10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2008
Commission File Number
001-08106
MasTec, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Florida
(State or Other jurisdiction
of
Incorporation or Organization)
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65-0829355
(I.R.S. Employer
Identification No.)
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800 S. Douglas Road, 12th Floor,
Coral Gables, FL
(Address of Principal
Executive Offices)
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33134
(Zip Code)
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(305) 599-1800
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.10 Par Value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Exchange Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer; as defined in rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is shell company
(as defined in
Rule 12b-2
of the
Act.) Yes o No þ
The aggregate market value of the registrants outstanding
common stock held by non-affiliates of the registrant computed
by reference to the price at which the common stock was last
sold as of the last business day of the registrants most
recently completed second fiscal quarter was $489,817,225 (based
on a closing price of $10.66 per share for the registrants
common stock on the New York Stock Exchange on
June 30, 2008).
There were 75,545,936 shares of common stock outstanding as
of February 25, 2009.
The registrants definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to
Regulation 14A for the 2008 annual meeting of shareholders
is incorporated by reference in Part III of this
Form 10-K
to the extent stated herein.
Cautionary
Statement Regarding Forward-Looking Statements
We are making this statement pursuant to the safe harbor
provisions for forward-looking statements described in the
Private Securities Litigation Reform Act of 1995. We make
statements in this Annual Report on
Form 10-K
and in the documents that we incorporate by reference into this
Annual Report that are forward-looking. When used in this Annual
Report or in any other presentation, statements which are not
historical in nature, including the words
anticipate, estimate, could,
should, may, plan,
seek, expect, believe,
intend, target, will,
project and variations of these words and negatives
thereof and similar expressions are intended to identify
forward-looking statements. They also include statements
regarding:
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our future growth and profitability;
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our competitive strengths; and
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our business strategy and the trends we anticipate in the
industries and economies in which we operate.
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These forward-looking statements are based on our current
expectations and are subject to a number of risks, uncertainties
and assumptions. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other
factors, some of which are beyond our control, are difficult to
predict, and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking
statements. Important factors that could cause actual results to
differ materially from those in forward-looking statements
include:
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economic downturns, reduced capital expenditures, reduced
financing availability, customer consolidation and technological
and regulatory changes in the industries we serve;
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market conditions, technical and regulatory changes in our
customers industries;
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our ability to retain qualified personnel and key management
from acquired businesses, integrate acquired businesses with
MasTec within expected timeframes and achieve the revenue, cost
savings and earnings levels from such acquisitions at or above
the levels projected.
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impact of the American Recovery and Reinvestment Act of 2009
(the Stimulus Act) and any similar local or state
regulations affecting renewable energy transmission, broadband
and related projects and expenditures;
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our ability to attract and retain qualified managers and skilled
employees;
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increases in fuel, maintenance, materials, labor and other costs;
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liquidity issues related to our securities held for sale;
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adverse determinations on any claim, lawsuit or proceeding;
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the highly competitive nature of our industry;
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our dependence on a limited number of customers;
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the ability of our customers to terminate or reduce the amount
of work, or in some cases prices paid for services under many of
our contracts;
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the adequacy of our insurance, legal and other reserves and
allowances for doubtful accounts;
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any exposure related to our divested state Department of
Transportation projects and assets;
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the restrictions imposed by our credit facility, senior notes
and any future loans or securities;
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the outcome of our plans for future operations, growth and
services, including backlog and acquisitions;
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any dilution or stock price volatility which shareholders may
experience in connection with shares we may issue as
consideration for earn-out obligations entered into, or as a
result of conversions of convertible stock issued, in connection
with past or future acquisitions; and
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the other factors referenced in this Annual Report, including,
without limitation, under Item 1. Business,
Item 1A Risk Factors and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
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We believe these forward-looking statements are reasonable;
however, you should not place undue reliance on any
forward-looking statements, which are based on current
expectations. Furthermore, forward-looking statements speak only
as of the date they are made. If any of these risks or
uncertainties materialize, or if any of our underlying
assumptions are incorrect, our actual results may differ
significantly from the results that we express in or imply by
any of our forward-looking statements. These and other risks are
detailed in this Annual Report on
Form 10-K,
in the documents that we incorporate by reference into this
Annual Report on
Form 10-K
and in other documents that we file with the Securities and
Exchange Commission. We do not undertake any obligation to
publicly update or revise these forward-looking statements after
the date of this Annual Report on
Form 10-K
to reflect future events or circumstances. We qualify any and
all of our forward-looking statements by these cautionary
factors.
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PART I
Overview
We are a leading specialty contractor operating mainly
throughout the United States and across a range of industries.
Our core activities are the building, installation, maintenance
and upgrade of utility and communications infrastructure,
including but not limited to, electrical utility transmission
and distribution, wind farm, other renewable energy and natural
gas infrastructure, wireless, wireline and satellite
communications and water and sewer systems. Our primary
customers are in the following industries: utilities (including
wind farms and other renewable energy, natural gas gathering
systems and pipeline infrastructure), communications (including
telephony, satellite television and cable television) and
government (including water and sewer, utilities and
communications work on military bases).
We, or our predecessor companies, have been in business for over
70 years. We offer our services primarily under the MasTec
service mark and operate through a network of approximately 200
locations and approximately 8,400 employees as of
December 31, 2008. We have consistently ranked among the
top specialty contractors by Engineering News-Record over the
past five years.
We serve a diversified domestic customer base including
DIRECTV®,
AT&T, Verizon, Tetra Tech, Energy Transfer Company, EMBARQ,
Progress Energy, Qwest and XTO Energy. For the years ended
December 31, 2008 and 2007, approximately 71.2% and 76.7%,
respectively, of our revenues were from our ten largest
customers. We have longstanding relationships with many
customers and often provide services under multi-year master
service agreements and other service agreements.
We have continued our diversification and expansion strategy
through several recent acquisitions which have expanded our
service offerings to customers. During 2007 and 2008, we
acquired the remaining ownership interest in GlobeTec
Construction, LLC. GlobeTec is involved in the construction and
maintenance of water and sewer pipelines and projects. In
October 2007, we acquired Three Phase Line Construction, Inc.,
which is involved in the construction and maintenance of
transmission and distribution utility systems, substation and
storm restoration in several northern states and has a largely
unionized workforce which is required for some projects. In
December 2007, we acquired certain assets of Power Partners,
LLC, an electrical utility contractor specializing in wind farm
electrical system design and construction. In May 2008, we
acquired Pumpco, Inc., a mid-stream natural gas pipeline
construction company. In July 2008, we acquired certain assets
of Nsoro, LLC, which specializes in wireless network design,
construction, upgrade and maintenance. Finally, in December
2008, we acquired Wanzek Construction, Inc., a construction
company focusing on wind farm, heavy civil and industrial and
infrastructure construction.
Industry
Trends
Our industry is composed of national, regional and local
companies that provide outsourced infrastructure services to
customers in the utilities and communications industries as well
as to government customers.
We believe the following industry trends impact demand for our
services:
Stimulus Act. The American Recovery and
Reinvestment Act of 2009, or the Stimulus Act, signed on
February 17, 2009, should have a positive impact on our
customer spending in a number of important areas, plus offer
additional incentives that should benefit our business. The
Stimulus Act provides for federal tax incentives applicable to
the wind energy industry including the extension of the
production tax credit to wind projects placed into service
before 2013, and a new investment tax credit equal to 30% of the
cost of certain qualifying assets that may be elected in lieu of
the production tax credit. The production tax credit provides
the owner of a U.S. wind facility (consisting of the pad,
tower and turbine) with a ten-year credit against its federal
income tax obligations based on the amount of electricity. The
Stimulus Act also includes a new U.S. Treasury grant
program which allows taxpayers that elect to claim the 30%
investment tax credit to receive grants from the
U.S. Treasury equal to the amount of the investment tax
credit in lieu of such credit. The Stimulus Act also extends the
50% bonus depreciation deduction for property placed in service
in 2009. Historically, these
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incentives have increased the construction activity in this
sector and are expected to do so in the future. The Stimulus Act
also contains several provisions aimed at improving the
U.S.s electrical transmission system in part to facilitate
the transfer of renewable energy from rural areas to high demand
areas, including $6 billion in funds for renewable energy
and transmission loan guarantees, which are expected to
facilitate more than $60 billion in loans for these
projects. The Stimulus Act also provides for $7.2 billion
in funds for the development of broadband facilities throughout
the United States.
Renewable Energy Projects. The desire
to decrease the countrys dependence on foreign oil imports
and the awareness of the potential effect of global warming have
created demand for more domestic, environmentally sensitive
electrical power production such as wind and solar collection
farms. According to the American Wind Energy Association, as of
December 31, 2008, the United States had approximately
25,200 megawatts of installed wind farm generating capacity with
approximately 4,300 megawatts currently under construction. In
addition, as of August 2008, 26 states in the United States
and the District of Columbia have already adopted renewable
portfolio standards or goals, which standards require or target
that an average of 19% of electricity be produced from renewable
sources, like wind power. As a result of these trends, Emerging
Energy Research, or EER, forecasted that more than
$66 billion will be invested in additional wind energy
capacity in the United States through 2013. The Stimulus Act,
which calls for expansion of domestic renewable energy sources
through tax incentives and loan guarantees, should also provide
our wind farm business with the potential for sustained growth.
Wind power generation is only feasible where adequate average
wind speed and consistency are present. The principal onshore
wind resource in the United States is located in the central
plains area of the country, roughly from the Texas panhandle to
the Canadian border. This wind corridor is a relatively remote
area where population density and industrial energy demand are
relatively low. As a result, there are often few traditionally
fueled generation facilities in these areas and extensive
collection and transmission projects are also necessary to
connect these renewable energy generation projects to the
electrical grid.
We believe that demand for new domestic sources of clean power
generation and the related substations and transmission lines
necessary to connect them to the electrical grid will provide
significant growth prospects for the foreseeable future. The new
generation of wind turbines can produce electrical power at
competitive rates. Currently, less than 2% of the United
States electrical needs are met by wind power generation.
A July 2008 report by the U.S. Department of Energy,
however, presents a roadmap for increasing wind power generation
to 20% of demand by 2030, which would require hundreds of
billions of dollars in new wind farm investment and transmission
lines.
Inadequacy of Existing Electric Power Transmission and
Distribution Networks. The United
States electric transmission and distribution
infrastructure requires significant ongoing maintenance,
upgrades and extensions to manage power line congestion and
avoid delivery failures. According to a November 2008 report
published by the Edison Electric Institute, or EEI, the
projected investment in new transmission systems from 2009 to
2013 is $27 billion and $298 billion for the period
2010 to 2030. Additionally, new renewable energy generation
projects, including wind and solar collection farms, are
typically located in remote areas, consequently significant
investment in new transmission lines will be required to connect
this power to the electrical grid and to transport this power to
more populated or industrial areas with higher demand. For
example, in July 2008, the Texas Public Utility Commission
approved the investment of approximately $4.9 billion for
the construction of electric transmission lines to carry power
generated by new wind farms in remote western and northern parts
of state to major population and industrial centers in Texas.
While the electrical grid reliability continues to deteriorate,
demand for electricity is expected to continue to grow.
According to the 2008 Annual Energy Outlook published by the
U.S. Department of Energys Energy Information
Administration, or EIA, the population of the United States has
increased by about 20% since 1990, with energy consumption
increasing by a comparable 18%. Additionally, the same EIA
report projects that total U.S. electricity sales from
producers to consumers will increase by 41% from
3,660 billion
kilowatt-hours
in 2005 to 5,168 billion
kilowatt-hours
in 2030. North American Electric Reliability Corporation, or
NERC, the organization of U.S. electric grid operators,
reports in its 2007 Long-Term Reliability Assessment that peak
demand for electricity in the U.S., which typically occurs in
the summer, is forecast to
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increase by 135,000 megawatts or 17.7% over the next ten years.
The Stimulus Act allocates $11 billion in funds for
modernization and expansion of the nations electrical grid.
NERC projects the number of transmission miles will increase by
8.8% or 14,500 circuit miles in the U.S. over the next ten
years. We believe spending levels will continue to increase as
utilities work to address infrastructure maintenance
requirements, as well as the future reliability standards
required by the Energy Policy Act of 2005, or the Energy Act.
Increased Production and Demand for Natural
Gas. Natural gas is one of the cleanest
burning hydrocarbon fuels and is in demand due to its relative
cost advantage over other fossil fuel sources. The level of
natural gas pipeline construction activity in the United States
is expected to increase substantially through 2010. According to
a report published in July 2008 by EIA, approximately 200 gas
pipeline projects, estimated to cost approximately
$28 billion, are already being planned or have been
approved by U.S. regulatory authorities. In addition, the
development of a number of proposed new liquefied natural gas
import facilities along the coastline of the United States, as
well as some in Canada and Mexico, if realized, likely will
continue to spark new pipeline proposals.
Demand for Increased Wireless and Wired Voice, Video and
Data Services. Demand for faster and more
robust voice, video and data services has increased
significantly with the proliferation of the Internet, broadband,
video and music download services, high definition television
and other advanced video services. To serve this developing
market and the ever-increasing need for more bandwidth, voice,
video and data for fixed and mobile devices, service providers
are upgrading the performance of their wired and wireless
networks or deploying new competing networks using new
technologies such as Worldwide Interoperability for Microwave
Access, or WiMax. Investment is facilitated by declining
equipment costs and expanded capabilities of wireline and
wireless network equipment. At the same time, major regional and
rural telecommunication companies are upgrading their networks
from copper line to fiber optic line in order to enhance their
ability to provide customers with bundled services that include
video, voice and data. Similar dynamics of providers seeking to
improve their offerings are prevalent in the cable and satellite
markets as well. The Stimulus Act allocates $7.2 billion
for the development of broadband facilities throughout the
U.S. and the expansion of broadband access into areas that
are currently not served by high-speed data networks.
Competitive
Strengths
Our competitive strengths include:
Diverse Customer Relationships. We
serve a diversified customer industry base. Our customers
include some of the largest contractors, communications, utility
and wind farm companies in the United States, including
DIRECTV®,
Verizon, AT&T, Energy Transfer Company, Tetra-Tech, M. A.
Mortensen, EMBARQ, Qwest, XTO Energy and Progress Energy.
Additionally, as a result of the Wanzek acquisition, we now
serve major wind energy customers such as FPL Energy, Iberdrola
and MidAmerican. We provide services to many of our significant
customers under multi-year master service agreements and other
service agreements. Furthermore, we believe that since acquiring
Wanzek, no single customer will account for greater than 30% of
our revenue.
National Footprint. We, or our
predecessor companies, have been in business for over
70 years and we are one of the largest companies in our
industry. Through our network of over 200 locations and
8,400 employees across the United States, as of
December 31, 2008, we offer consistent, comprehensive
infrastructure services to our customers nationwide. We believe
our experience, technical expertise, geographic reach and size
are important to our customers.
Ability to Respond Quickly and
Effectively. The skills required to serve our
end markets are similar, which allows us to utilize qualified
personnel across multiple industries. We are able to respond
quickly and effectively to industry changes and major weather
events by allocating our employees, fleet and other assets as
and where they are needed, enabling us to provide cost effective
and timely services for our customers.
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Reputation for Reliable Customer Service and Technical
Expertise. We believe that over the years we
have established a reputation for quality customer service and
technical expertise. We also believe our reputation for
technical expertise gives us an advantage in competing for new
work from both our existing and potential customers.
Additionally, the technical expertise gained through recent
acquisitions broadens our exposure in areas of wind power and
renewable energy, wireless technology and pipeline
infrastructure.
Experienced Management Team. Our
management team, which includes our chief executive officer,
chief operating officer, group presidents and financial
officers, plays a significant role in establishing and
maintaining long-term relationships with our customers,
supporting the growth of our business and managing the financial
aspects of our operations. Our chief executive officer, chief
operating officer and business unit presidents average 20 plus
years of industry experience and have a deep understanding of
our customers and their requirements. Generally, key managers
and founders of our recently acquired companies continue to work
for us under long-term employment agreements or services
agreements and, in some cases, earn-out arrangements.
Strategy
The key elements of our business strategy are as follows:
Focus on Growth Opportunities. We
believe that the end markets that we focus on offer several
compelling growth opportunities. We expect a continuation of the
trends for increased spending by key customers in many
industries in which we provide services. We expect wind farm
development and maintenance, electrical transmission and
distribution grid upgrades and expansions, and wireless
infrastructure expansion to be areas of high investment and
opportunity over the next few years. We intend to use our
national presence, technical expertise, customer relationships
and full range of services to capitalize on these trends to grow
our business.
Operational Excellence. We intend to
continue improving our operating margins and cash flows by
focusing on our more profitable services and on projects that
have higher margins, while improving our working capital
management. We intend to improve our operating effectiveness by,
in some cases, allocating our resources across multiple
customers and projects which will continue to increase our
utilization rates. Furthermore, we intend to continue our
actions and programs we have instituted to improve our operating
efficiencies and working capital management, such as hiring
additional experienced operating and financial professionals,
requiring increased accountability throughout our organization,
expanding the use of our Oracle management information systems,
managing customer contract bidding procedures more effectively
and increasing individual project profitability.
Maintain Conservative Capital
Structure. We have increased our financial
resources in recent years with the receipt of the net proceeds
from the public offering of our common stock in 2006, the
offering of our senior notes in 2007 and the expansion of our
credit facility in 2008. Further, during the fourth quarter of
2008, both Standards & Poors and Moodys
reaffirmed our credit ratings. We intend to maintain our
conservative capital structure.
Leverage Core Expertise Through Acquisitions, Strategic
Alliances and Divestitures. We intend to
continue pursuing selected acquisitions and strategic alliances
that allow us to expand our operations into targeted geographic
areas or allow us to expand our service offerings in related
fields. Our strategy will include timely and efficient
integration to best fit into our internal control environment.
We may also consider sales or divestitures of portions of our
assets, operations, projects, real estate or other properties in
order to efficiently deploy our capital.
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Services
Our core services are building, installing, maintaining and
upgrading infrastructure for our communications, utility and
government customers. We provide each of these customers with
similar services that include:
Build. We build wind farms, underground
and overhead distribution systems, such as trenches, conduits,
cable, power lines and pipelines, which provide wireless and
wireline communications, electrical power generation and
delivery, and natural gas transport.
Install. We install buried and aerial
fiber optic cables, coaxial cables, copper lines, electrical and
other energy distribution systems, transmission systems and
satellite dishes in a variety of environments for our customers.
In connection with our installation work, we deploy and manage
network connections that involve our customers hardware,
software and network equipment.
