flow from operations,
borrowings under revolving lines of credit and the proceeds from the sale of
investments and non-core assets.
Net cash provided by operating activities for the 1998 period was $13.2
million, compared to $29.8 million in the 1997 period. This decrease was due to
a breakeven result in the first quarter of 1998 absent charges previously
discussed and fluctuations in working capital, particularly increases in
accounts receivable and unbilled revenue from Brazilian and North American
operations.
The Company invested cash, net of cash acquired, in acquisitions and
investments in unconsolidated companies totaling $65.3 million during 1998
compared to $15.3 million in 1997. During 1998, the Company made capital
expenditures of $32.7 million, primarily for machinery and equipment used in the
production of revenue, compared to $8.2 million in 1997.
As of June 30, 1998, working capital totaled $180.4 million, compared to
working capital of $124.1 million at December 31, 1997. Included in working
capital at June 30, 1998 were temporary investments of approximately $20.0
million.
The Company continues to pursue a strategy of growth through acquisitions
and internal expansion. During 1998, the Company completed 12 acquisitions for
$66.3 million in cash and seller financing of $8.6 million. Additionally, the
Company believes that there are significant business opportunities available to
it that may require the Company to provide customer financing in connection with
the sale of its services. As of June 30, 1998, the Company had entered into one
such financing agreement to provide up to $50 million of financing to one
customer. As of June 30, 1998, the Company had $7.5 million outstanding under
this agreement. The Company anticipates customer financing will increase in the
future. Additionally, the Company has commitments to purchase approximately
$27.0 million over a 3 year period of telecommunications equipment for a PCS
wireless network in Paraguay.
The Company believes that cash generated from operations, borrowings under
its Credit Facility and proceeds from the sale of investments and non-core
assets will be sufficient to finance these payments, as well as the Company's
working capital needs, capital expenditures and debt service obligations for the
foreseeable future. Future acquisitions and internal growth are expected to be
financed from these sources, as well as other external financing sources, to the
extent necessary, including the additional borrowings.
The Company announced a stock repurchase program in April 1998. Through
July 24, 1998, the Company has purchased a total of 496,700 shares with an
average price of $21.54. The Company may continue to purchase shares from time
to time. The Credit Facility restricts the amount of shares that the Company may
repurchase up to an additional $3.3 million.
In February 1998, the Company issued $200.0 million principal amount of
7.75% Senior Subordinated Notes (the "Notes") due 2008 with interest due
semi-annually. The Credit Facility and the Notes contain certain covenants
which, among other things, restrict the payment of dividends and limit the
Company's ability to incur additional debt, create liens, dispose of assets,
merge or consolidate with another entity or make other investments or
acquisitions. These covenants also require the Company to maintain minimum
amounts of shareholders' equity and to meet certain financial ratio coverages,
among others, minimum ratios at the end of each fiscal quarter of debt to
earnings and earnings to interest expense. See Note 4 of Notes to Consolidated
Financial Statements.
The Company conducts business in several foreign currencies that are
subject to fluctuations in the exchange rate relative to the U.S. dollar. The
Company does not enter into foreign exchange contracts. It is the Company's
intent to utilize foreign earnings in the foreign operations for an indefinite
period of time. In addition, the Company's results of operations from foreign
activities are translated into U.S. dollars at the average prevailing rates of
exchange during the period reported, which average rates may differ from the
actual rates of exchange in effect at the time of the actual conversion into
U.S. dollars.
The Company's current and future operations and investments in certain
foreign countries are generally subject to the risks of political, economic or
social instability, including the possibility of expropriation, confiscatory
taxation, hyper-inflation or other adverse regulatory or legislative
developments, or limitations on the repatriation of investment income, capital
and other assets. The Company cannot predict whether any of such factors will
occur in the future or the extent to which such factors would have a material
adverse effect on the Company's international operations.
Year 2000
The Company has been assessing the impact that the Year 2000 issue will
have on its computer systems, including both hardware and software. The Company
has also initiated formal communications with all of its significant suppliers
and large customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failures to remediate their own
Year 2000 issue. Assuming that remediation projects can be implemented as
planned, the Company believes future costs relating to the Year 2000 issue,
which will be expensed as incurred, will not have a material adverse impact on
the Company's business, operations or financial condition.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 7 to the Condensed Consolidated Financial Statements.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
The 1998 Annual Meeting of Stockholders of MasTec, Inc. was
held on May 14, 1998 for the purpose of: (1) electing two Class III directors
for a three-year term ending at the annual meeting of stockholders in 2001 and
(2) the reincorporation of the Company from Delaware to Florida.
The following summarizes the results of the vote for each
issue listed above:
Number of Shares Voted
Issue For Withheld Against Abstaining
1a Arthur B. Laffer 20,381,202 19,697
1b Jose S. Sorzano 20,377,601 23,298
2 Reincorporation 16,133,657 2,145,736 199,505
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Articles of Incorporation of the
company, filed as Exhibit 3.1 to Form
8-K dated May 29, 1998 and
incorporated by reference herein.
3.2 Bylaws of the company, filed as Exhibit
to Form 8-K dated May 29, 1998 and
incorporated by reference herein.
4.1 7 3/4% Senior Subordinated notes Due 2008
Indenture dated as of February 4, 1998,
filed as Exhibit 4.2 to the Company's
Registration Statement on From S-4
(file No. 333-46361) and incorporated by
reference herein.
10.1 First Amendment to Revolving Credit
Agreement between the Company, certain of
its subsidiaries, and Bank Boston, N.A., as
agent.
27.1 Article 5 - Financial Data Schedules.
(b) Report on Form 8-K.
On June 29, 1998 the company filed a Form
8-K Current Report dated May 29, 1998
reporting information under item 5 thereof
regarding the change in the Company's
domicile from Delaware to Florida.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MasTec, Inc.
Registrant
Date: August 14, 1998 /s/ Stephen D. Daniels
----------------------
Stephen D. Daniels
Senior Vice President-
Chief Financial Officer
(Principal Financial and
Accounting Officer)