MTZ 9.30.2012 10-Q
UNITED STATES
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 September 30, 2012
Commission File Number 001-08106
_____________________________________________
MASTEC, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________
|
| |
Florida | 65-0829355 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
| |
800 S. Douglas Road, 12th Floor, Coral Gables, FL | 33134 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (305) 599-1800
_____________________________________________
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 R No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | |
þ Large accelerated filer | ¨ Accelerated filer | ¨ Non-accelerated filer | ¨ Smaller reporting company |
|
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes£ NoR
As of October 29, 2012, MasTec, Inc. had 75,974,952 shares of common stock, $0.10 par value, outstanding.
MASTEC, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2012
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 1,067,300 |
| | $ | 816,226 |
| | $ | 2,794,431 |
| | $ | 2,099,674 |
|
Costs of revenue, excluding depreciation and amortization | 924,304 |
| | 702,969 |
| | 2,445,056 |
| | 1,805,997 |
|
Depreciation and amortization | 22,645 |
| | 19,587 |
| | 65,125 |
| | 52,769 |
|
General and administrative expenses | 42,514 |
| | 35,174 |
| | 118,192 |
| | 97,739 |
|
Interest expense, net | 9,446 |
| | 8,977 |
| | 27,883 |
| | 25,202 |
|
Gain on remeasurement of equity interest in acquiree | — |
| | — |
| | — |
| | (29,041 | ) |
Other expense, net | 8,815 |
| | 650 |
| | 7,989 |
| | 160 |
|
Income from continuing operations before provision for income taxes | $ | 59,576 |
| | $ | 48,869 |
| | $ | 130,186 |
| | $ | 146,848 |
|
Provision for income taxes | (23,478 | ) | | (18,042 | ) | | (51,229 | ) | | (56,374 | ) |
Income from continuing operations before non-controlling interests | $ | 36,098 |
| | $ | 30,827 |
| | $ | 78,957 |
| | $ | 90,474 |
|
Discontinued operations (See Note 4 – Discontinued Operations): | | | | | | | |
(Loss) income from discontinued operations, net of tax, including impairment charges and loss on disposal of $7.7 million and $8.2 million, net of tax, respectively, for the three and nine month periods ended September 30, 2012 | $ | (9,281 | ) | | $ | 1,003 |
| | $ | (7,881 | ) | | $ | 6,937 |
|
Net income | $ | 26,817 |
| | $ | 31,830 |
| | $ | 71,076 |
| | $ | 97,411 |
|
Net loss attributable to non-controlling interests | (4 | ) | | (12 | ) | | (9 | ) | | (31 | ) |
Net income attributable to MasTec, Inc. | $ | 26,821 |
| | $ | 31,842 |
| | $ | 71,085 |
| | $ | 97,442 |
|
Earnings per share (1) (See Note 2 - Earnings Per Share): | | | | | | | |
Basic earnings (loss) per share: | | | | | | | |
Continuing operations | $ | 0.47 |
| | $ | 0.36 |
| | $ | 1.00 |
| | $ | 1.10 |
|
Discontinued operations | (0.12 | ) | | 0.01 |
| | (0.10 | ) | | 0.09 |
|
Total basic earnings per share | $ | 0.35 |
| | $ | 0.38 |
| | $ | 0.90 |
| | $ | 1.19 |
|
Basic weighted average common shares outstanding | 76,194 |
| | 84,732 |
| | 79,009 |
| | 81,982 |
|
Diluted earnings (loss) per share: | | | | | | | |
Continuing operations | $ | 0.45 |
| | $ | 0.35 |
| | $ | 0.97 |
| | $ | 1.05 |
|
Discontinued operations | (0.12 | ) | | 0.01 |
| | (0.10 | ) | | 0.08 |
|
Total diluted earnings per share | $ | 0.34 |
| | $ | 0.36 |
| | $ | 0.87 |
| | $ | 1.13 |
|
Diluted weighted average common shares outstanding | 79,526 |
| | 89,324 |
| | 81,982 |
| | 86,933 |
|
| |
(1) | Note that earnings per share tables may contain slight summation differences due to rounding. |
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Net income | $ | 26,817 |
| | $ | 31,830 |
| | $ | 71,076 |
| | $ | 97,411 |
|
Foreign currency translation gains (losses) | 2,176 |
| | (3,094 | ) | | 2,304 |
| | (3,060 | ) |
Unrealized gains (losses) on available for sale securities: | | | | | | | |
Unrealized gains (losses) on available for sale securities, before tax | 634 |
| | (334 | ) | | 545 |
| | (753 | ) |
Plus: Reversal of unrealized losses on redeemed security | — |
| | — |
| | — |
| | 458 |
|
Less: (Provision for) benefit from income taxes | (246 | ) | | 127 |
| | (206 | ) | | 111 |
|
Unrealized gain (loss) on available for sale securities, net of tax | $ | 388 |
| | $ | (207 | ) | | $ | 339 |
| | $ | (184 | ) |
Comprehensive income | $ | 29,381 |
| | $ | 28,529 |
| | $ | 73,719 |
| | $ | 94,167 |
|
Comprehensive loss attributable to non-controlling interests | (4 | ) | | (12 | ) | | (9 | ) | | (31 | ) |
Comprehensive income attributable to MasTec, Inc. | $ | 29,385 |
| | $ | 28,541 |
| | $ | 73,728 |
| | $ | 94,198 |
|
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) |
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 10,472 |
| | $ | 7,406 |
|
Accounts receivable, net of allowance | 873,102 |
| | 652,553 |
|
Inventories | 91,037 |
| | 88,914 |
|
Deferred tax assets, net | — |
| | 10,596 |
|
Prepaid expenses and deposits | 27,851 |
| | 21,001 |
|
Other current assets | 6,435 |
| | 11,739 |
|
Current assets of discontinued operations | 16,665 |
| | 30,608 |
|
Total current assets | $ | 1,025,562 |
| | $ | 822,817 |
|
Property and equipment, net | 287,529 |
| | 263,007 |
|
Goodwill | 724,347 |
| | 714,772 |
|
Other intangible assets, net | 102,229 |
| | 110,707 |
|
Available for sale auction rate securities | 14,110 |
| | 13,565 |
|
Other assets | 32,928 |
| | 42,167 |
|
Long-term assets of discontinued operations | 9,195 |
| | 121,695 |
|
Total assets | $ | 2,195,900 |
| | $ | 2,088,730 |
|
Liabilities and Shareholders’ Equity | | | |
Current liabilities: | | | |
Current maturities of long-term debt | $ | 42,436 |
| | $ | 34,050 |
|
Accounts payable | 431,864 |
| | 297,712 |
|
Accrued salaries and wages | 55,661 |
| | 37,561 |
|
Accrued taxes payable | 22,316 |
| | 5,383 |
|
Accrued insurance | 18,351 |
| | 19,304 |
|
Other accrued expenses | 17,021 |
| | 10,629 |
|
Current deferred tax liabilities, net | 4,619 |
| | — |
|
Acquisition-related contingent consideration, current | 19,210 |
| | 16,955 |
|
Billings in excess of costs and earnings | 104,281 |
| | 108,433 |
|
Other current liabilities | 28,407 |
| | 27,169 |
|
Current liabilities of discontinued operations | 5,334 |
| | 29,274 |
|
Total current liabilities | $ | 749,500 |
| | $ | 586,470 |
|
Acquisition-related contingent consideration | 70,870 |
| | 75,925 |
|
Long-term debt | 410,561 |
| | 460,690 |
|
Deferred tax liabilities, net | 108,684 |
| | 122,614 |
|
Other liabilities | 40,319 |
| | 31,824 |
|
Total liabilities | $ | 1,379,934 |
| | $ | 1,277,523 |
|
Commitments and contingencies (See Note 14) |
|
| |
|
|
Shareholders’ equity: | | | |
Preferred stock, $1.00 par value; authorized shares - 5,000,000; issued and outstanding shares - none | $ | — |
| | $ | — |
|
Common stock, $0.10 par value; authorized shares - 145,000,000; issued shares – 85,435,438 and 85,162,527 as of September 30, 2012 and December 31, 2011, respectively | 8,544 |
| | 8,516 |
|
Capital surplus | 798,108 |
| | 792,096 |
|
Accumulated surplus | 164,574 |
| | 93,489 |
|
Accumulated other comprehensive loss | (5,303 | ) | | (7,946 | ) |
Treasury stock, at cost; shares - 9,467,286 and 4,593,663 as of September 30, 2012 and December 31, 2011, respectively | (150,000 | ) | | (75,000 | ) |
Total MasTec, Inc. shareholders’ equity | $ | 815,923 |
| | $ | 811,155 |
|
Non-controlling interests | 43 |
| | 52 |
|
Total shareholders’ equity | $ | 815,966 |
| | $ | 811,207 |
|
Total liabilities and shareholders’ equity | $ | 2,195,900 |
| | $ | 2,088,730 |
|
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2012 | | 2011 |
Cash flows from operating activities: | | | |
Net income | $ | 71,076 |
| | $ | 97,411 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 65,767 |
| | 53,552 |
|
Stock-based compensation expense | 3,351 |
| | 2,779 |
|
Excess tax benefit from stock-based compensation | (302 | ) | | (3,942 | ) |
Non-cash interest expense | 6,424 |
| | 5,460 |
|
Provision for doubtful accounts | 2,533 |
| | 1,478 |
|
Impairment of securities available for sale | — |
| | 457 |
|
(Gain) loss on sale of assets | (1,569 | ) | | 139 |
|
Impairment charges and loss on disposal of businesses | 12,922 |
| | — |
|
Gain on remeasurement of equity interest in acquiree | — |
| | (29,041 | ) |
Changes in assets and liabilities, net of assets acquired and liabilities assumed: | | | |
Accounts receivable | (233,220 | ) | | (226,993 | ) |
Inventories | 9,936 |
| | (35,340 | ) |
Deferred tax assets and liabilities, net | (3,555 | ) | | 38,816 |
|
Other assets, current and non-current portion | (6,383 | ) | | 939 |
|
Accounts payable and accrued expenses | 176,289 |
| | 93,467 |
|
Billings in excess of costs and earnings | (3,367 | ) | | (61,916 | ) |
Other liabilities, current and non-current portion | 14,768 |
| | (361 | ) |
Net cash provided by (used in) operating activities | $ | 114,670 |
| | $ | (63,095 | ) |
Cash flows provided by (used) in investing activities: | | | |
Cash paid for acquisitions, net, including contingent consideration | (17,496 | ) | | (85,367 | ) |
Capital expenditures | (50,331 | ) | | (56,996 | ) |