Maintain and Upgrade. We offer
24-hours-a-day,
7-days-a-week
and
365-days-a-year
maintenance and upgrade support to our customers. Our
comprehensive service offerings include the regular maintenance
of our customers distribution facilities and networks as
well as emergency services for accidents or storm damage. Our
upgrade work ranges from routine replacements and upgrades to
major network overhauls.
Customers
We provide building, installation, maintenance and upgrade
services to our customers, which are companies in the
communications and utilities industries, as well as government
customers.
We have longstanding relationships with many customers, and a
significant portion of our revenue is derived from projects
performed under service agreements. We also provide services
under master service agreements which are generally multi-year
agreements. Certain of our master service agreements are
exclusive up to a specified dollar amount per work order for
each defined geographic area. Work performed under master
service and other agreements is generated by work orders, each
of which is performed for a fixed fee. The majority of these
services are of a maintenance nature and, to a lesser extent,
upgrade services. These master service agreements and other
service agreements are frequently awarded on a competitive bid
basis, although customers may negotiate contract extensions
beyond their original terms without re-bidding. Our master
service agreements and other service agreements have various
terms, depending upon the nature of the services provided and
are typically subject to termination on short notice.
The remainder of our work is generated pursuant to contracts for
specific projects that may require the construction and
installation of specified units within an infrastructure system
or an entire infrastructure system. Customers are billed with
varying frequency: weekly, monthly or upon attaining specific
milestones. Such contracts generally include retainage
provisions under which 2% to 15% of the contract price is
withheld from us until the work has been completed and accepted
by the customer.
We believe that our industry experience, technical expertise and
customer service are important to our being retained by large
utility and communications companies and governments. The
relationships developed between these customers and our senior
management and project management teams are also important to
our being retained.
Backlog
Our 18-month
backlog was approximately $1.7 billion as of
December 31, 2008 and $1.3 billion as of
December 31, 2007. We expect to realize approximately 74%
of our 2008 backlog in 2009. Approximately 83% of our backlog at
December 31, 2008 was comprised of services to be performed
under existing master service agreements and long term
contracts. The balance is our estimate of work to be completed
on other service agreements. See Item 1A. Risk
Factors Amounts included in our backlog may not
result in actual revenue or translate into profits.
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Sales and
Marketing
We market our services individually and in combination with
other companies to provide what we believe is the most efficient
and effective solution to meet our customers demands,
which increasingly require resources from multiple disciplines.
Through our unified
MasTec®
brand and an integrated organizational structure designed to
permit rapid deployment of labor, equipment and materials, we
are able to quickly and efficiently allocate resources to meet
customer needs.
We have developed a marketing plan emphasizing the
MasTec®
registered service mark and the tradenames of certain acquired
companies and an integrated service offering to position
ourselves as a provider of a full range of service solutions,
providing services ranging from basic installation to
sophisticated engineering, design and integration. We believe
our long-standing relationships with our customers and
reputation for reliability and efficiency facilitate our
recurring business. Our marketing efforts are principally
carried out by the management of our project groups in
coordination with our corporate marketing organization. Our
management team has many years of industry experience, both at
the service provider level and in some cases with the customers
we serve. Our project group managers market directly to existing
and potential customers for new contracts and also market our
company to be placed on lists of vendors invited to submit
proposals for service agreements and individual projects. Our
executive management supplements these efforts at the national
level.
Safety
and Insurance/Risk Management
We strive to instill safe work habits in our employees. We
require our employees to participate in internal training and
service programs relevant to their employment and to complete
any training programs required by law. We evaluate employees in
part based upon their safety records and the safety records of
the employees they supervise. We have established a company-wide
safety program to share best practices and to monitor and
improve compliance with safety procedures and regulations.
Our business involves heavy equipment and exposure to conditions
that can be dangerous. While we are committed to operating
safely and prudently, we are subject to claims by employees,
customers and third parties for property damage and personal
injuries that occur in connection with our work. See
Item 1A. Risk Factors Our business is
subject to hazards that could result in substantial liabilities
and weaken our financial condition.
We presently maintain insurance policies subject to per claim
deductibles of $1 million for our workers
compensation policy, $2 million for our general liability
policy and $2 million for our automobile liability policy.
We have excess umbrella coverage of up to $100 million per
claim and in the aggregate. We also maintain an insurance policy
with respect to employee group health claims subject to per
claim deductibles of $350,000 after satisfying an annual
deductible of $100,000. See Item 1A. Risk
Factors We are self-insured against many potential
liabilities. We are required to periodically post letters
of credit and provide cash collateral to our insurance carriers
related to our insurance programs. Total outstanding letters of
credit amounted to $82.4 million and cash collateral posted
amounted to $3.3 million at December 31, 2008. See
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies and Estimates-Insurance
Reserves.
Suppliers,
Materials and Working Capital
Under many of our contracts, our customers supply the necessary
materials and supplies and we are responsible for installation,
but not for material costs or material warranties. Under certain
of our contracts we acquire materials and supplies for our own
account from third-party providers. We are not dependent on any
one supplier for materials or supplies and have not experienced
any significant difficulty in obtaining an adequate supply of
materials and supplies.
We utilize independent contractors to assist on projects and to
help us manage work flow. Our independent contractors are
typically sole proprietorships or small business entities that
provide their own vehicles, tools and insurance coverage. We are
not dependent on any single independent contractor. See
Item 1A. Risk Factors We may choose, or
be required, to pay our subcontractors even if our customers do
not pay, or delay paying, us for the related services.
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We need working capital to support seasonal variations in our
business, primarily due to the impact of weather conditions on
external construction and maintenance work, including storm
restoration work, and the corresponding spending by our
customers on their annual capital expenditure budgets. Our
business is typically slower in the first and fourth quarters of
each calendar year and stronger in the second and third
quarters. We generally experience seasonal working capital needs
from approximately April through September to support growth in
unbilled revenue and accounts receivable, and to a lesser
extent, inventory. Our billing terms are generally net 30
to 60 days, although some contracts allow our customers to
retain a portion (from 2% to 15%) of the contract amount until
the contract is completed to their satisfaction. We maintain
inventory to meet the material requirements of some of our
contracts. Some of our customers pay us in advance for a portion
of the materials we purchase for their projects, or allow us to
pre-bill them for materials purchases up to a specified amount.
Competition
Our industry is highly competitive and highly fragmented. We
often compete with a number of companies in markets where we
operate, ranging from small local independent companies to large
national firms. The national or large regional firms that
compete with us include Quanta Services, Inc., Pike Electric,
Inc., M.A. Mortenson Company, D.H. Blattner & Sons,
Inc., and Dycom Industries, Inc.
Relatively few significant barriers to entry exist in the
markets in which we operate and, as a result, any organization
that has adequate financial resources and access to technical
expertise may become a competitor. Some of our customers employ
personnel to perform infrastructure services of the type we
provide. We compete based upon our industry experience,
technical expertise, financial and operational resources,
nationwide presence, industry reputation and customer service.
While we believe our customers consider a number of factors when
selecting a service provider, most of their work is awarded
through a bid process. Consequently, price is often a principal
factor in determining which service provider is selected. See
Item 1A. Risk Factors - Our industry is highly
competitive which may reduce our market share and harm our
financial performance.
Regulation
We are subject to state and federal laws that apply to
businesses generally, including laws and regulations related to
labor relations, worker safety and environmental protection.
While many of our customers operate in regulated industries (for
example, utilities regulated by the public service commission or
broadband companies regulated by franchise agreements with
various municipalities), we are not generally subject to such
regulation and oversight.
As a contractor, our operations are subject to various laws,
including:
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regulations related to vehicle registrations, including those of
state and the United States Departments of Transportation;
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regulations related to worker safety and health, including those
established by the Occupational Safety and Health Administration;
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contractor licensing requirements;
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building and electrical codes; and
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permitting and inspection requirements.
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We are also subject to various environmental laws. Our failure
to comply with environmental laws could result in significant
liabilities. For example,
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Some of the work we perform is in underground environments. If
the field location maps supplied to us are not accurate, or if
objects are present in the soil that are not indicated on the
field location maps, our underground work could strike objects
in the soil containing pollutants and result in a rupture and
discharge of pollutants. In such a case, we may be liable for
fines and damages.
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We own and lease several facilities at which we store our
equipment. Some of these facilities contain fuel storage tanks
which may be above or below ground. If these tanks were to leak,
we could be responsible for the cost of remediation as well as
potential fines.
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We sometimes perform directional drilling operations below
certain environmentally sensitive terrains and water bodies. Due
to the inconsistent nature of the terrain and water bodies, it
is possible that such directional drilling may cause a surface
fracture releasing subsurface materials. These releases may
contain contaminants in excess of amounts permitted by law,
potentially exposing us to remediation costs and fines.
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See Item 1A. Risk Factors Our failure to
comply with environmental laws could result in significant
liabilities.
We believe we have all licenses and permits needed to conduct
operations and that we are in compliance with all material
applicable regulatory requirements. However, if we fail to
comply with any material applicable regulatory requirements, we
could incur significant liabilities. See Item 1A.
Risk Factors Our failure to comply with regulations
of the U.S. Occupational Safety and Health Administration,
the U.S. Department of Transportation and other state and
local agencies that oversee transportation and safety compliance
could reduce our revenue, profitability and liquidity.
We offer services and are branded under the
MasTec®
service mark. We do not have any patents that are material to
our business.
Financial
Information About Geographic Areas
As of December 31, 2008, we operate almost exclusively in
the United States. During the years ended December 31, 2007
and 2006, we operated in the United States and Canada. In March
2007, we declared our Canadian operations as discontinued. On
April 10, 2007, we sold substantially all of our Canadian
operations. Accordingly, our results of operations for all
periods presented reflect our Canadian business as discontinued.
Employees
As of December 31, 2008, we had approximately
8,400 employees. Only approximately 250 of our employees
are represented by a union or subject to a collective bargaining
agreement. We hire employees from a number of sources, including
our industry, trade schools and colleges. Our primary sources
for employees include promotion from within, team member
referrals, print and Internet advertising and direct recruiting.
We attract and retain employees by offering technical training
opportunities, bonus opportunities, stock ownership, competitive
salaries and a comprehensive benefits package.
We believe that our focus on training and career development
helps us to attract and retain employees. Our employees
participate in ongoing educational programs, many of which are
internally developed, to enhance their technical and management
skills through classroom and field training. We provide
opportunities for promotion and mobility within our organization
that we also believe helps us to retain our employees. We
believe our relations with our employees are good.
Recent
Developments
In December 2008, we acquired all of the outstanding shares of
Wanzek Construction, Inc., a construction company focusing on
wind farm and infrastructure construction for $50 million
in cash, 7.5 million shares of MasTec common stock, an 8%
convertible note in the principal amount of $55 million due
December 2013 with interest payments payable in April, August,
and December of each year, commencing in April 2009, the
assumption of up to $15 million of Wanzeks debt and a
two-year earn-out equal to 50% of Wanzeks EBITDA over
$40 million per year.
Wanzek, headquartered in Fargo, North Dakota, has been in
business more than 37 years and manages a team of
highly-skilled workers and tradesmen which it deploys throughout
the country and which is capable of working under extreme
weather conditions. Wanzek currently derives a significant
portion of its revenue from wind farm construction and maintains
a fleet of heavy equipment, including a number of specialized
heavy cranes, a critical
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component for the successful erection of wind turbine towers.
With the acquisition of Wanzek, MasTec will be capable of
providing end-to-end construction services to wind farm owners
and developers. The Wanzek acquisition complements MasTecs
existing expertise and contracts in the construction of the
electrical collection systems, substations and transmission
lines necessary to connect energy from wind farms to the energy
grid. Wanzek will also bring additional experience and
capabilities to MasTec in the construction of natural gas
processing plants and compression stations, and other
heavy/civil and industrial process construction.
Available
Information
A copy of this Annual Report on
Form 10-K,
as well as our Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and any amendments to those reports filed or furnished pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934, are available free of charge on the Internet at our
website, www.mastec.com, as soon as reasonably practicable after
we electronically file these reports with, or furnish these
reports to, the SEC. Copies of our Board of Directors Governance
Principles, Personal Responsibility Code, which applies to all
staff and expressly applies to our senior officers (including
our principal executive officer, principal financial officer and
our controller), and the charters for each of our Audit,
Compensation and Nominating and Corporate Governance Committees
are also available on the Internet in the Investor Relations
section of our website, www.mastec.com, or may be obtained by
contacting our Vice President of Investor Relations, by phone at
(305) 406-1815
or by email at investor.relations@mastec.com. We intend to
provide any amendments or waivers to our Personal Responsibility
Code for any of our directors and senior officers on our website
within four business days of any such amendment or waiver. The
reference to our website address does not constitute
incorporation by reference of the information contained on the
website and should not be considered part of this report. Our
reports filed with the SEC may be read or copied at the
SECs Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. Information on the operation of the
SECs Public Reference Room may be obtained by calling the
SEC at
1-800-SEC-0330.
Alternatively, you may access these reports at the SECs
website at www.sec.gov.
You should carefully consider the risks described below,
together with all of the other information in this Annual Report
on
Form 10-K.
The risks described below are not the only risks facing us.
Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also materially and
adversely affect our business operations. If any of these risks
actually occurs, our business, financial condition and results
of operations could suffer and the trading price of our common
stock could decline.
Risks
Related to Our Industry and Our Customers
Industries
The
current credit crisis and economic downturn could reduce capital
expenditures in the industries we serve, which may result in a
decrease in demand for our services.
The demand for our services has been, and will likely continue
to be, cyclical in nature and vulnerable to general downturns in
the U.S. economy. Given the recent financial market turmoil
and tightening of credit, our customers may have difficulty in
obtaining financing, which may result in cancellations of
projects or deferral of projects to a later date. Such
cancellations or deferrals could result in decreased demand for
our services and could materially adversely affect our results
of operations, cash flows and liquidity.
In addition, our customers are affected by economic downturns
that decrease the need for their services or the profitability
of their services. Slow-downs in real estate, fluctuations in
commodity prices and decreased demand by end-customers for
higher value services could affect our customers and their
capital expenditure plans. Because we have been negatively
impacted by previous economic downturns, we constantly monitor
our customers industries and their relative health
compared to the economy as a whole. The recent reduction in new
housing starts, for example, could negatively impact our
customers who utilize our services to construct their last
mile of communications infrastructure, as well as other
industries we serve, including electric utility transmission and
grid connection, water and sewer and natural gas pipeline
construction. Additionally, our customers who provide satellite
and broadband communications to consumers across the country
could be adversely impacted by an economic downturn if new
subscriptions and upgrades for new and existing consumers are
not ordered at the rate
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that we and our customers anticipate. During an economic
downturn, our customers also may not have the ability or desire
to continue to fund capital expenditures for infrastructure at
their current levels or may determine to outsource less work. A
decrease in any of these projects, new subscriptions and
upgrades or any other services we provide could materially
adversely affect our results of operations, cash flows and
liquidity.
Many
of the industries we serve are subject to consolidation and
rapid technological and regulatory change, and our inability or
failure to adjust to our customers changing needs could
reduce demand for our services.
We derive, and anticipate that we will continue to derive, a
substantial portion of our revenue from customers in the
communications and utilities industries. The communications and
utilities industries are subject to rapid changes in technology
and governmental regulation. Changes in technology may reduce
the demand for the services we provide. For example, new or
developing technologies could displace the wireline systems used
for the transmission of voice, video and data, and improvements
in existing technology may allow communications providers to
significantly improve their networks without physically
upgrading them. Technological advances may also result in lower
costs for sources of energy, which may render existing wind
energy projects and technologies uncompetitive or obsolete.
Additionally, both the communications and utilities industries
have been characterized by a high level of consolidation that
may result in the loss of one or more of our customers. Our
failure to rapidly adopt and master new technologies as they are
developed in any of the industries we serve or the consolidation
of one or more of our significant customers could have a
material adverse effect on our results of operations, cash flows
and liquidity.
Our
industry is highly competitive, which may reduce our market
share and harm our financial performance.
Our industry is highly fragmented, and we compete with other
companies in most of the markets in which we operate, ranging
from small independent firms servicing local markets to larger
firms servicing regional and national markets. We also face
competition from existing or prospective customers that employ
in-house personnel to perform some of the same types of services
we provide. There are relatively few barriers to entry into the
markets in which we operate and, as a result, any organization
that has adequate financial resources and access to technical
expertise and skilled personnel may become one of our
competitors.
Most of our customers work is awarded through a bid
process. Consequently, price is often the principal factor in
determining which service provider is selected, especially on
smaller, less complex projects. Smaller competitors are
sometimes able to win bids for these projects based on price
alone due to their lower costs and financial return
requirements. If we are unsuccessful in bidding on these
projects, or if our ability to win such projects requires that
we accept lesser margins, then our results of operations, cash
flows and liquidity could be materially and adversely affected.
Risks
Related to Our Business
We
derive a significant portion of our revenue from a few
customers, and the loss of one of these customers or a reduction
in their demand for our services could impair our financial
performance.
For the year ended December 31, 2008, we derived
approximately 34.0%, 11.9% and 7.9% of our revenue from
DIRECTV®,
AT&T and Verizon, and respectively. For the year ended
December 31, 2007, we derived approximately 44.1%, 6.8% and
9.1% of our revenue from
DIRECTV®,
AT&T and Verizon, respectively. In addition, our ten
largest customers accounted for approximately 71.2%, 76.7%, and
76.4% of our revenue in the years ended December 31, 2008,
2007 and 2006, respectively. Because our business is
concentrated among relatively few major customers, our revenue
could significantly decline if we lose one or more of these
customers or if the amount of business we obtain from them is
reduced, which could result in reduced profitability and
liquidity.
Our
profitability and liquidity could decline if certain customers
reduce the amounts they pay for our services or if our customers
are unable to pay for our services.
In the past, we incurred significant losses after a number of
customers filed for bankruptcy or experienced financial
difficulties following a general economic downturn and certain
industry specific factors that worsened the impact of the
overall economic downturn on those customers. In 2008, 2007 and
2006 total provisions for bad debts
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aggregated to $3.5 million, $17.5 million and
$10.0 million, respectively, of which $0.9 million,
$14.1 million and $7.9 million, respectively, resulted
from anticipated legal settlements and discontinued operations.
As of December 31, 2008, we had remaining receivables from
customers undergoing bankruptcy reorganization totaling
$1.6 million, of which $0.3 million is included in
specific reserves for bad debts, with the remaining amounts
expected to be recovered through secured and unsecured claims
and enforcement of liens or bonds.