Proceeds from sale of assets | 5,808 |
| | 4,456 |
|
Proceeds from disposal of business, net | 97,728 |
| | — |
|
Proceeds from redemption of investments | — |
| | 4,600 |
|
Investments in life insurance policies | (284 | ) | | (283 | ) |
Net cash provided by (used in) investing activities | $ | 35,425 |
| | $ | (133,590 | ) |
Cash flows (used in) provided by financing activities: | | | |
Proceeds from credit facility | 631,815 |
| | 135,761 |
|
Repayments of credit facility | (681,815 | ) | | (108,761 | ) |
Repayments of other borrowings | (15,510 | ) | | (9,098 | ) |
Proceeds from (repayments of) book overdrafts | (5,645 | ) | | 22,698 |
|
Payments of capital lease obligations | (14,806 | ) | | (12,926 | ) |
Proceeds from stock option exercises and other share-based awards | 1,445 |
| | 11,921 |
|
Excess tax benefit from stock-based compensation | 302 |
| | 3,942 |
|
Purchases of treasury stock | (75,000 | ) | | (1,950 | ) |
Payments of financing costs | (113 | ) | | (6,069 | ) |
Net cash (used in) provided by financing activities | $ | (159,327 | ) | | $ | 35,518 |
|
Net decrease in cash and cash equivalents | (9,232 | ) | | (161,167 | ) |
Net effect of currency translation on cash | 135 |
| | (74 | ) |
Cash and cash equivalents - beginning of period | $ | 20,279 |
| | $ | 177,604 |
|
Cash and cash equivalents - end of period | $ | 11,182 |
| | $ | 16,363 |
|
Cash and cash equivalents of discontinued operations | $ | 710 |
| | $ | 9,079 |
|
Cash and cash equivalents of continuing operations | $ | 10,472 |
| | $ | 7,284 |
|
Supplemental cash flow information: | | | |
Interest paid | $ | 20,879 |
| | $ | 20,558 |
|
Income taxes paid, net of refunds | $ | 37,219 |
| | $ | 18,570 |
|
Receipt of inventory prepaid in prior year | $ | 12,005 |
| | $ | — |
|
Supplemental disclosure of noncash information: | | | |
Equipment acquired under capital lease | $ | 29,917 |
| | $ | 5,286 |
|
Equipment acquired under financing arrangements | $ | 4,887 |
| | $ | 10,692 |
|
Conversion of leases from operating to capital | $ | — |
| | $ | 23,366 |
|
Shares issued in connection with business combinations | $ | — |
| | $ | 94,213 |
|
Exchange of senior convertible notes | $ | — |
| | $ | 202,322 |
|
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Note 1 – Business, Basis of Presentation and Significant Accounting Policies
Nature of the Business
MasTec, Inc. (collectively with its subsidiaries, “MasTec” or the “Company”) is a leading infrastructure construction company operating mainly throughout North America across a range of industries. The Company’s activities include the engineering, building, installation, maintenance and upgrade of energy, utility and communications infrastructure, such as: electrical utility transmission and distribution; power generation; natural gas and petroleum pipeline infrastructure; wireless, wireline and satellite communications; wind farms, solar farms and other renewable energy; industrial infrastructure; and water and sewer systems. MasTec’s customers are primarily in the utility, communications and government industries.
Basis of Presentation
The accompanying condensed unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated balance sheet as of December 31, 2011 is derived from the Company’s audited financial statements as of that date. Because certain information and footnote disclosures have been condensed or omitted, these condensed unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2011 contained in the Company’s most recent Annual Report on Form 10-K, as amended. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. The Company believes that the disclosures made in these condensed unaudited consolidated financial statements are adequate to make the information not misleading.
Principles of Consolidation
The accompanying condensed unaudited consolidated financial statements include MasTec, Inc. and its subsidiaries and include the accounts of all majority-owned subsidiaries over which the Company exercises control and, when applicable, entities in which the Company has a controlling financial interest. Other parties’ interests in companies for which MasTec exercises control and has a controlling financial interest are reported as non-controlling interests within shareholders’ equity. Net income or loss attributable to non-controlling interests is reported as a separate line item below net income. The Company’s investments in entities in which the Company does not have a controlling interest, but has the ability to exert significant influence, are accounted for using the equity method of accounting. Equity method investments are recorded as long-term assets in the condensed unaudited consolidated balance sheets. Income or loss from these investments is recorded in other income or expense, net, in the condensed unaudited consolidated statements of operations. The cost method is used for investments in entities in which the Company does not have the ability to exert significant influence. All significant intercompany balances and transactions have been eliminated in consolidation.
Discontinued Operations
In determining whether a group of assets to be disposed of should be presented as a discontinued operation, the Company makes a determination as to whether such assets comprise a component of the entity, which includes an assessment as to whether it has historic operations and cash flows that can be clearly distinguished. The Company also determines whether the cash flows associated with the group of assets will be significantly eliminated from the ongoing operations of the Company as a result of the disposal transaction and whether the Company will have no significant continuing involvement in the operations of the disposed assets after the disposal transaction. If management believes these conditions exist, then the assets and liabilities and results of operations of the assets to be disposed, as well as any estimated gain or loss on the disposal transaction, are aggregated for presentation separately from the financial position and operating results of the Company's continuing operations.
For those businesses for which management has committed to a plan of sale, the business is valued at the lower of its carrying amount or estimated fair value less costs to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Estimated fair value is determined using management estimates and entity-specific assumptions. Management considers historical experience and all available information at the time such estimates are made; however, the fair value that is ultimately recognized upon sale of the related business may differ from the estimated fair value as reflected in the condensed unaudited consolidated financial statements. Depreciation and amortization expense is not recorded on assets of a business to be sold once that business has been classified as held for sale.
In May 2012, Red Ventures LLC (“Red Ventures”) exercised its purchase option to acquire MasTec’s wholly owned subsidiary, DirectStar TV, LLC (“DirectStar”), including its subsidiaries (together, the “DirectStar Business”). The transaction was consummated in June 2012. Accordingly, the DirectStar Business is presented as a discontinued operation in the condensed unaudited consolidated financial statements for all periods presented.
In September 2012, MasTec's board of directors approved a plan of sale for the projects and net assets of its wholly-owned subsidiary, Globetec Construction LLC and subsidiaries (“Globetec”), to be completed on or before September 30, 2013. Accordingly, Globetec is presented as a discontinued operation in the condensed unaudited consolidated financial statements for all periods presented. In connection with its decision to sell Globetec, the Company recognized impairment losses of $12.7 million during the three month period ended September 30, 2012.
See Note 4 - Discontinued Operations.
Management Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Key estimates include: the recognition of revenue, in particular, on long-term construction contracts, including estimates to complete and provisions for contract losses; allowances for doubtful accounts; accrued self-insured claims; estimated fair values of goodwill and intangible assets, acquisition-related contingent consideration, assets and liabilities classified as held-for-sale, investments in equity method investees, securities available for sale and certain convertible debt obligations; asset lives used in computing depreciation and amortization, including amortization of intangible assets; accounting for income taxes; and the estimated impact of contingencies and ongoing litigation. While management believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole, actual results could differ from those estimates and such differences may be material to the condensed unaudited consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current period presentation.
Significant Accounting Policies
Except for adoption of the accounting pronouncements discussed below, there have been no material changes to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as amended.
Recently Issued Accounting Standards, Not Adopted as of September 30, 2012
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02 Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired before performing quantitative impairment testing. The more-likely-than-not threshold is defined as having a likelihood of greater than 50%. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2012-02 on its indefinite-lived intangible asset impairment assessment methodology.
Recently Adopted Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“ASU 2011-04”). The objective of ASU 2011-04 is to converge guidance of the FASB and the International Accounting Standards Board on fair value measurement and disclosure. This update changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements; clarifies the FASB’s intent about the application of existing fair value measurement requirements; and changes particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04, which the Company adopted as of January 1, 2012, is effective prospectively for interim and annual periods beginning after December 15, 2011. See fair value disclosures in Note 6 - Fair Value of Financial Instruments.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU 2011-05 provides the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”), which defers the provisions in ASU 2011-05 relating to the presentation of reclassification adjustments. ASU 2011-12 reinstates the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before ASU 2011-05. The remaining provisions of ASU 2011-05 are effective retrospectively for annual periods, and interim periods within those years, beginning after December 15, 2011. ASU 2011-12, which the Company adopted as of January 1, 2012, is effective for reporting periods beginning after December 15, 2011. See the condensed unaudited consolidated statements of comprehensive income for related disclosures.
Note 2 – Earnings Per Share
Basic earnings per share is computed by dividing earnings available to MasTec’s common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing earnings by the number of fully diluted shares, which includes the effect of potentially dilutive issuances of common shares, as determined using earnings from continuing operations. Potentially dilutive common shares include outstanding stock options and unvested restricted share awards, as calculated under the treasury stock method, as well as shares associated with the Company’s outstanding convertible securities.
The following table provides details of the Company’s earnings per share calculations for the periods indicated (in thousands, except per share amounts). Note that earnings per share calculations may contain slight summation differences due to rounding.
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Basic | | | | | | | |
Net income attributable to MasTec: | | | | | | | |
Net income from continuing operations before non-controlling interests | $ | 36,098 |
| | $ | 30,827 |
| | $ | 78,957 |
| | $ | 90,473 |
|
Net (loss) income from discontinued operations before non-controlling interests | (9,277 | ) | | 1,015 |
| | (7,872 | ) | | 6,969 |
|
Basic net income attributable to MasTec | $ | 26,821 |
| | $ | 31,842 |
| | $ | 71,085 |
| | $ | 97,442 |
|
Weighted average shares outstanding | 76,194 |
| | 84,732 |
| | 79,009 |
| | 81,982 |
|
Basic earnings (loss) per share attributable to MasTec: | | | | | | | |
Continuing operations | $ | 0.47 |
| | $ | 0.36 |
| | $ | 1.00 |
| | $ | 1.10 |
|
Discontinued operations | (0.12 | ) | | 0.01 |
| | (0.10 | ) | | 0.09 |
|
Total basic earnings per share | $ | 0.35 |
| | $ | 0.38 |
| | $ | 0.90 |
| | $ | 1.19 |
|
Diluted | | | | | | | |
Net income attributable to MasTec: | | | | | | | |
Basic net income from continuing operations before non-controlling interests | $ | 36,098 |
| | $ | 30,827 |
| | $ | 78,957 |
| | $ | 90,473 |
|
Interest expense on Original 4.0% Notes, net of tax | 59 |
| | 62 |
| | 176 |
| | 272 |
|
Interest expense on Original 4.25% Notes, net of tax | 19 |
| | 20 |
| | 58 |
| | 134 |
|
Diluted net income from continuing operations before non-controlling interests | $ | 36,176 |
| | $ | 30,909 |
| | $ | 79,191 |
| | $ | 90,879 |
|
Net (loss) income from discontinued operations before non-controlling interests | (9,277 | ) | | 1,015 |
| | (7,872 | ) | | 6,969 |
|
Diluted net income attributable to MasTec | $ | 26,899 |
| | $ | 31,924 |
| | $ | 71,319 |
| | $ | 97,848 |
|
Shares: | | | | | | | |
Basic weighted average shares outstanding | 76,194 |
| | 84,732 |
| | 79,009 |
| | 81,982 |
|
Dilutive common stock equivalents | 887 |
| | 1,049 |
| | 842 |
| | 1,207 |
|
Dilutive premium shares, New 4.0% Notes | 794 |
| | 1,366 |
| | 631 |
| | 1,166 |
|
Dilutive premium shares, New 4.25% Notes | 845 |
| | 1,371 |
| | 694 |
| | 1,187 |
|
Dilutive shares, Original 4.0% Notes | 612 |
| | 612 |
| | 612 |
| | 945 |
|
Dilutive shares, Original 4.25% Notes | 194 |
| | 194 |
| | 194 |
| | 446 |
|
Diluted weighted average shares outstanding | 79,526 |
| | 89,324 |
| | 81,982 |
| | 86,933 |
|
Diluted earnings (loss) per share attributable to MasTec: | | | | | | | |
Continuing operations | $ | 0.45 |
| | $ | 0.35 |
| | $ | 0.97 |
| | $ | 1.05 |
|
Discontinued operations | (0.12 | ) | | 0.01 |
| | (0.10 | ) | | 0.08 |
|
Total diluted earnings per share | $ | 0.34 |
| | $ | 0.36 |
| | $ | 0.87 |
| | $ | 1.13 |
|
There were no weighted average anti-dilutive common stock equivalents from restricted share awards for the three or nine months ended September 30, 2012, respectively. A total of 7,609 and 2,564 weighted average anti-dilutive common stock equivalents were not included in the Company’s diluted earnings per share calculations for the three and nine months ended September 30, 2011, respectively.
Treasury Stock and Share Activity
During the fourth quarter of 2011, the Company’s Board of Directors authorized a $150 million share repurchase plan, under which the Company repurchased 4.6 million shares of common stock for $75.0 million during the year ended December 31, 2011. During the second quarter of 2012, the Company repurchased an additional 2.9 million shares under this plan for an aggregate purchase price of $43.8 million. In July 2012, the Company repurchased an additional 2.0 million shares for an aggregate purchase price of $31.2 million, which completed the share repurchase plan. The repurchased shares are held in the Company’s treasury.
A summary of share activity for the nine months ended September 30, 2012 is as follows (in thousands):
|
| | | | | |
| Common Shares Outstanding | | Treasury Shares |
Balance as of December 31, 2011 | 80,569 |
| | 4,594 |
|
Shares issued for stock options | 68 |
| | |
Shares issued for restricted stock | 143 |
| | |
Other shares issued | 61 |
| | |
Common stock repurchases | (4,873 | ) | | 4,873 |
|
Balance as of September 30, 2012 | 75,968 |
| | 9,467 |
|
Senior Convertible Notes – Diluted Share Impact
The Company had convertible notes outstanding during each of the three and nine months ended September 30, 2012 and 2011. During the first quarter of 2011, the Company exchanged $105.3 million of its original 4.0% senior convertible notes (the “Original 4.0% Notes”) and $97.0 million of its original 4.25% senior convertible notes (the “Original 4.25% Notes” and, together with the Original 4.0% Notes, the “Original Notes”) for identical principal amounts of new 4.0% and 4.25% senior convertible notes (the “New 4.0% Notes” and the “New 4.25% Notes,” respectively and, collectively, the “New Notes”). The terms of the New Notes are substantially identical to the Original Notes, except that the New Notes have an optional physical (common share), cash or combination settlement feature and contain certain conditional conversion features. Due to the optional cash settlement feature and management’s intent to settle the principal amount thereof in cash, the conversion shares underlying the outstanding principal amount of the New Notes, totaling approximately 13.0 million shares, are not required to be included in the Company’s diluted share count. If, however, the Company’s average stock price per share for the corresponding periods exceeds the $15.76 conversion price for the New 4.0% Notes or the $15.48 conversion price for the New 4.25% Notes, the resulting amount, in shares, of the premium over the principal amount is included in the Company’s diluted share count (“premium shares”).
The number of common shares issuable upon conversion of the Company’s Original Notes is reflected in the calculation of diluted earnings per share for the corresponding periods by application of the “if-converted” method to the extent their effect on the computation of earnings per share from continuing operations is dilutive. Under the “if-converted” method, net income from continuing operations is adjusted to add back the after-tax amount of interest recognized in the period associated with the convertible notes, and correspondingly, the convertible notes are assumed to have been converted with the resulting common shares added to weighted average shares outstanding. Premium shares associated with the New Notes are reflected in the calculation of diluted earnings per share to the extent that the Company’s average stock price for the corresponding periods exceeded the respective conversion prices of the New Notes, beginning with the date of issuance, or the beginning of the period, as applicable.
The following table summarizes the principal amounts of the Company’s outstanding convertible notes for the periods indicated, including their respective classification within the computation of earnings per share for each period (in millions):
|
| | | | | | | |
| Three and Nine Months Ended September 30, |
| 2012 | | 2011 |
Dilutive: | | | |
New 4.0% Notes (1) | $ | 105.3 |
| | $ | 105.3 |
|
New 4.25% Notes (1) | 97.0 |
| | 97.0 |
|
Original 4.0% Notes (2) | 9.7 |
| | 9.7 |
|
Original 4.25% Notes (2) | 3.0 |
| | 3.0 |
|
Total principal amount, dilutive outstanding convertible notes | $ | 215.0 |
| | $ | 215.0 |
|
(1)Dilutive shares associated with the New Notes are attributable to the premium over the respective conversion prices.