Most
of our contracts do not obligate our customers to undertake any
infrastructure projects or other work with us.
A significant portion of our revenue is derived from multi-year
master service agreements and other service agreements. Under
our multi-year master service agreements and other service
agreements, we contract to provide customers with individual
project services, through work orders, within defined geographic
areas on a fixed fee basis. Under these agreements, our
customers have no obligation to undertake any infrastructure
projects or other work with us. A significant decline in the
projects customers assign us under these service agreements
could result in a decline in our results of operations, cash
flows and liquidity.
We
recorded unrealized losses in 2007 and 2008 to reduce the
carrying value of certain auction rate securities we hold, and
we may incur additional impairment charges with respect to
auction rate securities in future periods.
The current overall credit concerns in capital markets may
affect our ability to liquidate certain securities that we
classify as securities available for sale on our balance sheet.
As of December 31, 2008, all of our securities available
for sale, or $33.7 million in par value of auction rate
securities, had insufficient bidders at the scheduled rollover
dates. We have recorded an aggregate unrealized loss on these
securities of $13.1 million as of December 31, 2008.
Our valuation is sensitive to market conditions and
managements judgment and can change significantly based on
the assumptions used. Factors that may impact our valuation
include changes to credit ratings of the securities as well as
to the underlying assets supporting those securities, rates of
default of the underlying assets, underlying collateral value,
discount rates, counterparty risk and ongoing strength and
quality of market credit and liquidity. At this time, we are
uncertain whether the liquidity issues associated with these
investments will improve, when we will be able to exit these
investments at their par value or whether we will incur any
additional temporary or other-than-temporary losses as a result
of these investments. As a result of this uncertainty, we have
classified the $20.6 million fair value of these securities
to long-term assets at December 31, 2008.
Most
of our contracts may be canceled on short notice, so our revenue
is not guaranteed.
Most of our contracts are cancelable on short notice, ranging
from immediate cancellation to cancellation upon 180 days
notice, even if we are not in default under the contract. Many
of our contracts, including our service agreements, are
periodically open to public bid. We may not be the successful
bidder on our existing contracts that are re-bid. We also
provide a significant portion of our services on a
non-recurring,
project-by-project
basis. We could experience a reduction in our revenue,
profitability and liquidity if:
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our customers cancel a significant number of contracts;
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we fail to win a significant number of our existing contracts
upon re-bid; or
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we complete the required work under a significant number of our
non-recurring projects and cannot replace them with similar
projects.
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We may
not accurately estimate the costs associated with our services
provided under fixed-price contracts which could impair our
financial performance.
A substantial portion of our revenue is derived from master
service agreements and other service agreements that are fixed
price contracts. Under these contracts, we set the price of our
services on a per unit or aggregate basis and assume the risk
that the costs associated with our performance may be greater
than we anticipated. In addition to master or other service
agreements we enter into contracts that require installation or
construction of specified units within an infrastructure system.
Under those agreements, we have also contractually agreed to a
price per unit. Profitability will be reduced if the actual
costs to complete each unit exceed original estimates. We are
also required
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to immediately recognize the full amount of any estimated costs
on these projects if estimated costs to complete the remaining
units for the projects exceed the revenue to be earned on such
units.
Our profitability is therefore dependent upon our ability to
accurately estimate the costs associated with our services.
These costs may be affected by a variety of factors, such as
lower than anticipated productivity, conditions at the work
sites differing materially from what was anticipated at the time
we bid on the contract and higher costs of materials and labor.
Certain agreements or projects could have lower margins than
anticipated or losses if actual costs for our contracts exceed
our estimates, which could reduce our profitability, cash flows
and liquidity.
Our
failure to properly manage projects may result in additional
costs or claims, which could have a material adverse effect on
our operating results, cash flows and liquidity.
Certain of our engagements involve large-scale, complex
projects. The quality of our performance on such a project
depends in large part upon our ability to manage our client
relationship and the project itself and to timely deploy
appropriate resources, including third-party contractors and our
own personnel. Our results of operations, cash flows and
liquidity could be adversely affected if we miscalculate the
resources or time needed to complete a project with capped or
fixed fees, or the resources or time needed to meet contractual
milestones. In addition, some of our agreements require that we
pay liquidated damages if we do not meet project deadlines;
therefore, any delay in the completion of projects could subject
us to penalties which could further adversely affect our results
of operations, cash flows and liquidity. Further, any defects or
errors, or failures to meet our customers expectations
could result in large damage claims against us, and, because of
the substantial cost of, and potentially long lead-time
necessary to acquire certain of the materials and equipment used
in our complex projects, particularly our wind farm projects,
damage claims may substantially exceed the amount we can charge
for our associated services.
We
recognize revenue for our installation/construction fixed price
contracts using the percentage-of-completion method, therefore,
variations of actual results from our assumptions may reduce our
profitability.
We recognize revenue on long-term installation/construction
fixed price contracts using the percentage-of-completion method.
Under the percentage-of-completion method, we record revenue as
work on the contract progresses. The cumulative amount of
revenue recorded on a contract at a specified point in time is
that percentage of total estimated revenue that incurred costs
to date bear to estimated total contract costs. The
percentage-of-completion method therefore relies on estimates of
total expected contract costs. Contract revenue and total cost
estimates are reviewed and revised periodically as the work
progresses. Adjustments are reflected in contract revenue in the
fiscal period in which such estimates are revised. Estimates are
based on managements reasonable assumptions and
experience, but are only estimates. Variation of actual results
from estimates on a large project or on a number of smaller
projects could be material. We immediately recognize the full
amount of the estimated loss on a contract when our estimates
indicate such a loss. Such adjustments and accrued losses could
result in reduced profitability which could negatively impact
our liquidity. For example, for the years ended
December 31, 2008, 2007 and 2006, we incurred approximately
$0.7 million, $0.3 million and $6.8 million,
respectively, of losses on percentage-of-completion contracts.
For the year ended December 31, 2006, $6.5 million was
included in loss from discontinued operations.
Amounts
included in our backlog may not result in actual revenue or
translate into profits.
Approximately 83% of our
18-month
backlog at December 31, 2008 was composed of master service
agreements and other service agreements, none of which require
our customers to purchase a minimum amount of services and are
cancelable on short notice. The balance of our backlog is our
estimate of work to be completed on long-term
installation/construction fixed price agreements. These backlog
amounts are based on our estimates and therefore may not result
in actual receipt of revenue in the originally anticipated
period, or at all. In addition, contracts included in our
backlog may not be profitable. We may experience variances in
the realization of our backlog because of project delays or
cancellations resulting from weather conditions, external market
factors and economic factors beyond our control. If our backlog
fails to materialize, our results of operations, cash flows and
liquidity would be materially and adversely affected.
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Our
business is seasonal and is affected by adverse weather
conditions and the spending patterns of our customers, exposing
us to variable quarterly results.
The budgetary years of many of our specialty infrastructure
services customers end December 31. As a result, some of
our customers reduce their expenditures and work order requests
towards the end of the year. Adverse weather conditions,
particularly during the winter season, also affect our ability
to perform outdoor services in certain regions of the United
States. As a result, we experience reduced revenue in the first
quarter of each calendar year.
Natural catastrophes such as hurricanes in the United States
could also have a negative impact on the economy overall and on
our ability to perform outdoor services in affected regions or
utilize equipment and crews stationed in those regions, which
could result in a decline in results of operations, cash flows
and liquidity.
Warranty
claims resulting from our services could have a material adverse
effect on our business.
We generally warrant the work we perform for a one- to two-year
period following substantial completion of a project, subject to
further extensions of the warranty period following repairs or
replacements. We have not historically accrued any reserves for
potential warranty claims as they have been immaterial. The
costs associated with such warranties, including any
warranty-related legal proceedings, could have a material
adverse effect on our results of operations, cash flows and
liquidity.
We are
self-insured against many potential liabilities.
Although we maintain insurance policies with respect to
automobile liability, general liability, workers
compensation and employee group health claims, those policies
are subject to high deductibles, and we are self-insured up to
the amount of the deductible. Since most claims against us do
not exceed the deductibles under our insurance policies, we are
effectively self-insured for substantially all claims. We
actuarially determine any liabilities for unpaid claims and
associated expenses, including incurred but not reported losses,
and reflect those liabilities in our balance sheet as other
current and non-current liabilities. The determination of such
claims and expenses and the appropriateness of the liability is
reviewed and updated quarterly. However, insurance liabilities
are difficult to assess and estimate due to the many relevant
factors, the effects of which are often unknown, including the
severity of an injury, the determination of our liability in
proportion to other parties, the number of incidents not
reported and the effectiveness of our safety program. If our
insurance claims increase or costs exceed our estimates of
insurance liabilities, we could experience a decline in
profitability and liquidity.
Increases
in our insurance premiums or collateral requirements could
significantly reduce our profitability, liquidity and
availability under our credit facility.
Because of factors such as increases in claims, projected
significant increases in medical costs and wages, lost
compensation and reductions in coverage, insurance carriers may
be unwilling to continue to provide us with our current levels
of coverage without a significant increase in insurance premiums
or collateral requirements to cover our deductible obligations.
An increase in premiums or collateral requirements could
significantly reduce our profitability and liquidity as well as
reduce availability under our revolving credit facility.
We may
be unable to obtain sufficient bonding capacity to support
certain service offerings, and the need for performance and
surety bonds may reduce our availability under our credit
facility.
Some of our contracts require performance and payment bonds. We
may not be able to maintain a sufficient level of bonding
capacity in the future, which could preclude us from being able
to bid for certain contracts and successfully contract with
certain customers. In addition, even if we are able to
successfully renew or obtain performance or payment bonds in the
future, we may be required to post letters of credit in
connection with the bonds which would reduce availability under
our credit facility.
The
impact of the Stimulus Act is uncertain.
The credit crisis and economic downturn resulted in a tremendous
amount of uncertainty with certain projects being delayed or
cancelled. While we believe that the Stimulus Act, which was
enacted into law in February 2009, should aid the wind,
electrical transmission and rural broadband businesses, the
extent to which it will is uncertain.
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The Stimulus Act provides for federal tax incentives applicable
to the wind energy industry including an investment tax credit,
a U.S. Treasury grant program, the production tax credit
and accelerated tax depreciation for certain wind assets. The
investment tax credit provides that taxpayers can elect to claim
an investment tax credit equal to 30% of the cost of certain
qualifying assets in lieu of the production tax credit. The
grant program allows taxpayers that elect to claim the 30%
investment tax credit in lieu of the production tax credit to
receive grants from the U.S. Treasury equal to the amount
of the investment tax credit (which grants shall be in lieu of
such credit). The production tax credit currently provides the
owner of a U.S. wind facility (consisting of the pad,
tower, and turbine) with a ten-year credit against its federal
income tax obligations based on the amount of electricity
produced at such facility by the owner and sold to unrelated
persons during that period. The accelerated depreciation for
wind generation assets provides for a five-year depreciable life
for these assets, rather than the 15- to
20-year
depreciable lives of many non-renewable energy assets. The
Stimulus Act also extends the 50% bonus depreciation deduction
for property placed in service in 2009.
The Stimulus Act also contains several provisions aimed at
improving the U.S.s electrical transmission system in part
to facilitate the transfer of renewable energy from rural areas
to high demand areas, including $6 billion in funds for
renewable energy and transmission loan guarantees. The Stimulus
Act also provides for $7.2 billion in funds for the
development of broadband facilities throughout the United
States. There are, however, many uncertainties surrounding how
these provisions of the Stimulus Act will be implemented and
their effectiveness and we also cannot guarantee you that we
will be able to secure additional work as a result of the
Stimulus Act.
The tax incentives provided by the Stimulus Act, however, have a
finite term. Currently, the election to claim the investment tax
credit in lieu of the production tax credit is only available
for qualified wind facilities placed in service from 2009 to
2012, the U.S. Treasury grant program will only be
applicable to wind projects placed in service in 2009 or 2010
(or after 2010 so long as construction begins in 2009 or 2010
and is completed before 2013), and the production tax credit is
scheduled to expire on December 31, 2012 and will not be
available for energy generated from wind facilities placed in
service after that date unless extended or renewed. We cannot
assure you that the new investment tax credit or
U.S. Treasury grant program will be effective or that any
future efforts to extend or renew the production tax credit, the
investment tax credit, or the U.S. Treasury grant program
will be successful or that any extension or renewal will be on
terms that are as favorable as those that currently exist. In
addition, we cannot assure you that any extension or renewal of
the production tax credit, the investment tax credit, or the
U.S. Treasury grant program would be enacted prior to its
expiration or, if allowed to expire, that any extension or
renewal enacted thereafter would be enacted with retroactive
effect. We also cannot assure you that the tax laws providing
for accelerated depreciation of wind generation assets will not
be modified, amended or repealed in the future. The ability of
our customers to obtain financing for these wind farm
developments would be impaired or eliminated and the resulting
wind farms would be less profitable thereby potentially reducing
demand for our wind power services if the investment tax credit
or the Department of Energy grant program are not effective or
if the federal production tax credit is not extended or renewed,
or is extended or renewed at a lower rate. This ability may be
further impaired or eliminated if the investment tax credit or
the U.S. Treasury grant program in not extended or renewed,
or is extended or renewed at a lower rate. Our revenue and
results of operations could be materially adversely affected if
demand for our wind power services were reduced.
Changes
to renewable portfolio standards could negatively impact our
results of operations, cash flows and liquidity.
A significant portion of our business is currently focused on
providing services to owners and operators of wind power
facilities. The development of wind facilities is highly
dependent upon the federal production tax credit (discussed
above) and the existence of renewable portfolio standards and
other state incentives. Renewable portfolio standards are state
specific statutory provisions specifying that electric utilities
generate a certain amount of electricity from renewable energy
sources or devote a certain portion of its plant capacity to
renewable energy sources. Additionally, certified renewable
energy generators earn certificates for every unit of
electricity they produce and can sell these along with their
electricity to supply companies. These standards have spurred
significant growth in the wind energy industry and a
corresponding increase in the demand for our wind power-related
services. Currently, 26 states in the United States as well
as the District of Columbia have adopted renewable portfolio
standards or goals. Eliminations of or changes to existing
renewable portfolio standards may impact the demand for our wind
power-related services.
18
We
have agreed to keep certain liabilities related to the state
Department of Transportation related projects and assets that
were sold in February 2007.
Effective February 1, 2007, we sold our state Department of
Transportation related projects and assets. On January 24,
2008, we entered into a settlement agreement with the buyer of
our state Department of Transportation projects and assets to
settle previously disclosed warranty, indemnification and other
claims primarily relating to work we had performed on the state
Department of Transportation projects we sold. In connection
with the settlement agreement, the parties also agreed to
further amend and restate the Amended Asset Purchase Agreement
effective as of January 24, 2008, which we refer to as the
Revised Amended Agreement. In connection with the
sale of our state Department of Transportation related projects
and assets and the related settlement, we agreed to keep certain
liabilities, mainly related to the cost to maintain and continue
certain performance and payment bonds, certain obligations under
leases between the parties and certain other litigation matters.
We may also be unable to recover any losses we incur as a result
of any third party claims to the extent any third parties seek
payment from us directly and we are unable to recover such
losses from the buyer pursuant to the indemnification
obligations contained in the Revised Amended Agreement;
including, in the event the buyer were financially unable to
meet certain obligations, any losses resulting from creditor
claims.
Under the terms of the Revised Amended Agreement, the buyer is
no longer required to issue a standby letter of credit in our
favor in February 2008 to cover any remaining exposure related
to our bonded obligations. Instead, pursuant to the terms of the
settlement agreement, the buyer entered into indemnity
agreements directly with certain surety bonding companies in
connection with our bonded obligations. Therefore, if the buyer
is unable to meet its contractual obligations, the surety
bonding company can seek its remedies under the indemnity
agreement. If the surety bonding company, however, pays the
amounts due under the bonds, the surety bonding company will
seek reimbursement of such payment from us. Accordingly, we may
incur losses in the future related to these contingent
liabilities if the buyer does not complete the bonded contracts
and we are unable to recover such losses from the buyer pursuant
to the indemnification provisions contained in the Revised
Amended Agreement. At December 31, 2008, we estimated that
the remaining cost to complete these state Department of
Transportation projects was $2.6 million on the related
$159.7 million in performance and payment bonds.
We may
incur goodwill impairment charges in our reporting entities
which could harm our profitability.
In accordance with Statement of Financial Accounting Standards,
No. 142, Goodwill and Other Intangible
Assets, or SFAS No. 142, we periodically
review the carrying values of our goodwill to determine whether
such carrying values exceed the fair market value. In connection
with our decision to sell substantially all our Canadian net
assets, we wrote off goodwill associated with this entity in the
amount of $0.4 million for the year ended December 31,
2007. When we acquire a business, we record goodwill equal to
the excess amount we pay for the business, including liabilities
assumed, over the fair value of the tangible and intangible
assets of the business we acquire. As a result of the
acquisitions we completed during the years ended
December 31, 2007 and 2008, we have recorded
$52.2 million and $221.5 million, respectively, of
goodwill and other identifiable intangible assets in connection
with acquisitions and payments of earn-outs made during those
periods. We expect to continue to record additions to goodwill
in future periods in connection with these acquisitions,
particularly as a result of future earn-out payments, and future
acquisitions. We may incur additional impairment charges related
to goodwill in connection with any of our acquisitions in the
future if the markets they serve or their business deteriorate.
We may
incur restructuring or impairment charges which could reduce our
profitability.
From time to time we review our operations in an effort to
improve profitability. We could incur charges in the future as a
result of:
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eliminating service offerings that no longer fit into our
business strategy;
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reducing or eliminating services that do not produce adequate
revenue or margin;
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reducing costs of businesses that provide adequate profit
contributions but need margin improvements; and
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reviewing new business opportunities capable of utilizing our
existing human and physical resources.
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For example, as a result of the sale of our state Department of
Transportation operations, we recorded impairment charges
totaling $44.5 million and $2.9 million for the years
ended December 31, 2006 and 2007, respectively. All charges
related to restructuring or impairment would be reflected as
operating expenses and could materially reduce our profitability
and liquidity.
Our
revolving credit facility and senior notes impose restrictions
on us which may prevent us from engaging in transactions that
might benefit us, including responding to changing business and
economic conditions or securing additional financing, if
needed.