(2)Dilutive shares associated with the Original Notes are attributable to the underlying principal amounts.
The Company’s average stock price for the three and nine month periods ended September 30, 2012 and 2011 exceeded the conversion prices of the New Notes. The number of premium shares included in the Company’s diluted share count varies with fluctuations in the Company’s actual share price for the related periods. Higher share prices result in a greater number of equivalent premium shares. Details of the calculation underlying the number of premium shares included in the Company’s diluted share count for the periods indicated are as follows (in thousands, except per share amounts): |
| | | | | | | | | | | | | | | |
| As of and for the Three Months Ended September 30, 2012 | | As of and for the Nine Months Ended September 30, 2012 |
| New 4.0% Notes | | New 4.25% Notes | | New 4.0% Notes | | New 4.25% Notes |
Principal amount | $ | 105,322 |
| | $ | 97,000 |
| | $ | 105,322 |
| | $ | 97,000 |
|
Conversion price per share | $ | 15.76 |
| | $ | 15.48 |
| | $ | 15.76 |
| | $ | 15.48 |
|
Number of conversion shares, principal amount | 6,683 |
| | 6,268 |
| | 6,683 |
| | 6,268 |
|
Weighted average actual per share price | $ | 17.89 |
| | $ | 17.89 |
| | $ | 17.40 |
| | $ | 17.40 |
|
Excess over principal amount | $ | 14,208 |
| | $ | 15,106 |
| | $ | 10,975 |
| | $ | 12,073 |
|
Weighted average equivalent premium shares (in thousands) | 794 |
| | 845 |
| | 631 |
| | 694 |
|
Note 3 – Acquisitions and Other Investments
Allocations of purchase prices for acquisitions are based on estimates of the fair value of consideration paid and the net assets acquired and are subject to adjustment upon finalization of these fair value estimates. During the second quarter of 2011, the Company acquired certain businesses, as discussed below and in Note 3 – Acquisitions and Other Investments of the Company’s financial statements included in its Annual Report on Form 10-K, as amended, for the year ended December 31, 2011. During the second quarter of 2012, the Company revised its preliminary allocations for certain of these acquisitions based on information about the facts and circumstances existing as of the respective dates of such acquisitions and for purchase price adjustments based on the final net assets and net working capital, as prescribed by the relevant purchase agreements. These adjustments resulted in the recognition of, or adjusted the fair values of, certain acquired assets and liabilities, resulting in the revision of comparative prior period financial information. The effects of measurement period adjustments on the allocations of purchase prices for acquired businesses are presented in the Company's financial statements as if the adjustments had been taken into account as of the respective dates of acquisition. All changes that do not qualify as measurement period adjustments are included in current period earnings.
EC Source
In November 2010, MasTec entered into a membership interest purchase agreement and invested $10 million in exchange for a 33% voting interest in EC Source Services LLC (“EC Source”) and a two-year option (the “EC Source Merger Option”) that granted MasTec the right, but not the obligation, to acquire the entirety of EC Source’s outstanding equity pursuant to the terms of a merger agreement. On April 29, 2011, the Company exercised its EC Source Merger Option and, effective May 2, 2011, acquired the remaining 67% membership interest in EC Source for a total ownership percentage of 100%, for an aggregate purchase price composed of 5,129,642 shares of MasTec common stock, valued at $94.2 million, $0.3 million in cash and a five year earn-out, valued at $25.0 million as of the date of acquisition. In addition, we assumed $8.6 million of debt, which relates primarily to equipment loans payable to the former owner of EC Source, of which $8.6 million remains outstanding as of September 30, 2012. The fair value of the 33% equity investment in EC Source was estimated to be $39.6 million immediately before the closing of the merger, resulting in a gain on remeasurement of $29.0 million, which was reflected as a component of other income in the Company’s results of operations during the second quarter of 2011.
The following table summarizes the estimated fair value of consideration paid and the final allocation of purchase price to the fair value of assets acquired and liabilities assumed as of the date of acquisition (in millions).
|
| | | |
Purchase price consideration: | |
Shares transferred | $ | 94.2 |
|
Cash | 0.3 |
|
Fair value of contingent consideration (earn-out liability) | 25.0 |
|
Total consideration transferred | $ | 119.5 |
|
Fair value of equity investment | 39.6 |
|
Fair value of total consideration | $ | 159.1 |
|
Purchase price allocation to identifiable assets acquired and liabilities assumed: | |
Current assets | $ | 21.0 |
|
Property and equipment | 10.1 |
|
Pre-qualifications | 31.3 |
|
Backlog | 11.0 |
|
Non-compete agreements | 1.5 |
|
Current liabilities | (13.4 | ) |
Debt | (8.6 | ) |
Deferred income taxes | (14.5 | ) |
Total identifiable net assets | $ | 38.4 |
|
Goodwill | $ | 120.7 |
|
Total consideration allocated | $ | 159.1 |
|
EC Source’s earnings have been consolidated as of the effective date of the acquisition, May 2, 2011. Prior to the effective date of the acquisition, the Company’s investment in EC Source was accounted for under the equity method of accounting.
Fabcor
Effective April 1, 2011, MasTec acquired all of the issued and outstanding shares of Fabcor TargetCo Ltd. (“Fabcor Parent” and, together with its wholly-owned Canadian subsidiaries, Fabcor 2001, Inc. and Fabcor Pipelines B.C. Inc., “Fabcor”) for an aggregate purchase price composed of approximately $24.2 million in cash, including a $1.4 million post-closing purchase price adjustment based on Fabcor’s final closing tangible net worth and net working capital, recorded in the second quarter of 2012, and a five year earn-out, valued at $16.9 million as of the date of acquisition. In addition, we assumed $7.0 million of debt, which was repaid immediately.
The following table summarizes the estimated fair value of consideration paid and the allocation of purchase price as of the date of acquisition (in millions).
|
| | | |
Purchase price consideration: | |
Cash | $ | 24.2 |
|
Fair value of contingent consideration (earn-out liability) | 16.9 |
|
Total consideration transferred | $ | 41.1 |
|
Purchase price allocation to identifiable assets acquired and liabilities assumed: | |
Current assets | $ | 24.3 |
|
Property and equipment | 12.8 |
|
Trade names | 0.7 |
|
Non-compete agreements | 0.1 |
|
Customer relationships | 3.1 |
|
Backlog | 0.4 |
|
Current liabilities | (24.1 | ) |
Deferred income taxes and other liabilities | (4.3 | ) |
Total identifiable net assets | $ | 13.0 |
|
Goodwill | $ | 28.1 |
|
Total consideration allocated | $ | 41.1 |
|
Fabcor’s earnings have been consolidated as of the effective date of the acquisition, April 1, 2011.
Other 2011 Acquisitions
During the second quarter of 2012, $3.9 million of additional goodwill and workers compensation liabilities related to the Halsted Communications, Ltd. ("Halsted") acquisition were recorded as a result of final claims data for the pre-acquisition period. Also, the estimated fair value of the contingent consideration arrangement related to Optima Network Services, Inc. ("Optima") was increased by $1.5 million in the second quarter of 2012 to reflect additional information and analysis. Refer to Note 3 – Acquisitions and Other Investments of the Company’s financial statements included in its Annual Report on Form 10-K, as amended, for the year ended December 31, 2011 for details of the Halsted and Optima acquisitions.
Revenues of $164.7 million and net income of $11.6 million resulting from the year over year incremental impact of the Company’s 2011 acquisitions are included in MasTec’s consolidated results of operations for the nine months ended September 30, 2012.
Other Investments
Through a 60%-owned consolidated subsidiary, MasTec acquired a 34% interest in a rock extraction business in Panama (for a net beneficial ownership interest of 20.4%) during 2010. This investment, which is a component of the Company's discontinued Globetec operation, is accounted for under the equity method of accounting, and is reflected within long-term assets of discontinued operations in the condensed unaudited consolidated financial statements. MasTec performed construction services for this investee and revenues of approximately $0.8 million and $0.7 million are included within the Company's results from discontinued operations for the three months ended September 30, 2012 and 2011, respectively. Revenues of $2.0 million and $2.4 million are included within the Company's results from discontinued operations for the nine months ended September 30, 2012 and 2011, respectively. Receivables from this investee, which are reflected within assets held for sale in the condensed unaudited consolidated financial statements, were approximately $3.9 million and $6.7 million as of September 30, 2012 and December 31, 2011, respectively, of which $1.1 million and $4.3 million, respectively, were classified as long term. In connection with the decision to sell the projects and assets of Globetec, an impairment charge of $4.4 million associated with the outstanding receivable balance from this investee was recognized during the three months ended September 30, 2012. See Note 4 – Discontinued Operations.