At December 31, 2008, we had outstanding
$150.0 million aggregate principal amount of our
7.625% senior notes due February 2017. We also have a
revolving credit facility under which we had $42.5 million
outstanding cash draws at December 31, 2008. We amended and
restated our revolving credit facility effective July 29,
2008 and expanded the maximum available borrowing from
$150.0 million to $210.0 million, subject to certain
restrictions. At December 31, 2008, the availability under
the credit facility was approximately $82.2 million net of
outstanding standby letters of credit aggregating
$82.4 million. The terms of our indebtedness contain
customary events of default and covenants that prohibit us from
taking certain actions without satisfying certain financial
tests or obtaining the consent of the lenders. The prohibited
actions include, among other things:
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buying back shares in excess of specified amounts;
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making investments and acquisitions in excess of specified
amounts;
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incurring additional indebtedness in excess of specified amounts;
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paying cash dividends;
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creating certain liens against our assets;
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prepaying our other indebtedness, excluding the senior notes;
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engaging in certain mergers or combinations; and
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engaging in transactions that would result in a change of
control (as defined in the credit facility and indenture).
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Our credit facility requires us to comply with a minimum fixed
charge coverage ratio. Should we be unable to comply with the
terms and covenants of our credit facility, we would be required
to obtain further modifications of the facility or secure
another source of financing to continue to operate our business.
A default could result in the acceleration of either our
obligations under the credit facility or under the indenture
relating to the senior notes, or both. In addition, these
covenants may prevent us from engaging in transactions that
benefit us, including responding to changing business and
economic conditions or securing additional financing, if needed.
Our business is capital intensive and, to the extent we need
additional financing, we may not be able to obtain such
financing at all or on favorable terms, which may materially
decrease our profitability, cash flows and liquidity.
If we
are unable to attract and retain qualified managers and skilled
employees, we will be unable to operate efficiently which could
reduce our revenue, profitability and liquidity.
Our business is labor intensive, and some of our operations
experience a high rate of employee turnover. In addition, given
the nature of the highly specialized work we perform, many of
our employees are trained in and possess specialized technical
skills. At times of low unemployment rates in the areas we
serve, it can be difficult for us to find qualified and
affordable personnel. We may be unable to hire and retain a
sufficient skilled labor force necessary to support our
operating requirements and growth strategy. Our labor expenses
may increase as a result of a shortage in the supply of skilled
personnel. We may also be forced to incur significant training
expenses if we are unable to hire employees with the requisite
skills. Additionally, our business is managed by a number of key
executive and operational officers and is dependent upon
retaining and recruiting qualified management. Labor shortages,
increased labor or training costs or the loss of key personnel
could materially adversely affect our results of operations,
cash flows and liquidity.
20
Increases
in the costs of fuel could reduce our operating
margins.
The price of fuel needed to run our vehicles and equipment is
unpredictable and fluctuates based on events outside our
control, including geopolitical developments, supply and demand
for oil and gas, actions by the Organization of the Petroleum
Exporting Countries and other oil and gas producers, war and
unrest in oil producing countries, regional production patterns
and environmental concerns. Most of our contracts do not allow
us to adjust our pricing. Accordingly, any increase in fuel
costs could materially reduce our profitability and liquidity.
Our
subcontractors may fail to satisfy their obligations to us or
other parties, or we may be unable to maintain these
relationships, either of which may have a material adverse
affect our results of operations, cash flows and
liquidity.
We depend on subcontractors to complete some of the work on some
of our projects. There is a risk that we may have disputes with
subcontractors arising from, among other things, the quality and
timeliness of work performed by the subcontractor, customer
concerns about the subcontractor or our failure to extend
existing task orders or issue new task orders under a
subcontract. In addition, if any of our subcontractors fail to
deliver on a timely basis the
agreed-upon
supplies
and/or
perform the
agreed-upon
services, then our ability to fulfill our obligations as a prime
contractor may be jeopardized. In addition, the absence of
qualified subcontractors with whom we have a satisfactory
relationship could adversely affect the quality of our service
and our ability to perform under some of our contracts. Any of
these factors may have a material adverse effect on our results
of operations, cash flows and liquidity.
We may
choose, or be required, to pay our subcontractors even if our
customers do not pay, or delay paying, us for the related
services.
We use subcontractors to perform portions of our services and to
manage work flow. In some cases, we pay our subcontractors
before our customers pay us for the related services. If we
choose, or are required, to pay our subcontractors for work
performed for customers who fail to pay, or delay paying us for
the related work, we could experience a material decrease in
profitability and liquidity.
Our
failure to comply with environmental laws could result in
significant liabilities.
Some of the work we perform is in underground environments. If
the field location maps supplied to us are not accurate, or if
objects are present in the soil that are not indicated on the
field location maps, our underground work could strike objects
in the soil containing pollutants and result in a rupture and
discharge of pollutants. In such a case, we may be liable for
fines and damages.
We own and lease several facilities at which we store our
equipment. Some of these facilities contain fuel storage tanks
which may be above or below ground. If these tanks were to leak,
we could be responsible for the cost of remediation as well as
potential fines.
We sometimes perform directional drilling operations below
certain environmentally sensitive terrains and water bodies. Due
to the inconsistent nature of the terrain and water bodies, it
is possible that such directional drilling may cause a surface
fracture releasing subsurface materials. These releases may
contain contaminants in excess of amounts permitted by law,
potentially exposing us to remediation costs and fines.
In addition, new environmental laws and regulations, stricter
enforcement of existing laws and regulations, the discovery of
previously unknown contamination or leaks, or the imposition of
new clean-up
requirements could require us to incur significant costs or
become the basis for new or increased liabilities that could
have a material negative impact our results of operations, cash
flows and liquidity.
Our
failure to comply with the regulations of the U.S. Occupational
Safety and Health Administration, the U.S. Department of
Transportation and other state and local agencies that oversee
transportation and safety compliance could reduce our revenue,
profitability and liquidity.
The Occupational Safety and Health Act of 1970, as amended, or
OSHA, establishes certain employer responsibilities, including
maintenance of a workplace free of recognized hazards likely to
cause death or serious injury, compliance with standards
promulgated by the Occupational Safety and Health Administration
and various record keeping, disclosure and procedural
requirements. Various standards, including standards for notices
of
21
hazards, safety in excavation and demolition work, may apply to
our operations. We have incurred, and will continue to incur,
capital and operating expenditures and other costs in the
ordinary course of our business in complying with OSHA and other
state and local laws and regulations and could incur penalties
and fines in the future, including in extreme cases, criminal
sanctions.
We have, from time to time, received notice from the
U.S. Department of Transportation that our motor carrier
operations will be monitored and that the failure to improve our
safety performance could result in suspension or revocation of
vehicle registration privileges. If we cannot successfully
resolve these issues, our ability to service our customers could
be damaged which could lead to a material reduction of our
results of operations, cash flows and liquidity.
Our
financial results are based, in part, upon estimates and
assumptions that may differ from actual results.
In preparing our consolidated financial statements in conformity
with accounting principles generally accepted in the United
States, a number of estimates and assumptions are made by
management that affect the amounts reported in the financial
statements. These estimates and assumptions must be made because
certain information that is used in the preparation of our
financial statements is either dependent on future events or
cannot be calculated with a high degree of precision from data
available. In some cases, these estimates are particularly
uncertain and we must exercise significant judgment. Estimates
are primarily used in our assessment of the revenue recognition
for costs and estimated earnings in excess of billings,
allowance for doubtful accounts, accrued self-insured claims,
valuation of goodwill and intangible assets, asset lives used in
computing depreciation and amortization, including amortization
of intangibles, the fair value of securities available for sale
and accounting for performance-based stock awards, income taxes
(including net deferred tax assets) and other contingencies and
litigation. Actual results could differ materially from the
estimates and assumptions that we use, which could have a
material adverse effect on our results of operations, cash flows
and liquidity.
Our
business is subject to hazards that could result in substantial
liabilities and weaken our financial condition.
Construction projects undertaken by our employees involve
exposure to electrical lines, pipelines carrying potentially
explosive materials, heavy equipment, mechanical failures,
transportation accidents, adverse weather conditions and damage
to equipment and property. These hazards can cause personal
injuries and loss of life, severe damage to or destruction of
property and equipment and other consequential damages and could
lead to suspension of operations and large damage claims (which
could, in some cases, substantially exceed the amount we charge
for the associated services). In addition, if serious accidents
or fatalities occur or our safety record were to deteriorate, we
may be restricted from bidding on certain work and obtaining
other new contracts, and certain existing contracts could be
terminated. In addition, our safety processes and procedures are
monitored by various agencies and rating bureaus. See Risk
Factors Our failure to comply with the regulations
of the U.S. Occupational Safety and Health Administration,
the U.S. Department of Transportation and other state and
local agencies that oversee transportation and safety compliance
could reduce our revenue, profitability and liquidity. The
occurrence of accidents in our business could result in
significant liabilities, employee turnover, increase the costs
of our projects or harm our ability to perform under our
contracts or enter into new contracts with customers, which
could materially reduce our revenue, profitability and liquidity.
Many
of our customers are highly regulated and the addition of new
regulations or changes to existing regulations may adversely
impact their demand for our specialty contracting services and
the profitability of those services.
Many of our communications customers are regulated by the
Federal Communications Commission, or FCC, and our energy
customers are regulated by the Federal Energy Regulatory
Commission, or FERC, and, in addition, our utility customers are
regulated by state public utility commissions. These agencies
may interpret the application of their regulations in a manner
that is different than the way such regulations are currently
interpreted and may impose additional regulations. If existing
or new regulations have an adverse affect on our customers and
adversely impact the profitability of the services they provide,
then demand for our specialty contracting services may be
reduced.
22
Claims,
lawsuits and proceedings could reduce our profitability, cash
flows and liquidity.
We are subject to various claims, lawsuits and proceedings which
arise in the ordinary course of business. These actions may
seek, among other things, compensation for alleged personal
injury, workers compensation, employment discrimination,
breach of contract, property damage, punitive damages, civil
penalties or other losses, consequential damages or injunctive
or declaratory relief. In addition, pursuant to our service
agreements, we generally indemnify our customers for claims
related to the services we provide thereunder. Claimants may
seek large damage awards and defending claims can involve
significant costs. When appropriate, we establish reserves
against these items that we believe to be adequate in the light
of current information, legal advice and professional indemnity
insurance coverage, and we adjust such reserves from time to
time according to case developments. If our reserves are
inadequate, or if in the future our insurance coverage proves to
be inadequate or unavailable or there is an increase in
liabilities for which we self-insure, we could experience a
reduction in our profitability and liquidity. An adverse
determination on any such claim, lawsuit or proceeding could
have a material adverse effect on our business, financial
condition or results of operations. In addition, claims,
lawsuits and proceedings may harm our reputation or divert
management resources away from operating our business.
Acquisitions
involve risks that could result in a reduction of our operating
results, cash flows and liquidity.
We have made, and in the future plan to make, strategic
acquisitions such as our recent acquisition of Wanzek
Construction, Inc., our largest strategic acquisition to date.
However, we may not be able to identify suitable acquisition
opportunities or may be unable to obtain the consent of our
lenders and therefore not be able to complete such acquisitions.
We may pay for acquisitions with our common stock or convertible
securities which may dilute your investment in our common stock
or decide to pursue acquisitions that investors may not agree
with. In connection with most of our acquisitions, we have also
agreed to substantial earn-out arrangements. To the extent we
defer the payment of the purchase price for any acquisition
through a cash earn-out arrangement, it will reduce our cash
flows in subsequent periods. In addition, acquisitions may
expose us to operational challenges and risks, including:
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the ability to profitably manage additional businesses or
successfully integrate the acquired business operations and
financial reporting and accounting control systems into our
business;
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increased indebtedness and contingent purchase price obligations
associated with an acquisition;
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the ability to fund cash flow shortages that may occur if
anticipated revenue is not realized or is delayed, whether by
general economic or market conditions or unforeseen internal
difficulties;
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the availability of funding sufficient to meet increased capital
needs;
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diversion of managements attention; and
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the ability to hire qualified personnel required for expanded
operations.
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A failure to successfully manage the operational challenges and
risks associated with or resulting from acquisitions could
result in a reduction of our results of operations, cash flows
and liquidity. Borrowings or issuances of convertible securities
associated with these acquisitions may also result in higher
levels of indebtedness which could impact our ability to service
our debt within the scheduled repayment terms.
Our
inability to enforce non-competition agreements with former
principals and key management of the businesses we acquire may
adversely affect our operating results, cash flows and
liquidity.
In connection with our acquisitions, we generally require that
key management and the former principals of the businesses we
acquire enter into non-competition agreements in our favor. The
laws of each state differ concerning the enforceability of
non-competition agreements. Generally, state courts will examine
all of the facts and circumstances at the time a party seeks to
enforce a non-competition agreement; consequently, we cannot
predict with certainty whether, if challenged, a court will
enforce any particular non-competition agreement. If one or more
former principals or members of key management of the businesses
we acquire leave us and the courts refuse to enforce the
non-compete agreement entered into by such person or persons, we
might be subject to increased competition, which could
materially and adversely affect our operating results, cash
flows and liquidity.
23
Risks
Related to Our Company and Our Common Stock
The
market price of our common stock has been, and may continue to
be, highly volatile.
During 2006, 2007 and 2008, our common stock fluctuated from a
high of $16.25 per share to a low of $5.55 per share. We may
continue to experience significant volatility in the market
price of our common stock. Numerous factors could have a
significant effect on the price of our common stock, including:
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announcements of fluctuations in our operating results or the
operating results of one of our competitors;
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future sales of our common stock or other securities (including
any shares issued in connection with earn-out obligations for
any past or future acquisition);
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announcements of new contracts or customers by us or one of our
competitors;
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market conditions for providers of services to communications
companies, utilities and government;
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changes in recommendations or earnings estimates by securities
analysts; and
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announcements of acquisitions by us or one of our competitors.
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In addition, the stock market has experienced significant price
and volume fluctuations in recent years that have sometimes been
unrelated or disproportionate to the operating performance of
companies. The market price for our common stock has been
volatile and such volatility could cause the market price of our
common stock to decrease and cause you to lose some or all of
your investment in our common stock.
In
connection with certain completed acquisitions, we have issued
shares of our common stock or securities that are convertible
into shares of our common stock or have the option to issue
shares of our common stock instead of cash as consideration for
future earn-out obligations, and we may agree to issue such
additional securities in connection with other future
acquisitions; which, if issued, would dilute your share
ownership and could lead to volatility in our common stock
price.
We grow our business organically as well as through
acquisitions. One method of acquiring companies or otherwise
funding our corporate activities is through the issuance of
additional equity securities. In connection with certain
completed acquisitions, we have the option to issue shares of
our common stock instead of cash for certain earn-out
obligations, provided we first register those shares for resale,
including one such obligation for which our earn-out obligation
is unlimited. In addition, in connection with our acquisition of
Wanzek we issued 7.5 million shares and $55.0 million
in principal amount of 8% convertible notes and granted the
sellers certain registration rights. Our Amended and Restated
Articles of Incorporation provide that we may issue up to a
total 100,000,000 shares of common stock, of which
75,454,565 shares were outstanding as of December 31,
2008. We may also agree to issue additional securities in
connection with future acquisitions. Such issuances could have
the effect of diluting our earnings per share as well as our
existing shareholders individual ownership percentages and
could lead to volatility in our common stock price.
A
small number of our existing shareholders have the ability to
influence major corporate decisions.
Jorge Mas, our Chairman, Jose Mas, our President and Chief
Executive Officer, and other members of the Mas family who are
employed by MasTec, beneficially owned approximately 29.3% of
the outstanding shares of our common stock as of
December 31, 2008. Accordingly, they are in a position to
influence:
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the vote of most matters submitted to our shareholders,
including any merger, consolidation or sale of all or
substantially all of our assets;
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the nomination of individuals to our Board of Directors; and
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a change in our control.
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These factors may discourage, delay or prevent a takeover
attempt that you might consider in your best interest or that
might result in you receiving a premium for your common stock.
24
Our
articles of incorporation and certain provisions of Florida law
contain anti-takeover provisions that may make it more difficult
to effect a change in our control.
Certain provisions of our articles of incorporation and by-laws
and the Florida Business Corporation Act, or the FBCA, could
delay or prevent an acquisition or change in control and the
replacement of our incumbent directors and management, even if
doing so might be beneficial to our shareholders by providing
them with the opportunity to sell their shares possibly at a
premium over the then market price of our common stock. For
example, our Board of Directors is divided into three classes.
At any annual meeting of our shareholders, our shareholders only
have the right to appoint approximately one-third of the
directors on our Board of Directors. Consequently, it will take
at least two annual shareholder meetings to effect a change in
control of our Board of Directors, which may discourage hostile
takeover bids. In addition, our articles of incorporation
authorize our Board of Directors, without further shareholder
approval, to issue preferred stock. The issuance of preferred
stock could also dilute the voting power of the holders of our
common stock, including by the grant of voting control to
others, which could delay or prevent an acquisition or change in
control.
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Item 1B.
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Unresolved
Staff Comments
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None.
MasTecs corporate headquarters is a 24,000 square
foot leased facility located in Coral Gables, Florida.
As of December 31, 2008, MasTecs operations were
conducted from over 200 locations. None of MasTecs
facilities in these locations is material to its operations
because most of its services are performed on customers
premises or on public rights of way and suitable alternative
locations are available in substantially all areas where MasTec
currently conducts business.
MasTec also owns property and equipment that, at
December 31, 2008, had a net book value of
$158.0 million. This property and equipment includes land,
buildings, vans, trucks, tractors, trailers, bucket trucks,
backhoes, bulldozers, directional boring machines, digger
derricks, cranes, networks, computers, computer software, office
and other equipment. MasTecs equipment is acquired from
various third-party vendors, none of which MasTec depends upon,
and MasTec did not experience any difficulties in obtaining
desired equipment in 2008.
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Item 3.
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Legal
Proceedings
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Legacy
Litigation
MasTec is subject to litigation, primarily dating from the
period 2001 through 2005.
During 2003, MasTec contracted to construct a natural gas
pipeline for Coos County, Oregon (Coos County). In
December 2003 construction work on the pipeline ceased after
Coos County refused payment due MasTec, and MasTec sued Coos
County in February 2004. Coos County subsequently counterclaimed
against MasTec for breach of contract for alleged failures to
properly construct the pipeline and for alleged environmental
and labor law violations, and other causes. In April 2008,
MasTec entered into a definitive settlement agreement to settle
its dispute with Coos County, which provides for a
$4.35 million payment to Coos County on the later of
June 1, 2008 or ten days after the entry of a judgment in
the United States Army Corps of Engineers (Corps of
Engineers) matter described below, and a
$4.35 million payment to Coos County on June 1, 2009
with 3% interest accruing beginning June 1, 2008. The
settlement agreement was subject to MasTec not being penalized
greater than $1.5 million in the Corps of Engineers case.
In February 2009, the Federal District Court entered a judgment
in favor of the Corps of Engineers in the amount of
$1.5 million thus making the settlement effective.
In connection with the Coos County pipeline project, the Corps
of Engineers and the Oregon Department of Environmental Quality
issued cease and desist orders and notices of non-compliance to
Coos County and to MasTec with respect to the project. On
March 30, 2007, the Corps of Engineers brought a complaint
in a federal district court against MasTec and Coos County and
are seeking damages in excess of $16 million. The matter
went to trial in
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February 2008 and in February 2009, the Federal District Court
entered a judgment in favor of the Corps of Engineers in the
amount of $1.5 million.
In June 2005, MasTec posted a $2.3 million bond in order to
pursue the appeal of a $2.0 million final judgment entered
against MasTec for damages plus attorneys fees resulting
from a break in a Citgo Products Pipeline Company
(Citgo) pipeline that occurred in 1999. In October
2008, the appellate court reduced the total award to
$1.9 million, and MasTec requested a rehearing, which was
denied by the appellate court. In February 2009, the parties
settled the dispute for $1.6 million. A portion of the
settlement will be reimbursed by insurance.
MasTec filed a lawsuit against Consolidated Edison, Inc.,
Consolidated Edison Company of New York, Inc. and Con Edison
Communications, Inc. (collectively, Con Edison) in
May 2002 in connection with a telecommunication project MasTec
worked on for Telergy, Inc. (Telergy). The lawsuit
alleges that Con Edison directly interfered with MasTecs
work for Telergy and that this interference resulted in
Telergys bankruptcy and resulted in Con Edison obtaining
MasTecs work on the Telergy project without paying for it.
MasTec seeks in excess of $40 million from Con Edison.
Discovery in the matter is ongoing.
In April 2006, MasTec settled, without payment to the plaintiffs
by MasTec, several complaints for purported securities class
actions filed against MasTec and certain officers in the second
quarter of 2004. As part of the settlement, MasTecs excess
insurance carrier retained rights to seek reimbursement of up to
$2.0 million from MasTec based on its claim that notice was
not properly given under the policy. Upon exhausting
MasTecs legal recourse, MasTec paid the insurance carrier
$2 million to resolve the dispute. MasTec is now vigorously
pursuing claims against Aon Risk Services, Inc. of Florida, the
insurance broker, for breach of contract and breach of fiduciary
duty for the losses arising from a denial of insurance coverage.
MasTec provided telecommunication infrastructure services to
Adesta Communications, Inc. (Adesta) in 2000 and
2001. Adesta filed for bankruptcy in 2001. Adestas
bankruptcy trustee sold Adestas assets in the trust, and
MasTec is waiting for a distribution from that trust. Based on
MasTecs current understanding of the expected
distribution, MasTec has reduced its receivable to
$1.3 million, which is recorded in other current assets on
its consolidated balance sheet at December 31, 2008.
Non-legacy
Litigation
In July 2008, MasTec filed a claim in arbitration against Credit
Suisse Securities (USA) LLC (Credit Suisse) with the
Financial Industry Regulatory Authority, Inc.
(FINRA) for negligence, unsuitability, negligent
supervision, negligent misrepresentations and omissions of
material fact, breach of fiduciary duty, breach of contract and
violations of state securities laws in connection with the sale
by Credit Suisse to MasTec of certain auction rate securities in
the aggregate principal amount of $33.7 million. MasTec is
seeking, among other relief, rescission of the purchase of the
auction rate securities. Credit Suisse responded denying
MasTecs claims. The matter is currently in the discovery
stage, and the arbitration is expected to occur in May 2009.
In addition to the matters discussed above, MasTec is also
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.
Accrued aggregate liabilities related to the matters described
above and other litigation matters amounted to
$13.2 million at December 31, 2008. A charge of
$3.5 million was recorded for the year ended
December 31, 2008 with respect to these matters. See
Note 17 Commitments and Contingencies in the
Notes to Consolidated Financial Statements and
Item 1A Risk Factors Risks
Related to Our Business Claims, lawsuits and
proceedings could reduce profitability and liquidity and weaken
our financial conditions.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
26
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock is listed on the New York Stock Exchange under
the symbol MTZ. The following table sets forth, for
the quarters indicated, the high and low sale prices of our
common stock, as reported by the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
9.57
|
|
|
$
|
7.12
|
|
|
$
|
12.40
|
|
|
$
|
10.60
|
|
Second Quarter
|
|
$
|
11.85
|
|
|
$
|
7.37
|
|
|
$
|
16.25
|
|
|
$
|
10.84
|
|
Third Quarter
|
|
$
|
15.64
|
|
|
$
|
9.79
|
|
|
$
|
16.10
|
|
|
$
|
12.02
|
|
Fourth Quarter
|
|
$
|
12.85
|
|
|
$
|
6.19
|
|
|
$
|
16.00
|
|
|
$
|
8.68
|
|
Holders. As of February 25, 2009, there
were 3,582 shareholders of record of our common stock.
27
Performance
Graph
The performance graph below compares the cumulative total
returns for our common stock with the cumulative total return
(including reinvestment of dividends) of the Standard and
Poors 500 Composite Stock Index (S&P 500) our
Peer Group, comprised of Dycom Industries, Inc., Quanta
Services, Inc. and Pike Electric, Inc.
The graph assumes an investment of $100 in our common stock and
each of the respective indices, for the period from
December 31, 2003 to December 31, 2008. The
comparisons in the graph are required by the SEC and are not
intended to forecast or be indicative of possible future
performance of our common stock.
The performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference
this annual report into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934 except to the extent
we specifically incorporate this information by reference, and
shall not otherwise be deemed filed under such acts.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among MasTec, Inc., The S&P 500 Index
And A Peer Group
|
|
|
* |
|
$100 invested on
12/31/03 in
stock & index-including reinvestment of dividends.
Fiscal year ending December 31. |
Copyright
©
2009 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
Dividends. We have never paid any cash
dividends and do not anticipate paying any cash dividends in the
foreseeable future. Instead we intend to retain any future
earnings for reinvestment. Our Board of Directors will make any
future determination as to the payment of dividends at its
discretion, and its determination will depend upon our operating
results, financial condition and capital requirements, general
business conditions and such other factors that the board of
directors considers relevant. In addition, our credit agreements
prohibit us from paying cash dividends or making other
distributions on our common stock without the prior consent of
the lender and the indenture governing our senior notes contains
covenants that restrict our ability to make certain payments
including the payment of dividends. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Financial Condition,
Liquidity and Capital Resources.
Purchases of MasTec Stock. We did not
repurchase any shares of our common stock during the year ended
December 31, 2008.
28
|
|
Item 6.
|
Selected
Financial Data
|
The following table states our selected consolidated financial
data, which has been derived from our audited consolidated
financial statements. The table reflects our consolidated
results of operations for the periods indicated. Our
consolidated results of operations are not necessarily
comparable from period to period due to the impact of recent
acquisitions. See Note 4 Acquisitions in the
Notes to Consolidated Financial Statements. All periods
presented reflect our Canadian operations and state Department
of Transportation projects as Discontinued Operations. The
following selected financial data should be read together with
our consolidated financial statements and notes thereto as well
as Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,378,663
|
|
|
$
|
1,037,779
|
|
|
$
|
940,421
|
|
|
$
|
838,663
|
|
|
$
|
795,510
|
|
Costs of revenue, excluding depreciation
|
|
$
|
1,180,310
|
|
|
$
|
891,606
|
|
|
$
|
808,142
|
|
|
$
|
722,427
|
|
|
$
|
703,817
|
|
Income (loss) from continuing operations
|
|
$
|
66,602
|
|
|
$
|
6,283
|
|
|
$
|
40,050
|
|
|
$
|
21,331
|
|
|
$
|
(11,504
|
)
|
Loss from discontinued operations, net of tax
|
|
$
|
(814
|
)
|
|
$
|
(13,611
|
)
|
|
$
|
(90,398
|
)
|
|
$
|
(35,947
|
)
|
|
$
|
(37,933
|
)
|
Net income (loss)
|
|
$
|
65,788
|
|
|
$
|
(7,328
|
)
|
|
$
|
(50,348
|
)
|
|
$
|
(14,616
|
)
|
|
$
|
(49,437
|
)
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.98
|
|
|
$
|
0.10
|
|
|
$
|
0.63
|
|
|
$
|
0.44
|
|
|
$
|
(0.24
|
)
|
Discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(1.42
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(0.78
|
)
|
Total basic net income (loss) per share
|
|
$
|
0.97
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(1.02
|
)
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.97
|
|
|
$
|
0.09
|
|
|
$
|
0.62
|
|
|
$
|
0.43
|
|
|
$
|
(0.24
|
)
|
Discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(1.39
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.78
|
)
|
Total diluted net income (loss) per share
|
|
$
|
0.96
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(1.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
105,317
|
|
|
$
|
163,812
|
|
|
$
|
164,042
|
|
|
$
|
135,742
|
|
|
$
|
134,810
|
|
Property and equipment, net
|
|
$
|
158,013
|
|
|
$
|
81,939
|
|
|
$
|
61,212
|
|
|
$
|
47,513
|
|
|
$
|
62,966
|
|
Total assets
|
|
$
|
1,090,897
|
|
|
$
|
710,749
|
|
|
$
|
646,113
|
|
|
$
|
584,837
|
|
|
$
|
600,870
|
|
Total debt
|
|
$
|
304,338
|
|
|
$
|
162,973
|
|
|
$
|
130,176
|
|
|
$
|
200,370
|
|
|
$
|
196,110
|
|
Total shareholders equity
|
|
$
|
443,090
|
|
|
$
|
314,565
|
|
|
$
|
304,711
|
|
|
$
|
179,603
|
|
|
$
|
191,153
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
historical consolidated financial statements and related notes
thereto in Item 8. Financial Statements and
Supplementary Data. The discussion below contains
forward-looking statements that are based upon our current
expectations and are subject to uncertainty and changes in
circumstances. Actual results may differ materially from these
expectations due to inaccurate assumptions and known or unknown
risks and uncertainties, including those identified in
Cautionary Statement Regarding Forward-Looking
Statements and Item 1A. Risk Factors.
29
Overview
We are a leading specialty contractor operating mainly
throughout the United States and across a range of industries.
Our core activities are the building, installation, maintenance
and upgrade of utility and communications infrastructure,
including but not limited to, electrical utility transmission
and distribution, wind farm, other renewable energy and natural
gas infrastructure, wireless, wireline and satellite
communications and water and sewer systems. Our primary
customers are in the following industries: utilities (including
wind farms and other renewable energy, natural gas gathering
systems and pipeline infrastructure), communications (including
telephony, satellite television and cable television) and
government (water and sewer, utilities and communications work
on military bases).
We, or our predecessor companies, have been in business for over
70 years. We offer our services primarily under the MasTec
service mark and operate through a network of approximately 200
locations and approximately 8,400 employees as of
December 31, 2008. We have consistently ranked among the
top specialty contractors by Engineering News-Record over the
past five years.
We have continued our diversification and expansion strategy
through several recent acquisitions which have expanded our
service offerings to customers. During 2007 and 2008, we
acquired the remaining ownership interest in GlobeTec
Construction, LLC. GlobeTec is involved in the construction and
maintenance of water and sewer pipelines and projects. In
October 2007, we acquired Three Phase Line Construction, Inc.,
which is involved in the construction and maintenance of
transmission and distribution utility systems, substation and
storm restoration in several northern states and has a largely
unionized workforce which is required for some projects. In
December 2007, we acquired certain assets of Power
Partners, LLC, which is an electrical utility contractor
specializing in wind farm electrical system design and
construction. In May 2008, we acquired Pumpco, Inc., which is a
mid-stream natural gas pipeline construction company. In July
2008, we acquired certain assets of Nsoro, LLC, which
specializes in wireless network design, construction, upgrade
and maintenance. Finally, in December 2008, we acquired all of
the outstanding shares of Wanzek Construction, Inc., a
construction company focusing on wind farm, heavy civil and
industrial and infrastructure construction. See
Note 4 Acquisitions in the Notes to
Consolidated Financial Statements.
The Company entered into an amended and restated Senior Secured
Credit Facility effective July 29, 2008, which expires
May 10, 2013 (the Credit Facility). The Credit
Facility has a maximum amount of available borrowing of
$210 million, subject to certain restrictions. The maximum
available borrowing may be increased to $260 million if
certain conditions are met.
Revenue
We provide services to our customers which are companies in the
communications and utilities industries as well as government
customers.
Revenue for customers in these industries is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Communications
|
|
$
|
865,499
|
|
|
|
63
|
%
|
|
$
|
766,184
|
|
|
|
74
|
%
|
|
$
|
684,217
|
|
|
|
73
|
%
|
Utilities
|
|
|
447,217
|
|
|
|
32
|
%
|
|
|
221,240
|
|
|
|
21
|
%
|
|
|
217,947
|
|
|
|
23
|
%
|
Government
|
|
|
65,947
|
|
|
|
5
|
%
|
|
|
50,355
|
|
|
|
5
|
%
|
|
|
38,257
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,378,663
|
|
|
|
100
|
%
|
|
$
|
1,037,779
|
|
|
|
100
|
%
|
|
$
|
940,421
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A significant portion of our revenue is derived from projects
performed under service agreements. We also provide services
under master service agreements which are generally multi-year
agreements. Certain of our master service agreements are
exclusive up to a specified dollar amount per work order for
each defined geographic area, but do not obligate our customers
to undertake any infrastructure projects or other work with us.
Work performed under master service and other agreements is
typically generated by work orders, each of which is performed
for a fixed fee. The majority of these services typically are of
a maintenance nature and to a lesser extent upgrade
30
services. These master service agreements and other service
agreements are frequently awarded on a competitive bid basis,
although customers are sometimes willing to negotiate contract
extensions beyond their original terms without re-bidding. Our
master service agreements and other service agreements have
various terms, depending upon the nature of the services
provided and are typically subject to termination on short
notice.
The remainder of our work is generated pursuant to contracts for
specific installation/construction projects or jobs that may
require the construction and installation of specified units
within an infrastructure system or an entire infrastructure
system. Customers are billed with varying frequency: weekly,
monthly or upon attaining specific milestones. Such contracts
generally include retainage provisions under which 2% to 15% of
the contract price is withheld from us until the work has been
completed and accepted by the customer.
Revenue by type of contract is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Master service and other service agreements
|
|
$
|
846,025
|
|
|
|
61
|
%
|
|
$
|
776,853
|
|
|
|
75
|
%
|
|
$
|
698,867
|
|
|
|
74
|
%
|
Installation/construction projects agreements
|
|
|
532,638
|
|
|
|
39
|
%
|
|
|
260,926
|
|
|
|
25
|
%
|
|
|
241,554
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,378,663
|
|
|
|
100
|
%
|
|
$
|
1,037,779
|
|
|
|
100
|
%
|
|
$
|
940,421
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of
Revenue
Our costs of revenue include the costs of providing services or
completing the projects under our contracts including operations
payroll and benefits, fuel, subcontractor costs, equipment
rental, materials not provided by our customers, and insurance.
Profitability will be reduced if the actual costs to complete
each unit exceed original estimates on fixed price service
agreements. Estimated losses on contracts are recognized
immediately when estimated costs to complete a project exceed
the remaining revenue to be received over the remainder of the
contract.
In certain circumstances our customers supply materials such as
cable, conduit and telephone equipment and determine the
specifications of the materials that are to be utilized to
perform installation/construction services. In cases in which
our customers retain the financial and performance risk of all
customer furnished materials, these materials are not included
in our revenue and cost of sales.
General
and Administrative Expenses
General and administrative expenses include all costs of our
management and administrative personnel, provisions for bad
debts, rent, utilities, travel, business development efforts and
back office administration such as financial services,
insurance, administration, professional costs and clerical and
administrative overhead.
Discontinued
Operations
Effective February 2007, we sold the state Department of
Transportation related projects and net assets. As a result of
this sale, we recorded impairment charges totaling
$2.9 million and $44.5 million during the years ended
December 31, 2007 and 2006, respectively. On
January 24, 2008, we entered into a settlement with the
buyer of our state Department of Transportation related projects
and assets, to settle previously disclosed warranty,
indemnification and other claims primarily relating to work we
had performed on the projects which were sold. As a result of
the settlement, we have recorded a charge of $6.0 million
which is reflected in our loss from discontinued operations for
the year ended December 31, 2007.
In April 2007, we sold substantially all of our Canadian
operations for approximately $1.0 million. In connection
therewith, we recorded a non-cash impairment charge of
$0.6 million, including $0.4 million reduction in the
carrying amount of goodwill. See Note 20
Discontinued Operations in the Notes to Consolidated Financial
31
Statements. The financial information for all periods presented
in this annual report on
Form 10-K
reflects the above operations as discontinued operations.
Financial
Metrics
Members of our senior management team regularly review key
performance metrics and the status of operating initiatives
within our business. These key performance indicators include:
|
|
|
|
|
revenue and profitability on an individual project basis;
|
|
|
|
monthly, quarterly and annual changes in revenue on an
individual project basis;
|
|
|
|
revenues by customer;
|
|
|
|
costs of revenue, and general and administrative expenses as
percentages of revenue;
|
|
|
|
days sales outstanding;
|
|
|
|
interest and debt service coverage ratios;
|
|
|
|
safety results and productivity; and
|
|
|
|
customer service metrics on an individual project basis.
|
We analyze this information periodically through operating
reviews which include detailed discussions of, proposed
investments in new business opportunities or property and
equipment and integration and cost reduction efforts. Measuring
these key performance indicators is an important tool that our
management uses to make operational decisions. These tools
enable our management to make more informed, better and quicker
decisions about the allocation of costs and resources which, we
believe, can help us improve our performance.
Critical
Accounting Policies and Estimates
This discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to
revenue recognition, allowance for doubtful accounts, securities
available for sale, goodwill and intangible assets, reserves and
accruals, impairment of assets, income taxes, insurance reserves
and litigation and contingencies. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis of making judgments about the carrying
values of assets and liabilities, that are not readily apparent
from other sources. Actual results may differ from these
estimates if conditions change or if certain key assumptions
used in making these estimates ultimately prove to be materially
incorrect.