The Company has certain other cost and equity method investments. None of these investments was material individually or in the aggregate as of September 30, 2012. No impairment charges related to the Company's cost method investments nor the Company's equity method investments were recorded during the three or nine months ended September 30, 2012 or 2011.
Note 4 – Discontinued Operations
DirectStar
In May 2012, Red Ventures exercised its option to acquire from the Company all of the issued and outstanding equity interests in DirectStar, which provides marketing and sales services on behalf of DIRECTV®. The sale of DirectStar to Red Ventures was consummated in June 2012. The Company sold DirectStar for a net sale price of $98.9 million in cash. The DirectStar Business is presented as a discontinued operation in the Company’s condensed unaudited consolidated financial statements for all periods presented.
The following is a summary of assets and liabilities associated with the DirectStar Business as of the dates as indicated (in millions):
|
| | | | | | | |
| May 31, 2012 | | December 31, 2011 |
Assets: | | | |
Current assets | $ | 12.0 |
| | $ | 9.8 |
|
Property and equipment, net | 1.2 |
| | 1.4 |
|
Goodwill and other intangible assets, net | 104.0 |
| | 101.2 |
|
Assets of discontinued operations | $ | 117.2 |
| | $ | 112.4 |
|
Liabilities: | | | |
Accounts payable and accrued expenses | $ | 10.6 |
| | $ | 9.6 |
|
Other current liabilities, including accrued earn-outs | 7.4 |
| | 10.6 |
|
Liabilities of discontinued operations | $ | 18.0 |
| | $ | 20.2 |
|
Results from discontinued operations associated with the DirectStar Business for the periods indicated were as follows (in millions): |
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | — |
| | $ | 41.1 |
| | $ | 60.2 |
| | $ | 114.3 |
|
Income from operations before provision for income taxes | — |
| | 3.4 |
| | 6.2 |
| | 17.4 |
|
Loss on disposal before provision for income taxes | — |
| | — |
| | (0.2 | ) | | — |
|
Provision for income taxes | $ | — |
| | $ | (1.3 | ) | | $ | (2.3 | ) | | $ | (6.6 | ) |
Net income from discontinued operations | $ | — |
| | $ | 2.1 |
| | $ | 3.7 |
| | $ | 10.8 |
|
Globetec
In September 2012, the Company's board of directors voted to approve a plan of sale for substantially all of the projects and assets of Globetec. The decision to sell was made after evaluation of, among other things, short and long-term prospects of the Globetec operation. Accordingly, Globetec's projects and assets are reflected as assets and liabilities of discontinued operations in the condensed unaudited consolidated balance sheets for all periods presented, and Globetec's results of operations are presented as discontinued operations in the condensed unaudited statements of operations for all periods presented.
As of September 30, 2012, the carrying value of the subject net assets held-for-sale was $20.6 million. This amount comprises total assets of $25.9 million and total liabilities of $5.3 million. For the three month period ended September 30, 2012, the Company recognized impairment charges of approximately $6.4 million pertaining to goodwill and other intangible assets associated with the Globetec operation. In addition, the Company recognized impairment charges of approximately $6.3 million pertaining to other assets of the Globetec operation, primarily composed of accounts receivable, work in process and other current assets, in connection with its decision to sell substantially all related projects and assets of the Globetec operation. This estimate was based on an evaluation of, among other things, the expected cash flows from the operation of these projects, as well as the estimated net realizable value of the assets to be sold, in light of the Company's plans pertaining to the future operations of Globetec and its decision to sell the related assets.
Management is currently in discussions with at least one potential buyer and is discussing a selling price which considers the Company's view of the estimated fair value of the projects and net assets that have been classified as held-for-sale as of September 30, 2012. The Company's estimates are subject to change in the future. If the Company is not able to sell these projects and assets at the currently estimated selling price, the Company may incur additional impairment charges in the future.
The following is a summary of assets and liabilities associated with the Globetec operation as of the dates as indicated (in millions): |
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Assets: | | | |
Current assets | $ | 16.7 |
| | $ | 20.8 |
|
Property and equipment, net | 2.0 |
| | 2.2 |
|
Goodwill and other intangible assets, net | — |
| | 6.4 |
|
Other long-term assets | 7.2 |
| | 10.5 |
|
Assets of discontinued operations | $ | 25.9 |
| | $ | 39.9 |
|
Liabilities: | | | |
Accounts payable and accrued expenses | $ | 0.7 |
| | $ | 6.1 |
|
Other current liabilities | 4.6 |
| | 3.0 |
|
Long-term liabilities | — |
| | — |
|
Liabilities of discontinued operations | $ | 5.3 |
| | $ | 9.1 |
|
Results from discontinued operations associated with Globetec for the periods indicated were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 4.8 |
| | $ | 8.0 |
| | $ | 13.5 |
| | $ | 20.8 |
|
Loss from operations before benefit from income taxes | (2.6 | ) | | (0.8 | ) | | (5.8 | ) | | (5.2 | ) |
Impairment of assets, disposal group, before benefit from income taxes | (12.7 | ) | | — |
| | (12.7 | ) | | — |
|
Benefit from (provision for) income taxes | $ | 6.0 |
| | $ | (0.3 | ) | | $ | 6.9 |
| | $ | 1.3 |
|
Net loss from discontinued operations | $ | (9.3 | ) | | $ | (1.1 | ) | | $ | (11.6 | ) | | $ | (3.9 | ) |
Included within the above results from discontinued operations for the DirectStar Business and Globetec are $0.2 million and $0.3 million of depreciation and amortization for the three month periods ended September 30, 2012 and 2011, respectively, and $0.6 million and $0.8 million of depreciation and amortization for the nine month periods ended September 30, 2012 and 2011, respectively.
Note 5 - Goodwill and Other Intangible Assets
The following table sets forth information for MasTec’s goodwill and intangible assets as of the dates indicated (in millions):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Amortizing intangible assets: (1) | | | |
Gross carrying amount | $ | 90.9 |
| | $ | 95.8 |
|
Less: accumulated amortization | (54.8 | ) | | (51.3 | ) |
Amortizing intangible assets, net | $ | 36.1 |
| | $ | 44.5 |
|
Non-amortizing intangible assets: | | | |
Trade names | 28.3 |
| | 28.3 |
|
Pre-qualifications | 31.3 |
| | 31.3 |
|
Other | 6.6 |
| | 6.6 |
|
Non-amortizing intangible assets | $ | 66.2 |
| | $ | 66.2 |
|
Goodwill | $ | 724.3 |
| | $ | 714.8 |
|
Goodwill and other intangible assets | $ | 826.6 |
| | $ | 825.5 |
|
| |
(1) | Consists principally of customer relationships, trade names and non-compete agreements with finite lives. |
The following table provides a reconciliation of changes in goodwill and other intangible assets for the period indicated (in millions):
|
| | | | | | | | | | | | | | | |
| | | Other Intangible Assets | | |
| Goodwill | | Non-amortizing | | Amortizing | | Total |
Balance at December 31, 2011 | $ | 714.8 |
| | $ | 66.2 |
| | $ | 44.5 |
| | $ | 825.5 |
|
Accruals of acquisition-related contingent consideration | 9.5 |
| | | | | | 9.5 |
|
Amortization expense | | | | | (8.4 | ) | | (8.4 | ) |
Balance at September 30, 2012 | $ | 724.3 |
| | $ | 66.2 |
| | $ | 36.1 |
| | $ | 826.6 |
|
See Note 4 - Discontinued Operations for information pertaining to goodwill and other intangible assets of discontinued operations.
Note 6 – Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts and notes receivable, cash collateral deposited with insurance carriers, cash surrender value of life insurance policies, auction rate securities, cost and equity method investments, deferred compensation plan assets and liabilities, accounts payable and other current liabilities, acquisition-related contingent consideration and debt obligations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value guidance establishes a valuation hierarchy, which requires maximizing the use of observable inputs. The three levels of inputs that may be used are:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Observable market based inputs or other observable inputs.
Level 3 - Significant unobservable inputs that cannot be corroborated by observable market data. These values are generally determined using valuation models incorporating management’s estimates of market participant assumptions.
Carrying amounts and estimated fair values of financial instruments as of the dates indicated were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets | | | | | | | |
Cash surrender value of life insurance policies | $ | 11.6 |
| | $ | 11.6 |
| | $ | 10.6 |
| | $ | 10.6 |
|
Auction rate securities | $ | 14.1 |
| | $ | 14.1 |
| | $ | 13.6 |
| | $ | 13.6 |
|
Liabilities | | | | | | | |
Acquisition-related contingent consideration | $ | 79.0 |
| | $ | 79.0 |
| | $ | 80.5 |
| | $ | 80.5 |
|
7.625% senior notes | $ | 150.0 |
| | $ | 156.0 |
| | $ | 150.0 |
| | $ | 156.4 |
|
Original 4.0% Notes | $ | 9.7 |
| | $ | 13.9 |
| | $ | 9.7 |
| | $ | 12.5 |
|
Original 4.25% Notes | $ | 3.0 |
| | $ | 4.2 |
| | $ | 3.0 |
| | $ | 4.0 |
|
New 4.0% Notes | $ | 100.2 |
| | $ | 102.1 |
| | $ | 98.2 |
| | $ | 99.4 |
|
New 4.25% Notes | $ | 91.6 |
| | $ | 93.7 |
| | $ | 89.9 |
| | $ | 91.1 |
|
The following methods and assumptions were used to estimate the fair values of financial instruments:
Cash Surrender Value of Life Insurance Policies. Cash surrender values of life insurance policies are based on current cash surrender values as quoted by insurance carriers. Life insurance policies support the Company’s split dollar agreements and deferred compensation plan assets.