We believe the following accounting policies are the most
critical in the preparation of the Companys consolidated
financial statements as they are both important to the portrayal
of the Companys financial condition and they require
significant or complex judgment and estimates on the part of
management. Refer to Note 2 Summary of
Significant Accounting Policies in the Notes to Consolidated
Financial Statements for further description of the
Companys significant accounting policies.
The Companys critical accounting policies are reviewed
frequently with the Audit Committee of the Board of Directors.
Revenue
Recognition
Revenue and related costs for master and other service
agreements billed on a time and materials basis are recognized
as the services are rendered. Services are also performed under
master and other service agreements billed on a fixed fee basis.
Under our fixed fee master service and similar type service
agreements, we furnish various specified units of service for a
separate fixed price per unit of service. For service agreements
on a fixed fee basis, profitability will be reduced if the
actual costs to complete each unit exceed original estimates.
32
In addition to master and other service agreements, we enter
into contracts that require the installation or construction of
specified units within an infrastructure system. Under these
contracts, revenue is recognized at the contractually agreed
price per unit as the units are completed and delivered. Our
profitability will be reduced if the actual costs to complete
each unit exceed our original estimates. The full amount of any
estimated loss on these projects is immediately recognized if
estimated costs to complete the remaining units for the project
exceed the revenue to be earned on such units.
We also enter into fixed price, long-term
installation/construction contracts that primarily require the
construction and installation of an entire infrastructure
system. We recognize revenue and related costs as work
progresses on these contracts using the percentage-of-completion
method, which relies on contract revenue and estimates of total
expected costs. We estimate total project costs and profit to be
earned on each fixed-price, long-term contract. Under the
percentage-of-completion method, we record revenue and recognize
profit or loss as work on the contract progresses. The
cumulative amount of revenue recorded on a contract at a
specified point in time is that percentage of total estimated
revenue that incurred costs to date bear to estimated total
contract costs. We recognize the full amount of any estimated
loss on a contract at the time our estimates indicate such a
loss.
Application of the percentage of completion method of accounting
requires the use of estimates of costs to be incurred for the
performance of the contract. The cost estimation process is
based upon the professional knowledge and experience of our
project managers and financial professionals. Contract costs
include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as
indirect labor, supplies, tools and costs of operation of
capital equipment (excluding depreciation). Factors that we
consider in estimating the work to be completed and ultimate
contract recovery include the availability and productivity of
labor, the nature and complexity of the work to be performed,
the effect of change orders, the availability of materials, the
effect of any delays in performance and the recoverability of
any claims. Changes in job performance, job conditions,
estimated profitability and final contract settlements are
factors that impact managements assessment of the total
estimated costs to complete these contracts and therefore, may
result in revisions to costs and income. If actual results
significantly differ from our estimates used for revenue
recognition and claim assessments, our financial condition and
results of operations could be materially impacted.
In certain circumstances, our customers determine the
specification and supply materials such as cable, conduit and
telephone equipment. Customer-furnished materials for which the
customer retains the financial and performance risk associated
with these materials are not included in revenue and cost of
sales.
Allowance
for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. Management analyzes the collectability of
accounts receivable, on a regular basis, based on the aging of
account balances, historical bad debt experience, customer
concentrations, customer credit-worthiness, customer financial
condition and credit reports, the availability of
mechanics and other liens, the existence of payment bonds
and other sources of payment, and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts.
If our estimates of the collectability of accounts receivable
change, adjustments to the allowance for doubtful accounts may
be required, which could reduce our profitability.
Our estimates for our allowance for doubtful accounts are
subject to significant change during times of economic weakness
or uncertainty in either the overall U.S. economy or the
industries we serve. We continue to monitor the economic
environment and its impact on our customers to proactively
manage accounts receivable aging and collections and to evaluate
our allowance for doubtful accounts.
We recorded total provisions against earnings for doubtful
accounts of $3.5 million, $17.5 million and
$10.0 million, for the years ended December 31, 2008,
2007 and 2006, respectively, of which $0.9 million,
$14.1 million and $7.9 million, respectively, resulted
from anticipated legal settlement and discontinued operations in
our consolidated statements of operations for those periods.
33
Securities
Available-for-Sale
Securities available-for-sale are recorded at fair value, and
temporary unrealized holding gains and losses are recorded as a
separate component of accumulated other comprehensive income
(loss). Unrealized losses are charged against net earnings when
a decline in fair value is determined to be
other-than-temporary. We review several factors to determine
whether a loss is other-than-temporary. These factors include
but are not limited to: i) the length of time a security is
in an unrealized loss position, ii) the extent to which
fair value is less than cost, iii) the financial condition
and near term prospects of the issuer and, iv) our intent
and ability to hold the security for a period of time sufficient
to allow for any anticipated recovery in fair value.
The Companys 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 structured finance
securities. These structured finance securities are
collateralized by credit-linked notes made up of floating rate
international bank notes or credit card receivable notes with
investment grade credit ratings by one or more of the major
credit rating agencies, and credit default swap agreements on
corporate debt obligations. These auction-rate securities are
accounted for as securities available for sale at fair value,
and unrealized gains and losses are included in accumulated
other comprehensive income (loss) as a separate component of
shareholders equity. The Companys estimate of fair
value is sensitive to market conditions and management judgment
and can change significantly based on the assumptions used.
Factors that may impact the Companys valuation include
changes to credit ratings of the securities as well as to the
underlying assets supporting those securities, rates of default
of the underlying assets, underlying collateral value, discount
rates, counterparty risk and ongoing strength and quality of
market credit and liquidity.
At December 31, 2008, there was insufficient observable
market data to determine the fair value of the Companys
auction rate securities due to the lack of activity in this
market. Therefore, the fair value of these investments was
estimated by an independent valuation firm, Houlihan
Smith & Company, Inc., using a probability weighted
discounted cash flow model. This model incorporates assumptions
market participants would use in their estimates of fair value
such as reset interest rates, final stated maturities,
collateral values, credit quality and insurance, and applies the
probabilities of either (a) a successful auction,
(b) a failed auction, or (c) a default, at each
auction (Level 3 inputs under SFAS 157). This
valuation is sensitive to market conditions and
managements judgment and can change significantly based on
the assumptions used. Factors that may impact the valuation
include changes to credit ratings of the securities as well as
to the underlying assets supporting the securities, rates of
default of the underlying assets, underlying collateral values,
discount rates, counterparty risk and ongoing strength and
quality of market credit and liquidity. Management is uncertain
at this time as to when the liquidity issues associated with
these investments will improve, and as a result of this
uncertainty, has classified the book value of these securities
as long-term assets since June 30, 2008. Additionally,
management is uncertain at this time as to when the Company will
be able to exit these investments at their par value or whether
additional temporary or other than temporary impairment related
to these investments will be incurred in the future. The
estimated fair value of securities available for sale totaled
$20.6 million at December 31, 2008.
Valuation
of Goodwill and Intangible Assets
In accordance with SFAS No. 142, we conduct, on at
least an annual basis, a review of our reporting units to
determine whether the carrying values of goodwill exceed the
fair market value using a discounted cash flow methodology for
each unit. Should this be the case, the value of our goodwill
may be impaired and written down. This impairment analysis
requires several estimates including future cash flows, growth
rates and the selection of a discount rate. Since the estimated
fair value of the net assets of the Companys reporting
units substantially exceeds the recorded book value, significant
changes in these estimates would have to occur to result in an
impairment charge related to goodwill and intangible assets.
However, we could record additional impairment losses if, in the
future, profitability and cash flows of our reporting entities
decline to the point where the carrying value of those units
exceed their market value. See Item 1A. Risk
Factors We may incur goodwill impairment charges in
our reporting entities which could harm our profitability.
In connection with our decision to sell substantially all of our
Canadian operations, we wrote off goodwill associated with this
entity in amount of $0.4 million for the year ended
December 31, 2007.
34
Insurance
Reserves
We presently maintain insurance policies subject to per claim
deductibles of $1 million for our workers
compensation policy, $2 million for our general liability
policy and $2 million for our automobile liability policy.
We have excess umbrella coverage up to $100 million per
claim and in the aggregate. We also maintain an insurance policy
with respect to employee group health claims subject to per
claim deductibles of $350,000. We actuarially determine any
liabilities for unpaid claims and associated expenses, including
incurred but not reported losses, and reflect the present value
of those liabilities in our balance sheet as other current and
non-current liabilities. The determination of such claims and
expenses and the appropriateness of the related liability is
reviewed and updated quarterly. However, insurance liabilities
are difficult to assess and estimate due to the many relevant
factors, the effects of which are often unknown, including the
severity of an injury, the determination of our liability in
proportion to other parties, the number of incidents not
reported and the effectiveness of our safety program. We
continue to work with our insurance carriers to resolve claims
more quickly in an effort to reduce our exposure. We are also
attempting to accelerate the claims process where possible so
that amounts incurred can be reported rather than estimated. In
addition, known amounts for claims that are in the process of
being settled, but have been paid in periods subsequent to those
being reported, are booked in the reporting period. Our accruals
are based upon known facts, historical trends and our reasonable
estimate of future expenses and we believe such accruals to be
adequate.
Income
Taxes
Tax valuation allowances are established to reduce tax assets,
such as tax loss carryforwards, to net realizable value. We
consider future pretax income and ongoing prudent and feasible
tax planning strategies in assessing the net realizable value of
tax assets and the need for such a valuation allowance. In the
event that we determine that we may not be able to realize all
or part of the net deferred tax asset in the future, a valuation
allowance for the deferred tax asset is charged against income
in the period such determination is made. As a result of our
historical operating losses, we have recorded valuation
allowances aggregating $24.2 million and $47.9 million
as of December 31, 2008 and 2007, respectively, to reduce
certain of our net deferred federal, foreign and state tax
assets to their estimated net realizable value.
Litigation
and Contingencies
Litigation and contingencies are reflected in our consolidated
financial statements based on our assessments, along with legal
counsel, of the expected outcome of such litigation or expected
resolution of such contingency. An accrual is made when the loss
of such contingency is probable and estimable. If the final
outcome of such litigation and contingencies differs
significantly from our current expectations, such outcome could
result in a charge to earnings. See Part I.
Item 3. Legal Proceedings for discussions of current
litigation.
2009
Outlook
We believe we have significant market opportunities in 2009 in
five areas:
Alternative and Renewable Energy Projects
we believe this market will continue to grow
in 2009 and we have made acquisitions to expand our capabilities
in this area, where our primary focus is the construction of
wind farms and related infrastructure. The increasing regulatory
mandates for electricity generation from alternative and
renewable sources and the Stimulus Act, which calls for
expansion of domestic renewable energy sources through tax
incentives and loan guarantees, should provide our wind farm
business with the potential for sustained growth.
Work for Electrical Grid Upgrades we
believe that the nations electrical grid, which routinely
encounters capacity and reliability issues, will be expanded,
modernized and upgraded in coming years. Also, renewable energy
which is often generated in remote areas will require a
significant investment in new transmission and substation assets
in order to deliver this power to population and industrial
centers with high electrical power demand. The Stimulus Act
allocates $11 billion for modernization and expansion of
the national electrical grid. Additionally, we believe that
customer cost and labor conditions are making it increasingly
attractive for utilities to outsource their construction and
maintenance activities.
35
Wireless and Fiber Communications Network Upgrades
we believe certain wireless and wire line
communications networks upgrades will grow in 2009 and that the
Regional Bell Operating Companies, or RBOCs, and other
communications companies, will continue to enhance their
capabilities in these areas which could increase the demand for
our services. We have made a recent acquisition to expand our
capabilities in wireless construction. Additionally, the
Stimulus Act allocates $7.2 billion for the development of
broadband facilities throughout the U.S and the expansion of
broadband access into areas that are currently not served by
high-speed data networks.
Natural Gas Pipelines we believe that
demand for clean-burning natural gas will grow in future years
and that new drilling and production of natural gas to support
this demand will provide increase opportunities for our gas
gathering, gas compression, gas treatment and mid-stream gas
pipeline construction operations. We have made a recent
acquisition to expand our capabilities in these areas.
Install to the Home we believe the
increased number of
DIRECTV®
subscribers and expansion of high definition video programming
provide us with the opportunity to provide installation, upgrade
and maintenance services for new and existing customers. Also,
AT&T began a co-marketing agreement with
DIRECTV®
on February 1, 2009 in which they bundle
DIRECTV®
services with their voice and data services in numerous markets
exclusively serviced by us. Additionally, our expertise in home
installation provides opportunities to offer similar, or
unrelated, installation services for new customers.
Our 2009 results could be adversely affected by the matters
discussed in the Cautionary Statement Regarding
Forward-looking Statements, Item 1A. Risk
Factors and Item 3. Legal Proceedings of
this Annual Report on
Form 10-K.
Comparisons
of Fiscal Year Results
The components of our consolidated statements of operations,
expressed in dollars (in thousands) and as a percentage of
revenue, are set forth in the following table. Our consolidated
results of operations are not necessarily comparable from period
to period due to the impact of recent acquisitions. See
Note 4 Acquisitions in the Notes to
Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
1,378,663
|
|
|
|
100.0
|
%
|
|
$
|
1,037,779
|
|
|
|
100.0
|
%
|
|
$
|
940,421
|
|
|
|
100.0
|
%
|
Costs of revenue, excluding depreciation
|
|
|
1,180,310
|
|
|
|
85.6
|
|
|
|
891,606
|
|
|
|
85.9
|
|
|
|
808,142
|
|
|
|
85.9
|
|
Depreciation and amortization
|
|
|
28,465
|
|
|
|
2.1
|
|
|
|
18,088
|
|
|
|
1.7
|
|
|
|
15,437
|
|
|
|
1.6
|
|
General and administrative expenses
|
|
|
88,585
|
|
|
|
6.4
|
|
|
|
113,623
|
|
|
|
11.0
|
|
|
|
72,406
|
|
|
|
7.7
|
|
Interest expense, net of interest income
|
|
|
14,758
|
|
|
|
1.1
|
|
|
|
9,236
|
|
|
|
0.9
|
|
|
|
10,083
|
|
|
|
1.1
|
|
Other (income) expense, net
|
|
|
(927
|
)
|
|
|
(0.1
|
)
|
|
|
(3,516
|
)
|
|
|
(0.3
|
)
|
|
|
(7,991
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
minority interest
|
|
|
67,472
|
|
|
|
4.9
|
|
|
|
8,742
|
|
|
|
0.8
|
|
|
|
42,344
|
|
|
|
4.5
|
|
Income taxes
|
|
|
(870
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(2,459
|
)
|
|
|
(0.2
|
)
|
|
|
(2,294
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
66,602
|
|
|
|
4.8
|
|
|
|
6,283
|
|
|
|
0.6
|
|
|
|
40,050
|
|
|
|
4.3
|
|
Loss from discontinued operations
|
|
|
(814
|
)
|
|
|
(0.0
|
)
|
|
|
(13,611
|
)
|
|
|
(1.3
|
)
|
|
|
(90,398
|
)
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
65,788
|
|
|
|
4.8
|
%
|
|
$
|
(7,328
|
)
|
|
|
(0.7
|
)%
|
|
$
|
(50,348
|
)
|
|
|
(5.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion and analysis of our results of
operations should be read in conjunction with our consolidated
financial statements and notes thereto in Item 8 of this
Form 10-K.
Comparison
of Years Ended December 31, 2008 and 2007
Revenue. Revenue was
$1,378.7 million for the year ended December 31, 2008,
compared to $1,037.8 million in 2007, representing an
increase of $340.9 million or 33%. Of the total increase,
19% was
36
primarily related to wireless, natural gas pipeline, wind farm
and other utilities projects resulting from our recent
acquisitions of Wanzek, Nsoro, Pumpco and Three Phase Line
Construction. The remaining increase of 14% was driven by growth
in the Companys legacy utilities and communications
projects, as well as organic growth in Power Partners. Key
customers driving growth in 2008 include AT&T, Tetra Tech,
Energy Transfer Company, Oncor, M. A. Mortenson, Verizon and
DIRECTV®.
Costs of Revenue. Costs of revenue were
$1,180.3 million or 85.6% of revenue in 2008, compared to
$891.6 or 85.9% of revenue in 2007. The dollar increase is
driven by our revenue growth as discussed above. As a percentage
of revenue, cost of revenue in 2008 decreased 30 basis
points primarily resulting from productivity gains and savings
in labor costs, partially offset by higher materials costs, and
reflects the overall similarity in margins between our
acquisitions and legacy projects.
Depreciation and
Amortization. Depreciation was
$24.8 million in 2008 compared to $17.0 million in
2007, representing an increase of $7.8 million or 46%. The
increase was due primarily to depreciation associated with
recent acquisitions, particularly Pumpco and Three Phase Line
Construction with the balance resulting from capital
expenditures during 2007 and 2008 to purchase or lease machinery
and equipment to support our growth. Amortization expense was
$3.7 million for in 2008 compared to $1.1 million in
2007, representing an increase of $2.6 million or 236% due
to the amortization of intangibles related to the acquisitions
of Wanzek, Nsoro, Pumpco, Power Partners and Three Phase Line
Construction.
General and Administrative
Expenses. General and administrative expenses
were $88.6 million or 6.4% of revenue in 2008, compared to
$113.6 million or 11.0% of revenue in 2007. General and
administrative expenses in 2007 included a charge of
$38.6 million (of the total $39.3 million in total
charges) related to legacy legal cases, disputes and other
contingencies, including litigation and other disputes involving
accounts receivable. Excluding this charge, general and
administrative expenses would have been $75.0 million or
7.2% of revenue in 2007. This 80 basis point decrease in
general and administrative expenses as a percent of revenue
(excluding the 2007 legacy legal charge) was primarily due to
lower employee compensation costs due to scale and productivity
gains and reduced outside legal fees as the legacy legal cases
wind down, partially offset by charges totaling
$3.5 million related to legacy legal settlements and an
incremental charge of $2.5 million related to the
compensation settlement for the Companys former CEO in
2008.
Interest expense, net. Interest
expense, net of interest income was $14.8 million in 2008
compared to $9.2 million in 2007, representing an increase
of $5.6 million or 61%. This increase was the result of a
decline in interest income due to reduced interest rates and
lower cash balances as well as higher interest expense on higher
debt balances, driven by cash paid and debt incurred in
connection with recent acquisitions and in support of our
growing business.
Other income, net. Other income, net
was $0.9 million in 2008, compared to $3.5 million in
2007, representing a decrease of $2.6 million primarily due
to lower gains on sales of property and equipment. We recognized
gains on asset sales of approximately $0.7 million during
the year ended December 31, 2008, compared to
$3.1 million during the year ended December 31, 2007,
including a $2.5 million gain on the sale of property.