Auction Rate Securities. The fair value of the Company’s auction rate securities was estimated by an independent valuation firm, Houlihan Capital Advisors, LLC, using a probability weighted discounted cash flow model. See Note 7 - Securities Available for Sale.
Acquisition-Related Contingent Consideration. Acquisition-related contingent consideration in the table above represents the estimated fair value of additional future earn-outs payable for acquisitions of businesses beginning with the acquisition of Precision Pipeline LLC in November of 2009. The fair value of such acquisition-related contingent consideration is based on management’s estimates and entity-specific assumptions, and is evaluated on an ongoing basis.
Debt. The estimated fair values of the Company’s 7.625% senior notes and Original Notes are based on quoted market prices. The estimated fair value of the debt component of the Company’s New Notes is calculated using an income approach, based on a discounted cash flow model. This method is based on management’s estimates of the Company’s market interest rate for a similar nonconvertible instrument. See Note 10 - Debt.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2012, the Company held certain assets and liabilities required to be measured at fair value on a recurring basis. The fair values of financial assets and liabilities measured on a recurring basis were determined using the following inputs as of the dates indicated (in millions):
|
| | | | | | | | | | | | | | |
| | | Fair Value Measurements Using Inputs Considered as Significant |
| Fair Value as of September 30, 2012 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Cash surrender value of life insurance policies | $ | 11.6 |
| | $ | 11.6 |
| | — |
| | — |
|
Auction rate securities | $ | 14.1 |
| | — |
| | — |
| | $ | 14.1 |
|
Liabilities | | | | | | | |
Acquisition-related contingent consideration | $ | 79.0 |
| | — |
| | — |
| | $ | 79.0 |
|
| | | | | | | |
| | | Fair Value Measurements Using Inputs Considered as Significant |
| Fair Value as of December 31, 2011 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Cash surrender value of life insurance policies | $ | 10.6 |
| | $ | 10.6 |
| | — |
| | — |
|
Auction rate securities | $ | 13.6 |
| | — |
| | — |
| | $ | 13.6 |
|
Liabilities | | | | | | | |
Acquisition-related contingent consideration | $ | 80.5 |
| | — |
| | — |
| | $ | 80.5 |
|
The following tables provide a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis using significant unobservable inputs as of the dates indicated (in millions).
|
| | | | | | | | | | | |
| Auction Rate Securities |
Three Months Ended September 30, 2012 and 2011: | Student Loan | | Structured Finance Securities | | Total |
Assets | | | | | |
Balances at June 30, 2012 | $ | 11.7 |
| | $ | 1.8 |
| | $ | 13.5 |
|
Changes in fair value recorded in earnings | — |
| | — |
| | — |
|
Changes in unrealized (losses)/gains included in other comprehensive income | — |
| | 0.6 |
| | 0.6 |
|
Balances at September 30, 2012 | $ | 11.7 |
| | $ | 2.4 |
| | $ | 14.1 |
|
| | | | | |
Balances at June 30, 2011 | $ | 12.1 |
| | $ | 2.3 |
| | $ | 14.4 |
|
Changes in fair value recorded in earnings | — |
| | (0.5 | ) | | (0.5 | ) |
Changes in unrealized (losses)/gains included in other comprehensive income | (0.3 | ) | | — |
| | (0.3 | ) |
Balances at September 30, 2011 | $ | 11.8 |
| | $ | 1.8 |
| | $ | 13.6 |
|
|
| | | | | | | |
| Contingent Consideration | | | | |
Liabilities |
| | | | |
Balances at June 30, 2012 | $ | 80.5 |
| | | | |
Additions from new business combinations | — |
| | | | |
Payments of contingent consideration | (1.5 | ) | | | | |
Balances at September 30, 2012 | $ | 79.0 |
| | | | |
| | | | | |
Balances at June 30, 2011 | $ | 80.5 |
| | | | |
Changes in fair value recorded in earnings | — |
| | | | |
Payments of contingent consideration | — |
| | | | |
Balances at September 30, 2011 | $ | 80.5 |
| | | | |
|
| | | | | | | | | | | |
| Auction Rate Securities |
Nine Months Ended September 30, 2012 and 2011: | Student Loan | | Structured Finance Securities | | Total |
Assets | | | | | |
Balances at December 31, 2011 | $ | 11.9 |
| | $ | 1.7 |
| | $ | 13.6 |
|
Changes in fair value recorded in earnings | — |
| | — |
| | — |
|
Changes in unrealized (losses)/gains included in other comprehensive income | (0.2 | ) | | 0.7 |
| | 0.5 |
|
Balances at September 30, 2012 | $ | 11.7 |
| | $ | 2.4 |
| | $ | 14.1 |
|
| | | | | |
Balances at December 31, 2010 | $ | 16.4 |
| | $ | 2.6 |
| | $ | 19.0 |
|
Redemption or sale of securities, cost basis | (4.6 | ) | | — |
| | (4.6 | ) |
Reversal of unrealized losses on redeemed or sold securities | 0.4 |
| | — |
| | 0.4 |
|
Changes in fair value recorded in earnings | — |
| | (0.5 | ) | | (0.5 | ) |
Changes in unrealized (losses)/gains included in other comprehensive income | (0.4 | ) | | (0.3 | ) | | (0.7 | ) |
Balances at September 30, 2011 | $ | 11.8 |
| | $ | 1.8 |
| | $ | 13.6 |
|
|
| | | | | | | |
Liabilities | Contingent Consideration | | | | |
Balances at December 31, 2011 | $ | 80.5 |
| | | | |
Additions from new business combinations | — |
| | | | |
Payments of contingent consideration | (1.5 | ) | | | | |
Balances at September 30, 2012 | $ | 79.0 |
| | | | |
| | | | | |
Balances at December 31, 2010 | $ | 45.0 |
| | | | |
Additions from new business combinations | 47.7 |
| | | | |
Payments of contingent consideration | (12.2 | ) | | | | |
Balances at September 30, 2011 | $ | 80.5 |
| | | | |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as equity method investments, goodwill and long-lived assets, which are initially measured at fair value and are subsequently remeasured in the event of an impairment or other measurement event, if applicable. Except for the assets and liabilities associated with the Globetec operation, which the Company reclassified as held-for-sale in the third quarter of 2012 and the Company’s equity investment in EC Source, which was remeasured in connection with the Company’s acquisition of EC Source’s remaining equity interests in the second quarter of 2011, the Company had no significant assets or liabilities required to be measured at fair value on a nonrecurring basis as of either September 30, 2012 or December 31, 2011. Refer to Note 3 – Acquisitions and Other Investments and Note 4 – Discontinued Operations.
Note 7 – Securities Available For Sale
The Company’s securities available for sale consist of auction rate securities, which represent interests in pools of student loans guaranteed by the U.S. government under the Federal Family Education Loan Program and a structured finance security. The structured finance security has an attached credit default swap under which the principal value of the structured finance security would be partially or fully forfeited at net default rates on the underlying corporate debt obligations ranging from 8% to 9%. The net default rate as of
September 30, 2012 was estimated to be 6.23%. Both the structured finance security and the credit default swap are collateralized by investment grade credit-linked notes made up of floating rate international bank notes.
Due to liquidity issues in the auction rate securities market, there was insufficient observable market data to determine the fair values of the Company’s auction rate securities as of September 30, 2012 or December 31, 2011. Therefore, their respective fair values were estimated by an independent valuation firm, Houlihan Capital Advisors, LLC, using a probability weighted discounted cash flow model. This valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used. The following tables set forth the fair values of the Company’s auction rate securities by type of security and underlying credit rating as of the dates indicated (in millions):
|
| | | | | | | | | | | | | | | | |
| | Underlying Credit Rating (1) |
As of September 30, 2012 | | AAA | | BB | | CCC | | Total |
Student loans | | $ | 9.1 |
| | $ | 2.6 |
| | $ | — |
| | $ | 11.7 |
|
Structured finance securities | | — |
| | — |
| | 2.4 |
| | 2.4 |
|
Total auction rate securities | | $ | 9.1 |
| | $ | 2.6 |
| | $ | 2.4 |
| | $ | 14.1 |
|
|
| | | | | | | | | | | | |
| | Underlying Credit Rating (1) |
As of December 31, 2011 | | AAA | | CCC | | Total |
Student loans | | $ | 11.9 |
| | $ | — |
| | $ | 11.9 |
|
Structured finance securities | | — |
| | 1.7 |
| | 1.7 |
|
Total auction rate securities | | $ | 11.9 |
| | $ | 1.7 |
| | $ | 13.6 |
|
| |
(1) | The Company’s auction rate securities maintain split ratings. For purposes of this table, securities are categorized according to their lowest rating. |
As of September 30, 2012, the yields on the Company’s auction-rate securities ranged from 1.50% to 2.48%. These yields represent the predetermined “maximum” reset rates that occur upon auction failures according to the specific terms within each security’s governing documents. The issuers have been making interest payments when due.
Auction Rate Securities – Other Than Temporary Losses
The Company’s structured finance security, for which cumulative credit losses of $3.3 million have been recognized through September 30, 2012, had a par value of $5.0 million and a cost basis of $1.7 million as of September 30, 2012. If unrealized losses are believed to be other-than-temporary, an impairment charge is recorded. There were no other-than-temporary impairment charges recognized for the three or nine months ended September 30, 2012. For each of the three and nine months ended September 30, 2011, the Company recognized $0.5 million of other-than-temporary impairment losses in earnings, with a corresponding reduction in the cost basis of the Company’s structured finance auction rate security.
Auction Rate Securities – Reconciliation of Cost Basis to Fair Value
The Company's student loan auction rate securities have been in a continuous unrealized loss position for over twelve months. The cost basis, gross cumulative unrealized (losses) gains and estimated fair values of the Company’s auction rate securities as of the dates indicated were as follows (in millions):
|
| | | | | | | | | | | |
| September 30, 2012 |
| Adjusted Cost Basis (1) | | Gross Cumulative Unrealized (Losses)/Gains | | Fair Value |
Auction rate securities – student loans | $ | 12.9 |
| | $ | (1.2 | ) | | $ | 11.7 |
|
Auction rate securities – structured finance securities | 1.7 |
| | 0.7 |
| | 2.4 |
|
Total auction rate securities | $ | 14.6 |
| | $ | (0.5 | ) | | $ | 14.1 |
|
| | | | | |
| December 31, 2011 |
| Adjusted Cost Basis (1) | | Gross Cumulative Unrealized (Losses) Gains | | Fair Value |
Auction rate securities – student loans | $ | 12.9 |
| | $ | (1.0 | ) | | $ | 11.9 |
|
Auction rate securities – structured finance securities | 1.7 |
| | — |
| | 1.7 |
|
Total auction rate securities | $ | 14.6 |
| | $ | (1.0 | ) | | $ | 13.6 |
|
| |
(1) | Adjusted cost basis reflects adjustments for credit and other losses recognized in earnings. Cumulative adjustments to the cost basis of securities held as of both September 30, 2012 and December 31, 2011 totaled $3.3 million. Par value of securities held as of both |
September 30, 2012 and December 31, 2011 was $17.9 million.
As of September 30, 2012, contractual maturities of the Company’s student loan auction rate securities ranged from 15 to 35 years, and for the structured finance security, 4 years.
Note 8 - Accounts Receivable, Net of Allowance
Accounts receivable, net of allowance, which is classified as current, is composed of the following as of the dates indicated (in millions):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Contract billings | $ | 486.2 |
| | $ | 389.8 |
|
Retainage | 105.5 |
| | 41.7 |
|
Costs and earnings in excess of billings | 289.0 |
| | 228.7 |
|
Accounts receivable, gross | $ | 880.7 |
| | $ | 660.2 |
|
Less allowance for doubtful accounts | (7.6 | ) | | (7.6 | ) |
Accounts receivable, net | $ | 873.1 |
| | $ | 652.6 |
|
Retainage, which has been billed, but is not due until completion of performance and acceptance by customers, is generally expected to be collected within one year. Receivables expected to be collected beyond one year are recorded in other long-term assets. The Company maintains an allowance for doubtful accounts for estimated losses, both for specific customers and as a reserve against other balances, resulting from the inability of customers to make required payments.
The Company has trade receivables for certain “pay-when-paid” projects, which provide for payment through September 2016. These receivables, which are included within assets of discontinued operations in the condensed unaudited consolidated financial statements, have been recorded at their respective net present values, with the non-current portion recorded within long-term assets of discontinued operations. Imputed interest is recognized as interest income as earned, and is reflected within the results of operations from discontinued operations. As of September 30, 2012, $6.5 million was outstanding, with $4.7 million recorded in long-term assets of discontinued operations.
Certain of the Company’s international subsidiaries comprised within discontinued operations utilize the factoring of accounts receivable as short-term financing mechanisms. No material factoring transactions were entered into during the three or nine months ended September 30, 2012, and the amount of related receivables outstanding as of September 30, 2012 was not material.
Note 9 – Property and Equipment, Net
Property and equipment, net, including property and equipment held under capital leases, is composed of the following as of the dates indicated (in millions):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Land | $ | 4.6 |
| | $ | 4.7 |
|
Buildings and leasehold improvements | 13.5 |
| | 12.5 |
|
Machinery and equipment | 439.0 |
| | 381.6 |
|
Office furniture and equipment | 90.2 |
| | 76.9 |
|
Total property and equipment | $ | 547.3 |
| | $ | 475.7 |
|
Less accumulated depreciation | (259.8 | ) | | (212.7 | ) |
Property and equipment, net | $ | 287.5 |
| | $ | 263.0 |
|
Depreciation expense from continuing operations for the three months ended September 30, 2012 and 2011 was $19.8 million and $15.7 million, respectively. Depreciation expense from continuing operations for the nine months ended September 30, 2012 and 2011 was $56.6 million and $43.1 million, respectively.
See Note 4 - Discontinued Operations for information pertaining to property & equipment of discontinued operations.
Note 10 – Debt
The carrying value of debt is composed of the following as of the dates indicated (in millions):
|
| | | | | | | | | | |
Description | | Maturity Date | | September 30, 2012 | | December 31, 2011 |
Credit facility | | August 22, 2016 | | $ | 10.0 |
| | $ | 60.0 |
|
7.625% senior notes | | February 1, 2017 | | 150.0 |
| | 150.0 |
|
New 4.0% Notes, $105.3 million principal amount | | June 15, 2014 | | 100.2 |
| | 98.2 |
|
New 4.25% Notes, $97.0 million principal amount | | December 15, 2014 | | 91.6 |
| | 89.9 |
|
Original 4.0% Notes | | June 15, 2014 | | 9.7 |
| | 9.7 |
|
Original 4.25% Notes | | December 15, 2014 | | 3.0 |
| | 3.0 |
|
Capital lease obligations, weighted average interest rate of 3.2% | | In installments through June 2019 | | 54.5 |
| | 40.6 |
|
Notes payable for equipment, weighted average interest rate of 3.8% | | In installments through October 2015 | | 34.0 |
| | 43.4 |
|
Total debt | | $ | 453.0 |
| | $ | 494.8 |
|
Less current maturities | | (42.4 | ) | | (34.1 | ) |
Long-term debt | | $ | 410.6 |
| | $ | 460.7 |
|
Credit Facility
As of September 30, 2012, the Company had outstanding under its credit facility, also referred to as the “Credit Facility,” revolving loans of $10.0 million and approximately $99.4 million of letters of credit. The remaining $490.6 million of Credit Facility borrowing capacity was available in its entirety for revolving loans or up to $250.6 million of new letters of credit. Outstanding letters of credit mature at various dates and most have automatic renewal provisions, subject to prior notice of cancellation. As of September 30, 2012, interest on outstanding revolving loans accrued at a rate of approximately 2.48% per annum, and interest on outstanding letters of credit accrued at either 1.125% or 2.25% per annum, based on the type of letter of credit issued. The unused facility fee as of September 30, 2012 was 0.40%.
Senior Convertible Notes
During the first quarter of 2011, the Company exchanged $105.3 million of its Original 4.0% Notes and $97.0 million of its Original 4.25% Notes for identical principal amounts of New 4.0% Notes and New 4.25% Notes. The Company has divided the principal balance of the New Notes between the fair value of the debt component and the fair value of the common stock conversion feature. The resulting debt discount of $17.4 million for the New Notes will be accreted to interest expense over the remaining terms of the New Notes. This will increase interest expense during the terms of the New Notes above their 4.0% and 4.25% cash coupon interest rates to an effective combined interest rate of 6.73%. As of September 30, 2012, the remaining period of amortization associated with the debt discount and related financing costs was approximately 2 years. The fair value of the common stock conversion feature was recorded as a component of shareholders’ equity.