Provision for income taxes. The
provision for income taxes in 2008 of $0.9 million
represents state and local taxes for recently acquired companies
in jurisdictions in which MasTec does not have an offsetting net
operating loss position. Both 2008 and 2007 benefited from the
utilization of net operating loss carryforwards. We expect a
substantial increase in the tax rate and provision for income
taxes in 2009 as these carryforwards will be fully utilized
during the year.
Minority interest. In the year ended
December 31, 2007, the Company recorded $2.5 million
in minority interest expense related to GlobeTec as we owned 51%
of this entity. In 2008, we acquired the remaining interest and
accordingly, we owned 100% of this entity. As such, there was no
minority interest charge during this period.
Discontinued operations. The loss from
discontinued operations in 2008 of $0.8 million was
primarily related to our Canadian operations. The year ended
December 31, 2007 included $12.3 million in losses
related to our state Department of Transportation projects and
assets and $1.3 million in losses related to our Canadian
operations, both of which were disposed of during 2007.
37
Comparison
of Years Ended December 31, 2007 and 2006
Revenue. Revenue was
$1,037.8 million for the year ended December 31, 2007,
compared to $940.4 million for the same period in 2006,
representing an increase of $97.4 million or 10.4%. The
increase from 2006 to 2007 was due primarily to higher revenue
of approximately $104.5 million from
DIRECTV®.
The
DIRECTV®
increase was primarily due to subscriber activations from our
February 2007 acquisition of DirectStar and an increase in the
number of work orders. Revenue from Verizon increased by
$16.8 million, mainly due to higher volume of work orders.
We also experienced increases in revenues from American Electric
Power, the City of Ft. Lauderdale and XTO Energy in amounts
of $8.4 million, $7.2 million, and $6.3 million,
respectively, when compared to the prior year. These increases
were partially offset by a decrease in revenue of
$25.6 million from AT&T, a decrease in revenue of
$11.3 million from Florida Power and Light due to
termination of unprofitable contracts, and a decrease in revenue
for Comcast Cable Communications, Inc. of $8.3 million.
Costs of Revenue. Costs of revenue were
$891.6 million or 85.9% of revenue for the year ended
December 31, 2007, compared to $808.1 million or 85.9%
of revenue for the same period in 2006. The increase of
$83.5 million was generally attributable to the higher
revenues achieved during the year ended December 31, 2007.
Our gross margin of 14.1%, excluding depreciation, remained
consistent in 2007 when compared to 2006 reflecting our
continued ability to sustain margins.
Depreciation. Depreciation was
$17.0 million or 1.6% of revenue for the year ended
December 31, 2007, compared to $14.5 million or 1.5%
of revenue for the same period in 2006, representing an increase
of $2.5 million. The increase was primarily due to capital
expenditures and capital lease agreements that we executed
during 2006 and 2007 to finance machinery and equipment.
General and administrative
expenses. General and administrative expenses
were $113.6 million or 10.9% of revenue for the year ended
December 31, 2007, compared to $72.4 million or 7.7%
of revenue for the same period in 2006, representing an increase
of $41.2 million. The increase in general and
administrative expenses was mainly attributable to
$38.6 million of the $39.3 million of expenses
recorded during 2007 related to actual or expected settlement of
legal cases, disputes and other contingencies, including
litigation and other disputes related to accounts receivables.
Excluding the impact of the $38.6 million of expenses
recorded during 2007, general and administrative expense for the
year ended December 31, 2007 would have been
$75.0 million or 7.2% of revenue as compared to the
$72.4 million, or 7.7% of revenue in 2006.
Interest expense, net. Interest
expense, net of interest income was $9.2 million or 0.9% of
revenue for the year ended December 31, 2007 compared to
$10.1 million or 1.1% of revenue for the same period in
2006 representing a decrease of $0.9 million. The decrease
was due to higher interest income, which increased
$2.5 million, from $4.4 million for the year ended
December 31, 2006 to $6.9 million for the year ended
December 31, 2007, mostly due to higher outstanding cash
and investment balances. Offsetting the increase in interest
income was an increase of $1.7 million in interest expense,
from $14.4 million for the year ended December 31,
2006 to $16.1 million for the year ended December 31,
2007, mostly due to an increase in average long term debt
outstanding, as a result of the issuance of our
$150 million 7.625% senior notes in 2007.
Other income, net. Other income was
$3.5 million or 0.3% of revenue for the year ended
December 31, 2007, compared to $8.0 million or 0.8% of
revenue for year ended December 31, 2006, representing a
decrease of $4.5 million. The decrease is mainly due to a
$5.7 million reduction in income earned during 2007 from
our ownership in an equity investment. As discussed in
Note 4 -Acquisitions in the Notes to Consolidated Financial
Statements, effective February 1, 2007, we acquired the
remaining 51% interest in DirectStar and consolidated the
results of this entity. As such, beginning February 1,
2007, no equity income was recorded for this entity as its
results of operations are consolidated, whereas for the year
ended December 31, 2006, we recorded $5.8 million in
equity income related to this entity. This decrease in other
income is partially offset by an increase of $1.0 million
in gains on sale of property and equipment, from
$2.1 million for the year ended December 31, 2006 to
$3.1 million for the year ended December 31, 2007.
Benefit for income taxes. For 2007 and
2006, our effective tax rate was 0%. Our balance sheet as of
December 31, 2007 and 2006 includes a net deferred tax
asset of $56.9 million and $57.0 million,
respectively, net of valuation allowance. The realization of
this net deferred tax asset is dependent on our ability to
generate future
38
pretax income. In the event that our future pretax income is
insufficient for us to use our deferred tax assets, we believe
that the deferred tax assets are still realizable based on
prudent and feasible tax planning strategies available to us.
Minority interest. Minority interest
for GlobeTec Construction resulted in a charge of
$2.5 million for the year ended December 31, 2007,
compared to a charge of $2.3 million for the same period in
2006, representing an increase of $0.2 million. GlobeTec
experienced an increase in business profits during 2007 compared
to 2006, however, we also increased our ownership interest in
GlobeTec acquiring an additional 45% equity interest during the
year ended December 31, 2007. The net effect of the
increase in profits and increase in ownership resulted in a
slight increase in the minority interest charge for 2007. See
Note 4 Acquisitions in the Notes to
Consolidated Financial Statements.
Discontinued operations. The loss from
discontinued operations which mainly includes the operations of
the state Department of Transportation related projects and
assets, and our Canadian operations was $13.6 million for
the year ended December 31, 2007 compared to
$90.4 million for the year ended December 31, 2006,
representing a decrease of $76.8 million. The decrease was
mostly due to the sale of our state Department of Transportation
related projects and assets effective February 1, 2007. On
January 24, 2008, we negotiated a settlement with the
buyers of our state Department of Transportation projects and
assets, who had raised certain warranty, indemnification and
other claims primarily related to work we had performed on the
projects which the buyers purchased. Under the terms of the
Settlement Agreement, MasTec paid $6.0 million in cash. As
a result, we recorded a charge of $6.0 million which is
reflected in our loss from discontinued operations for the year
ended December 31, 2007. As such, the results of operations
for our state Department of Transportation related projects and
assets for the year ended December 31, 2007 was a loss of
$12.3 million, which included the settlement charges, other
changes in estimates and one month of operation in 2007,
compared to a loss of $88.8 million for the year ended
December 31, 2006 a decrease of $76.5 million compared
to the prior year. The net loss attributable to our discontinued
Canadian operations was $1.3 million for the year ended
December 31, 2007 compared to $1.1 million for the
year ended December 31, 2006, a decrease of
$0.2 million.
Financial
Condition, Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from continuing
operations, availability under our Credit Facility and our cash
balances.
Credit
Facility
We amended and restated our Senior Secured Credit Facility
effective July 29, 2008, expiring May 10, 2013 (the
Credit Facility). The Credit Facility has a maximum
amount of available borrowing of $210 million, subject to
certain restrictions. The maximum available borrowing may be
increased to $260 million if certain conditions are met.
As in the past, the amount that we can borrow at any given time
is based upon a formula that takes into account, among other
things, eligible billed and unbilled accounts receivable,
equipment, real estate and eligible cash collateral, which can
result in borrowing availability of less than the full amount of
the Credit Facility. At December 31, 2008 and 2007, net
availability under the Credit Facility totaled
$82.2 million and $44.0 million, respectively, net of
outstanding standby letters of credit aggregating
$82.4 million and $86.4 million in each period,
respectively. These letters of credit mature at various dates
and most have automatic renewal provisions subject to prior
notice of cancellation. The Credit Facility is collateralized by
a first priority security interest in substantially all of our
assets and the assets of our wholly-owned subsidiaries and a
pledge of the stock of certain of our operating subsidiaries. At
December 31, 2008 and 2007, we had outstanding cash draws
of $42.5 million and $0 under the Credit Facility,
respectively. Interest under the Credit Facility accrues at
variable rates based, at our option, on the agent banks
base rate (as defined in the Credit Facility) plus a margin of
between 1.25% and 1.75%, or at the LIBOR rate plus a margin of
between 2.0% and 3.0%, depending on certain financial
thresholds. At December 31, 2008, the margin over LIBOR is
2.50% and the margin over the base rate was 1.25%. The Credit
Facility includes an unused facility fee ranging from 0.375% to
0.5% based on usage. The weighted average interest rate on the
Credit Facility at December 31, 2008 is 3.96%.
39
The Credit Facility contains customary events of default
(including cross-default) provisions and covenants related to
our operations that prohibit, among other things, making
investments and acquisitions in excess of specified amounts,
incurring additional indebtedness in excess of specified
amounts, creating liens against our assets, prepaying other
indebtedness excluding our 7.625% senior notes, making
acquisitions in excess of specified amounts, and engaging in
certain mergers or combinations without the prior written
consent of the lenders. The Credit Facility also limits our
ability to make certain distributions or pay dividends. In
addition, we are required to maintain a minimum fixed charge
coverage ratio of 1.20 to 1.00, as defined in the Credit
Facility. Any deterioration in the quality of billed and
unbilled receivables, reduction in the value of our equipment or
an increase in our lease expense related to real estate, would
reduce availability under the Credit Facility. At
December 31, 2008, we were in compliance with all
provisions and covenants of the Credit Facility.
Based upon the current availability under our Credit Facility,
liquidity and projections for 2009, we believe we will be in
compliance with the Credit Facilitys terms and conditions
and the minimum availability requirements throughout 2009. We
are dependent upon borrowings and letters of credit under this
Credit Facility to fund operations. Should we be unable to
comply with the terms and conditions of the Credit Facility, we
would be required to obtain modifications to the Credit Facility
or another source of financing to continue to operate. We may
not be able to achieve our 2009 projections and this may
adversely affect our ability to remain in compliance with the
Credit Facilitys minimum net availability requirements and
minimum fixed charge coverage ratio in the future.
On January 31, 2007, we issued $150.0 million of
7.625% senior notes due February 2017 with semi-annual
interest payments of approximately $5.7 million. The notes
contain default (including cross-default) provisions and
covenants restricting many of the same transactions as under our
Credit Facility. The indenture which governs our senior notes
allows us to incur the following additional indebtedness among
others: credit facilities under a defined threshold, renewals to
existing debt permitted under the indenture plus an additional
$50 million of indebtedness, and further indebtedness if
our fixed charge coverage ratio, as defined, is at least 2:1. In
addition, the indenture prohibits incurring additional capital
lease obligations in excess of 5% of our consolidated net
assets, as defined, at any time the senior notes remain
outstanding.
In connection with the acquisition of Pumpco, we entered into an
equipment term loan in the aggregate amount of
$22.5 million at 7.05% interest, payable in 60 monthly
installments, maturing in 2013. The proceeds from this equipment
term loan were used to pay off $8.7 million of Pumpco
indebtedness, with the remaining balance funding a portion of
the acquisition purchase price. We also assumed approximately
$9.5 million in notes payable for equipment and capital
lease obligations. In connection with the acquisition of Nsoro,
we assumed approximately $12 million in indebtedness, which
was subsequently repaid during the third quarter. In connection
with the acquisition of Wanzek, we entered into an 8%
convertible note in the principal amount of $55 million due
December 2013 with interest payments payable in April, August,
and December of each year, commencing in April 2009 and also
assumed approximately $15 million of Wanzeks debt.
See Notes 4 Acquisitions and
Note 10 Debt in the Notes to Consolidated
Financial Statements for further discussion.
Our primary liquidity needs are for working capital, capital
expenditures, insurance collateral in the form of cash and
letters of credit, earn out obligations and debt service. We
estimate we will spend between $40 million and
$49 million per year on capital expenditures. This increase
versus our historic levels of capital expenditures is due, in
part, to the equipment intensive nature and recent growth of
Wanzeks and Pumpcos businesses. We will continue to
evaluate lease versus buy decisions to meet our equipment needs
and based on this evaluation, our capital expenditures may
increase from this estimate in the future. We expect to continue
to sell older vehicles and equipment as we upgrade to new
equipment, and we expect to generate proceeds from these sales.
Additionally, we have made certain acquisitions and have agreed
to pay certain of the sellers earn-out payments generally based
on the future performance of the investment or acquired
business. Certain of these earn-out payments may be made in
either cash or, under certain circumstances, MasTec common stock
at our option. During the years ended December 31, 2008 and
2007, we made cash payments of $11.4 million and
$3.0 million, respectively, related to such earn-out
obligations.
We need working capital to support seasonal variations in our
business, primarily due to the impact of weather conditions on
external construction and maintenance work, including storm
restoration work, and the corresponding spending by customers on
their annual capital expenditure budgets. Our business is
typically slower in the first and
40
fourth quarters of each calendar year and stronger in the second
and third quarters. Accordingly, we generally experience
seasonal working capital needs from approximately April through
September to support growth in unbilled revenue and accounts
receivable, and to a lesser extent, inventory. Our billing terms
are generally net 30 to 60 days, and some of our
contracts allow our customers to retain a portion (from 2% to
15%) of the contract amount until the job is completed according
to the terms and conditions therein. We maintain inventory to
meet the material requirements of certain of our contracts.
Certain of our customers pay us in advance for a portion of the
materials we purchase for their projects, or allow us to
pre-bill them for materials purchases up to specified amounts.
Our vendors generally offer us terms ranging from 30 to
90 days. Our agreements with subcontractors usually contain
a pay-when-paid provision, whereby our payments to
subcontractors are made only after we are paid by our customers.
We anticipate that funds generated from continuing operations,
borrowings under our Credit Facility and our cash balances will
be sufficient to meet our working capital requirements,
anticipated capital expenditures, insurance collateral
requirements, earn-out obligations, letters of credit and debt
service obligations for at least the next twelve months.
Sources
and Uses of Cash
As of December 31, 2008, we had $105.3 million in
working capital, defined as current assets less current
liabilities, compared to $163.8 million as of
December 31, 2007. This decrease was due to lower cash
balances driven by amounts paid in connection with recent
acquisitions and the reclassification of our auction rate
securities to long-term assets. Cash and cash equivalents,
including approximately $18.1 million of restricted cash,
decreased from $74.3 million at December 31, 2007 to
$47.3 million at December 31, 2008 primarily due to
$123.8 million paid for acquisitions and earn-out payments
during 2008 partially offset by improved earnings and net
proceeds from borrowings under the Credit Facility, equipment
term loan and other equipment notes, as well as
$15.5 million in net proceeds from the sale of auction rate
securities classified as securities available for sale in our
balance sheet.
Sources and uses of cash are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Net cash provided by operating activities
|
|
$
|
58.2
|
|
|
$
|
68.7
|
|
|
$
|
46.4
|
|
Net cash used in investing activities
|
|
$
|
(142.0
|
)
|
|
$
|
(62.5
|
)
|
|
$
|
(94.7
|
)
|
Net cash provided by financing activities
|
|
$
|
57.0
|
|
|
$
|
32.8
|
|
|
$
|
81.8
|
|
Net cash provided by operating activities was $58.2 million
for the year ended December 31, 2008 as improved earnings
adjusted for non-cash items such as higher depreciation and
amortization were partially offset by increased receivables and
inventories, the impact of timing of payments to vendors and
changes in other accrued liabilities, including payments of
approximately $9 million related to the resolution of
legacy legal litigation. Net cash provided by operating
activities was $68.7 million during the year ended
December 31, 2007 and was primarily related to the sources
of cash from other assets and liabilities, inventory management
and the timing of cash payments related to our accrued expenses
including the $39.3 million charge recorded for legacy
legal cases, disputes and other contingencies, including
litigation and other disputes involving accounts receivable.
Net cash used in investing activities was $142.0 million
for the year ended December 31, 2008 and was driven by
$123.8 million used in connection with acquisitions and
earn-out payments, net of cash acquired, and $35.0 million
used for capital expenditures, partially offset by net proceeds
of $15.5 million from the sales and purchases of auction
rate securities. Net cash used in investing activities during
the year ended December 31, 2007 was $62.5 million and
was primarily related to $35.4 million used in connection
with acquisitions made net, of cash acquired, and
$32.1 million used for capital expenditures offset by
$4.2 million in net proceeds from sales and purchases of
auction rate securities.
Net cash provided by financing activities was $57.0 million
for the year ended December 31, 2008 compared to
$32.8 million net cash provided by financing activities for
the year ended December 31, 2007. Net cash provided by
financing activities in 2008, consisted primarily of net
proceeds from borrowings under the Credit Facility of
$42.5 million and other borrowings including the equipment
term loan in connection with the acquisition of
41
Pumpco (see Note 4 Acquisitions in the Notes to
Consolidated Financial Statements). Net cash provided by
financing activities in the year ended December 31, 2007,
consisted primarily of the proceeds from the issuance of
$150.0 million 7.625% senior notes in January 2007 and
$13.9 million in proceeds from stock option exercises,
partially offset by the redemption of $121.0 million
7.75% senior subordinated notes in March 2007 and
$4.1 million in payments of financing costs.
Additionally, non-cash financing items include the 8%
convertible note for $55 million and 7.5 million
shares of common stock issued in connection with the acquisition
of Wanzek (see Note 4 Acquisitions in the Notes
to Consolidated Financial Statements).