The carrying values of the debt and equity components of the New Notes as of September 30, 2012 were as follows (in millions):
|
| | | | | | | |
| September 30, 2012 |
| New 4.0% Notes | | New 4.25% Notes |
Principal amount | $ | 105.3 |
| | $ | 97.0 |
|
Unamortized debt discount and financing costs | (5.1 | ) | | (5.4 | ) |
Net carrying amount of debt component | $ | 100.2 |
| | $ | 91.6 |
|
Carrying amount of equity component | $ | 8.9 |
| | $ | 8.5 |
|
Debt Guarantees and Covenants
The Company’s 7.625% senior notes, New Notes and Original Notes are fully and unconditionally guaranteed on an unsecured, unsubordinated, joint and several basis by the Company's existing and future 100%-owned direct and indirect domestic subsidiaries that are guarantors of the Company's Credit Facility or other outstanding indebtedness. See supplemental financial information in Note 17 - Supplemental Guarantor Financial Information.
MasTec was in compliance with all provisions and covenants pertaining to its outstanding debt instruments as of September 30, 2012 and December 31, 2011.
Interest Expense, Net
Details of interest expense, net, classified within continuing operations for the periods indicated is as follows (in millions): |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Interest expense: | | | | | | | |
Contractual and other interest expense | $ | 6.9 |
| | $ | 6.6 |
| | $ | 20.5 |
| | $ | 19.3 |
|
Accretion of senior convertible note discount | 1.2 |
| | 1.2 |
| | 3.7 |
| | 3.0 |
|
Deferred financing costs and commitment fees | 1.4 |
| | 1.3 |
| | 4.0 |
| | 3.3 |
|
Total interest expense | $ | 9.5 |
| | $ | 9.1 |
| | $ | 28.2 |
| | $ | 25.6 |
|
Interest income | (0.1 | ) | | (0.1 | ) | | (0.3 | ) | | (0.4 | ) |
Interest expense, net | $ | 9.4 |
| | $ | 9.0 |
| | $ | 27.9 |
| | $ | 25.2 |
|
Note 11 - Stock-Based Compensation
The Company has certain stock-based compensation plans that have stock options and restricted share awards outstanding as of September 30, 2012. Under plans currently in effect, there were a total of 4,151,282 shares available for grant as of September 30, 2012. Details of total stock-based compensation expense and related tax benefits for the periods indicated were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Stock based compensation expense: | | | | | | | |
Restricted share awards | $ | 1.2 |
| | $ | 1.0 |
| | $ | 3.4 |
| | $ | 2.8 |
|
Stock options | — |
| | — |
| | — |
| | — |
|
Total stock based compensation expense | $ | 1.2 |
| | $ | 1.0 |
| | $ | 3.4 |
| | $ | 2.8 |
|
Income tax benefit from stock based compensation: | | | | | | | |
Restricted share awards | $ | 0.6 |
| | $ | 0.4 |
| | $ | 1.4 |
| | $ | 2.1 |
|
Stock options | 0.1 |
| | 0.5 |
| | 0.2 |
| | 2.9 |
|
Total income tax benefit from stock based compensation | $ | 0.7 |
| | $ | 0.9 |
| | $ | 1.6 |
| | $ | 5.0 |
|
Excess tax benefit from stock based compensation: | | | | | | | |
Vested restricted shares (1) | $ | 0.1 |
| | $ | — |
| | $ | 0.1 |
| | $ | 1.0 |
|
Stock options exercised (1) | 0.1 |
| | 0.5 |
| | 0.2 |
| | 2.9 |
|
Total excess tax benefit from stock based compensation | $ | 0.2 |
| | $ | 0.5 |
| | $ | 0.3 |
| | $ | 3.9 |
|
| |
(1) | Excess tax benefits, which represent cash flows from tax deductions in excess of compensation expense recognized for stock options exercised and vested restricted shares, are classified as financing cash flows in the Company’s condensed unaudited consolidated statements of cash flows. |
During the three and nine month periods ended September 30, 2012, the Company granted 5,286 and 175,290 restricted share awards, respectively. Total unearned compensation related to restricted share awards as of September 30, 2012 was $6.3 million, which is expected to be recognized over a weighted average period of approximately 2 years. The intrinsic value of options exercised during the three and nine month periods ended September 30, 2012 was $0.4 million and $0.7 million, respectively. Proceeds received from options exercised during the three and nine month periods ended September 30, 2012 totaled $0.3 million and $0.6 million, respectively.
Note 12 – Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, unrealized gains and losses from securities available for sale, and losses from non-controlling interests. See condensed unaudited consolidated statements of comprehensive income for details. Accumulated other comprehensive losses of $5.3 million as of September 30, 2012 and $7.9 million as of December 31, 2011 were primarily attributable to unrealized losses on securities available for sale, net of tax, and foreign currency translation gains and/or losses.
Note 13 - Income Taxes
The Company’s consolidated tax rates on income from continuing operations for the three month periods ended September 30, 2012 and 2011 were 39.4% and 36.9%, respectively, and for the nine month periods ended September 30, 2012 and 2011 were 39.4% and 38.4%, respectively. In determining the quarterly provision for income taxes, management uses an estimated annual effective tax rate based on forecasted annual pre-tax income, permanent tax differences, statutory tax rates and tax planning opportunities in the various jurisdictions in which the Company operates. The impact of significant discrete items is separately recognized in the quarter(s) in which they occur.
Note 14 – Commitments and Contingencies
In addition to the matters discussed below, MasTec is subject to a variety of legal cases, claims and other disputes that arise from time to time in the ordinary course of its business. MasTec cannot provide assurance that it will be successful in recovering all or any of the potential damages it has claimed or in defending claims against it.
Legacy Litigation. MasTec is subject to litigation, some of which dates from the period 2001 through 2006.
Outstanding Legacy Litigation
The Company was pursuing claims in excess of $5 million against Aon Risk Services, Inc. of Florida ("Aon"), an insurance broker, for breach of contract and breach of fiduciary duty for the losses arising from a denial of insurance coverage. In September 2012, the parties reached an agreement whereby the Company would recover $3.5 million from Aon, which resulted in a small gain considering expenses incurred, in exchange for a release. Payment was received in October 2012, which will be reflected in the Company's results of operations in the fourth quarter of 2012.
The labor union representing the workers of Sistemas e Instalaciones de Telecomunicacion S.A. (“Sintel”), a former MasTec subsidiary that was sold in 1998, filed a claim that initiated an investigative action with the Audiencia Nacional, a Spanish federal court, against Telefonica and dozens of other defendants including current and former officers and directors of MasTec (including Jorge Mas, Chairman of the Company’s Board of Directors) and Sintel, relating to Sintel’s 2000 bankruptcy. The labor union alleged Sintel and its creditors were damaged in the approximate amount of 300 million euros (approximately $386 million as of September 30, 2012). In June 2009, the Audiencia Nacional issued an order that the trial phase was commencing against the MasTec defendants and other defendants.
On June 14, 2012, the Sintel trial began. As a consequence of the MasTec defendant’s arguments and presentation of evidence, a meeting with the prosecutor took place on July 24, 2012. At that meeting, a tentative agreement (the “Agreement”) was reached which would result in the exoneration of the MasTec defendants (including an acknowledgment that the MasTec defendants acted in good faith and did not cause Sintel’s bankruptcy) and the dismissal of all the charges against them (including Jorge Mas, our Chairman). The trial is expected to continue in November 2012 against the non-MasTec defendants.
In order to avoid significant legal fees and the potential liabilities resulting from the actions of other Spanish defendants for which MasTec may be financially responsible under a theory of subsidiary (or vicarious) liability, the uncertainty of a trial before a foreign tribunal such as the Audiencia Nacional and to eliminate management time devoted to this matter, we entered into the Agreement. MasTec recorded a pre-tax charge of approximately $10 million in the third quarter of 2012 in connection with this Agreement, which is included within other expense, net, in the condensed unaudited consolidated financial statements. As part of this Agreement, MasTec would be dismissed from the case with prejudice. This Agreement is subject to further negotiation and satisfaction of several conditions, which currently have not been met. There can be no assurance that the Agreement will be completed.
Other Outstanding Litigation
During 2010 and 2011, pursuant to a written contract, the Company provided certain construction services for the City of Marathon in Marathon, Florida. We completed those services in 2011. At the end of 2011, the Company had still not been paid for all of the work performed on the project. In December 2011, the Company filed a lawsuit seeking in excess of $6 million against the City of Marathon for breach of contract and against the City of Marathon’s engineers for professional negligence. The City of Marathon and the engineers filed answers denying liability and claiming that the Company breached the contract. The Company is pursuing and will continue to vigorously pursue these claims.
Other Commitments and Contingencies
Leases. In the ordinary course of business, the Company enters into non-cancelable operating leases for certain of its facility, vehicle and equipment needs, including related party leases. These leases allow the Company to conserve cash by paying a monthly rental fee for use of the related facilities, vehicles and equipment rather than purchasing them. The terms of these agreements vary from lease to lease, including some with renewal options and escalation clauses. The Company may decide to cancel or terminate a lease before the end of its term, in which case the Company is typically liable for the remaining lease payments under the term of the lease. Rent expense related to operating leases, including short-term rentals, reflected within continuing operations was approximately $69.4 million and $44.3 million for the three month periods ended September 30, 2012 and 2011, respectively, and was approximately $168.2 million and $127.2 million for the nine month periods ended September 30, 2012 and 2011.