The Companys securities available for sale consist of
investment grade auction rate securities that represent
interests in pools of student loans guaranteed by the
U.S. government under the Federal Family Education Loan
Program and structured finance securities. These structured
finance securities are collateralized by investment grade
credit-linked notes made up of floating rate international bank
notes or credit card receivable notes and credit default swap
agreements on corporate debt obligations with remaining terms of
8 to 9 years. Under the terms of the credit default swaps,
the principal value of these auction rate securities would be
impaired at net default rates on the underlying corporate debt
obligations ranging from 8% to 11%. All of these auction rate
securities carry investment grade ratings from one or more of
the major credit rating agencies, and the Company continues to
earn and collect interest on these securities.
Liquidity for these auction-rate securities is typically
provided by an auction process that resets the applicable
interest rate at pre-determined intervals, usually every 7, 28
or 35 days. Due to disruptions in the credit markets, these
auctions have not had sufficient bidders to allow investors to
complete a sale, indicating that immediate liquidity at par is
unavailable. Management has the intent and believes the Company
has the ability to hold these securities until they can be sold
at par value. Management is uncertain at this time as to when
the liquidity issues associated with these investments will
improve, and as a result of this uncertainty, has classified the
book value of these securities as long-term assets since
June 30, 2008. Management is uncertain at this time as to
when the Company will be able to exit these investments at their
par value or whether additional temporary or
other-than-temporary impairment related to these investments
will be incurred in the future.
As of December 31, 2008, we hold $33.7 million in par
value of these auction rate securities, with a fair value and
carrying value of $20.6 million, net of a
$13.1 million unrealized loss. While the investments are of
a high credit quality, at this time we are uncertain when the
liquidity issues associated with these investments will improve
and when we will be able to exit these investments at their par
value. We currently anticipate holding these securities until we
can realize their par value and believe our existing cash
resources will be sufficient to meet our anticipated needs for
working capital and capital expenditures to execute our current
business plan. We continue to monitor this situation. See
Note 6 Securities Available for Sale in the
Notes to Consolidated Financial Statements.
Certain of our contracts require us to provide performance and
payment bonds, which we obtain from a surety company. If we were
unable to meet our contractual obligations to a customer and the
surety paid our customer the amount due under the bond, the
surety would seek reimbursement of such payment from us. At
December 31, 2008, the estimated cost to complete on our
$485.6 million performance and payment bonds was
approximately $68.3 million.
42
The following table sets forth our contractual obligations as of
December 31, 2008 during the periods indicated below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
5 Years and
|
|
Obligations(1)
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Thereafter
|
|
|
Senior notes
|
|
$
|
150,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150,000
|
|
Line of credit outstanding
|
|
|
42,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,468
|
|
Convertible notes
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
Equipment term loan
|
|
|
20,243
|
|
|
|
4,052
|
|
|
|
9,010
|
|
|
|
7,181
|
|
|
|
|
|
Notes payable for equipment
|
|
|
25,614
|
|
|
|
10,310
|
|
|
|
11,311
|
|
|
|
3,809
|
|
|
|
184
|
|
Earn-out obligations(2)
|
|
|
14,701
|
|
|
|
14,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
11,013
|
|
|
|
2,522
|
|
|
|
5,643
|
|
|
|
2,720
|
|
|
|
128
|
|
Operating leases
|
|
|
74,447
|
|
|
|
24,746
|
|
|
|
28,846
|
|
|
|
15,064
|
|
|
|
5,791
|
|
Legal settlement(3)
|
|
|
8,700
|
|
|
|
8,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive life insurance
|
|
|
14,399
|
|
|
|
1,134
|
|
|
|
2,269
|
|
|
|
2,269
|
|
|
|
8,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
416,585
|
|
|
$
|
66,165
|
|
|
$
|
57,079
|
|
|
$
|
86,043
|
|
|
$
|
207,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not include interest payments. |
|
(2) |
|
Under certain acquisition agreements, we have agreed to pay the
sellers earn-outs based on the performance of the businesses
acquired. Certain of these earn-out payments may be made in
either cash or, under certain circumstances, MasTec common stock
at our option. Due to the contingent nature of these earn-out
payments, we have only included earn-out obligations which are
presently quantifiable. |
|
(3) |
|
In April 2008, we entered into a definitive settlement agreement
to settle our dispute with Coos County, which provides for two
payments of $4.35 million each, totaling $8.7 million.
See Note 17 Commitments and Contingencies. |
Off-balance sheet arrangements. We
provide letters of credit to secure our obligations primarily
related to our insurance arrangements and surety bonds. We also
provide letters of credit related to legal matters. Total
letters of credit reduce our available borrowings under our
credit facility and amounted to $82.4 million at
December 31, 2008 of which $66.2 million were related
to our insurance programs.
Certain of our contracts require us to provide performance and
payment bonds, which we obtain from a surety company. If we were
unable to meet our contractual obligations to a customer and the
surety paid our customer the amount due under the bond, the
surety would seek reimbursement of such payment from us. At
December 31, 2008, the cost to complete on our
$485.6 million performance and payment bonds was
$68.3 million.
Seasonality
The budgetary years of many of our specialty infrastructure
services customers end December 31. As a result, some of
our customers reduce their expenditures and work order requests
towards the end of the year. Adverse weather conditions,
particularly during the winter season, also affect our ability
to perform outdoor services in certain regions of the United
States. We expect this pattern to be more dramatic in the future
as a greater proportion of our projects are in northern climates
due to our recent acquisitions. As a result we experience
reduced revenue in the first quarter and, to a lesser extent, in
the fourth quarter, of each calendar year.
Impact of
Inflation
The primary inflationary factor affecting our operations is
increased labor costs. We did not experience significant
increases in labor costs in 2008, 2007 or 2006. To a lesser
extent, we are also affected by changes in fuel costs which
increased significantly in the first three quarters of 2008 and
in 2007.
43
Recently
Issued Accounting Pronouncements
See Note 2 Summary of Significant Accounting
Policies in Item 8. Financial Statements and
Supplementary Data.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
Approximately 14% of our outstanding debt at December 31,
2008 was subject to variable interest rates, including
$42.5 million outstanding under our Credit Facility at
December 31, 2008. Interest under the Credit Facility
accrues at variable rates based, at our option, on the agent
banks base rate (as defined in the Credit Facility) plus a
margin of between 1.25% and 1.75%, or at the LIBOR rate plus a
margin of between 2.00% and 3.00%, depending on certain
financial thresholds. At December 31, 2008, the margin over
LIBOR was 2.50% and the margin over the base rate was 1.25%.
Based upon debt balances outstanding at December 31, 2008,
a 100 basis point (i.e., 1%) addition to our weighted
average effective interest rate for variable rate debt would not
have a material impact on our consolidated results of operations.
The remainder of our debt has fixed interest rates. Our fixed
interest rate debt primarily includes $150.0 million (face
value) in senior notes, $55.0 million (face value) in
convertible notes issued in connection with the Wanzek
acquisition, and a $22.5 million equipment term loan issued
in connection with the Pumpco acquisition. The fair market value
of the senior notes at December 31, 2008 was
$112.4 million.
Foreign
Currency Risk
Previously, we had an investment in a subsidiary in Canada and
sold our services into this foreign market. On April 10,
2007, we sold substantially all of our Canadian operations, and
any remaining currency risk is minimal. The operations in Canada
have been accounted for as discontinued operations for all
periods presented.
Auction
Rate Securities
The Companys securities available for sale consist of
investment grade auction rate securities that represent
interests in pools of student loans guaranteed by the
U.S. government under the Federal Family Education Loan
Program and structured finance securities. These structured
finance securities are collateralized by credit-linked notes
made up of investment grade floating rate international bank
notes or credit card receivable notes and credit default swap
agreements on corporate debt obligations with remaining terms of
8 to 9 years. Under the terms of these credit default
swaps, the principal value of these auction rate securities
would be impaired at net default rates of the underlying
corporate debt obligations ranging from 8% to 11%. The current
credit crisis and economic downturn increases both the
illiquidity and default risks of these securities. See
Note 6 Securities Available for Sale in the
Notes to Consolidated Financial Statements.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Consolidated Financial Statements
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders of MasTec, Inc.
We have audited the accompanying consolidated balance sheets of
MasTec, Inc. and subsidiaries as of December 31, 2008 and
2007 and the related consolidated statements of operations,
changes in shareholders equity, and cash flows for the
three years then ended. In connection with our audits of the
consolidated financial statements, we have also audited the
schedule listed in Item 15(a)2. These financial statements
and the schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of MasTec, Inc. as of December 31, 2008
and 2007, and the consolidated results of their operations and
their cash flows for the three years then ended in conformity
with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions as of January 1, 2007.
Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the Standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of MasTec, Inc.s internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) and our report dated
March 2, 2009, expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Certified Public Accountants
Miami, Florida
March 2, 2009
46
MASTEC,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
1,378,663
|
|
|
$
|
1,037,779
|
|
|
$
|
940,421
|
|
Costs of revenue, excluding depreciation
|
|
|
1,180,310
|
|
|
|
891,606
|
|
|
|
808,142
|
|
Depreciation and amortization
|
|
|
28,465
|
|
|
|
18,088
|
|
|
|
15,437
|
|
General and administrative expenses, including non-cash stock
compensation expenses of $3,731, $5,555 and $7,401, respectively
|
|
|
88,585
|
|
|
|
113,623
|
|
|
|
72,406
|
|
Interest expense, net of interest income
|
|
|
14,758
|
|
|
|
9,236
|
|
|
|
10,083
|
|
Other (income) expense, net
|
|
|
(927
|
)
|
|
|
(3,516
|
)
|
|
|
(7,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
minority interest
|
|
|
67,472
|
|
|
|
8,742
|
|
|
|
42,344
|
|
Income taxes
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
Minority Interest
|
|
|
|
|
|
|
(2,459
|
)
|
|
|
(2,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
66,602
|
|
|
|
6,283
|
|
|
|
40,050
|
|
Loss from discontinued operations, net of tax
|
|
|
(814
|
)
|
|
|
(13,611
|
)
|
|
|
(90,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
65,788
|
|
|
$
|
(7,328
|
)
|
|
$
|
(50,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.98
|
|
|
$
|
0.10
|
|
|
$
|
0.63
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.21
|
)
|
|
|
(1.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic net income (loss) per share
|
|
$
|
0.97
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
67,983
|
|
|
|
66,147
|
|
|
|
63,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.97
|
|
|
$
|
0.09
|
|
|
$
|
0.62
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.20
|
)
|
|
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted net income (loss) per share
|
|
$
|
0.96
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
68,916
|
|
|
|
67,626
|
|
|
|
65,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
MASTEC,
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including restricted cash of $18,050
at both December 31, 2008 and December 31, 2007
|
|
$
|
47,263
|
|
|
$
|
74,288
|
|
Securities available for sale
|
|
|
|
|
|
|
44,360
|
|
Accounts receivable, costs and earnings in excess of billings
and retainage, net of allowance
|
|
|
327,382
|
|
|
|
160,089
|
|
Inventories
|
|
|
32,769
|
|
|
|
32,402
|
|
Deferred tax asset
|
|
|
5,945
|
|
|
|
26,467
|
|
Prepaid expenses and other current assets
|
|
|
26,006
|
|
|
|
29,801
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
439,365
|
|
|
|
367,407
|
|
Property and equipment, net
|
|
|
158,013
|
|
|
|
81,939
|
|
Goodwill and other intangibles, net
|
|
|
420,604
|
|
|
|
202,829
|
|
Deferred taxes, net
|
|
|
25,165
|
|
|
|
30,386
|
|
Securities available for sale
|
|
|
20,580
|
|
|
|
|
|
Other assets
|
|
|
27,170
|
|
|
|
28,188
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,090,897
|
|
|
$
|
710,749
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of debt
|
|
$
|
16,884
|
|
|
$
|
2,694
|
|
Accounts payable and other accrued expenses
|
|
|
192,407
|
|
|
|
133,861
|
|
Billings in excess of costs and earnings
|
|
|
57,720
|
|
|
|
6,142
|
|
Accrued legal settlement charges
|
|
|
13,212
|
|
|
|
21,269
|
|
Accrued insurance
|
|
|
17,297
|
|
|
|
16,645
|
|
Other current liabilities
|
|
|
36,528
|
|
|
|
22,984
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
334,048
|
|
|
|
203,595
|
|
Other liabilities
|
|
|
26,305
|
|
|
|
32,310
|
|
Long-term debt
|
|
|
287,454
|
|
|
|
160,279
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
647,807
|
|
|
|
396,184
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
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 100,000,000; issued and outstanding
shares 75,454,565 and 67,174,171 shares at
December 31, 2008 and December 31, 2007, respectively
|
|
|
7,545
|
|
|
|
6,717
|
|
Capital surplus
|
|
|
622,745
|
|
|
|
552,491
|
|
Accumulated deficit
|
|
|
(173,788
|
)
|
|
|
(239,576
|
)
|
Accumulated other comprehensive loss
|
|
|
(13,412
|
)
|
|
|
(5,067
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
443,090
|
|
|
|
314,565
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,090,897
|
|
|
$
|
710,749
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
MASTEC,
INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Capital
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Surplus
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance December 31, 2005
|
|
|
49,222
|
|
|
|
4,922
|
|
|
|
356,131
|
|
|
|
(181,900
|
)
|
|
|
450
|
|
|
|
179,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,348
|
)
|
|
|
|
|
|
|
(50,348
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash stock compensation
|
|
|
|
|
|
|
|
|
|
|
7,643
|
|
|
|
|
|
|
|
|
|
|
|
7,643
|
|
Issuance of common stock from public offerings
|
|
|
14,375
|
|
|
|
1,438
|
|
|
|
155,027
|
|
|
|
|
|
|
|
|
|
|
|
156,465
|
|
Issuance of common stock for acquisition
|
|
|
637
|
|
|
|
64
|
|
|
|
6,824
|
|
|
|
|
|
|
|
|
|
|
|
6,888
|
|
Stock issued, primarily for stock options exercised
|
|
|
948
|
|
|
|
94
|
|
|
|
4,554
|
|
|
|
|
|
|
|
|
|
|
|
4,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
65,182
|
|
|
|
6,518
|
|
|
|
530,179
|
|
|
|
(232,248
|
)
|
|
|
262
|
|
|
|
304,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,328
|
)
|
|
|
|
|
|
|
(7,328
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(539
|
)
|
|
|
(539
|
)
|
Unrealized loss from securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,790
|
)
|
|
|
(4,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash stock compensation
|
|
|
|
|
|
|
|
|
|
|
5,530
|
|
|
|
|
|
|
|
|
|
|
|
5,530
|
|
Issuance of common stock from public offerings
|
|
|
300
|
|
|
|
30
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
|
3,061
|
|
Issuance of common stock for acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued, primarily for stock options exercised
|
|
|
1,692
|
|
|
|
169
|
|
|
|
13,751
|
|
|
|
|
|
|
|
|
|
|
|
13,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
67,174
|
|
|
|
6,717
|
|
|
|
552,491
|
|
|
|
(239,576
|
)
|
|
|
(5,067
|
)
|
|
|
314,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,788
|
|
|
|
|
|
|
|
65,788
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
(67
|
)
|
Unrealized loss from securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,278
|
)
|
|
|
(8,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash stock compensation
|
|
|
|
|
|
|
|
|
|
|
3,731
|
|
|
|
|
|
|
|
|
|
|
|
3,731
|
|
Issuance of common stock for acquisition
|
|
|
7,500
|
|
|
|
750
|
|
|
|
58,500
|
|
|
|
|
|
|
|
|
|
|
|
59,250
|
|
Stock issued, primarily for stock options exercised
|
|
|
781
|
|
|
|
78
|
|
|
|
8,023
|
|
|
|
|
|
|
|
|
|
|
|
8,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
75,455
|
|
|
$
|
7,545
|
|
|
$
|
622,745
|
|
|
$
|
(173,788
|
)
|
|
$
|
(13,412
|
)
|
|
$
|
443,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
MASTEC,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
65,788
|
|
|
$
|
(7,328
|
)
|
|
$
|
(50,348
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
28,465
|
|
|
|
18,088
|
|
|
|
15,437
|
|
Impairment of goodwill and assets
|
|
|
|
|
|
|
328
|
|
|
|
44,545
|
|
Non-cash stock-based compensation expense
|
|
|
3,731
|
|
|
|
5,555
|
|
|
|
7,643
|
|
Gain on disposal of assets and investments
|
|
|
(673
|
)
|
|
|
(2,854
|
)
|
|
|
(2,306
|
)
|
Provision for doubtful accounts
|
|
|
3,482
|
|
|
|
17,473
|
|
|
|
9,960
|
|
Provision for losses on construction projects
|
|
|
711
|
|
|
|
267
|
|
|
|
3,075
|
|
Income from equity investment
|
|
|
|
|
|
|
(119
|
)
|
|
|
(5,772
|
)
|
Write-down of assets
|
|
|
|
|
|
|
|
|
|
|
280
|
|
Income tax refunds
|
|
|
|
|
|
|
515
|
|
|
|
861
|
|
Provision for inventory obsolescence
|
|
|
99
|
|
|
|
|
|
|
|
583
|
|
Minority interest
|
|
|
|
|
|
|
2,459
|
|
|
|
2,294
|
|
Changes in assets and liabilities net of effect of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, unbilled revenue and retainage, net
|
|
|
(13,797
|
)
|
|
|
991
|
|
|
|
4,172
|
|
Inventories
|
|
|
(8,859
|
)
|
|
|
24,756
|
|
|
|
8,976
|
|
Other assets, current and non-current portion
|
|
|
12,302
|
|
|
|
7,728
|
|
|
|
23,502
|
|
Accounts payable and accrued expenses
|
|
|
(8,348
|
)
|
|
|
(20,092
|
)
|
|
|
(9,810
|
)
|
Other accrued liabilities, current and non-current portion
|
|
|
(24,719
|
)
|
|
|
20,931
|
|
|
|
(6,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
58,182
|
|
|
|
68,698
|
|
|
|
46,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(35,015
|
)
|
|
|
(32,135
|
)
|
|
|
(22,283
|
)
|
Cash paid for acquisitions and contingent consideration, net of
cash acquired
|
|
|
(123,825
|
)
|
|
|
(35,432
|
)
|
|
|
(19,285
|
)
|
Investments in unconsolidated companies
|
|
|
|
|
|
|
(1,025
|
)
|
|
|
(4,680
|
)
|
Investment in life insurance policies
|
|
|
(1,107
|
)
|
|
|
(1,284
|
)
|
|
|
(1,043
|
)
|
Net proceeds from sale of assets and investments
|
|
|
2,459
|
|
|
|
3,223
|
|
|
|
6,177
|
|
Payments received from sub-leases
|
|
|
|
|
|
|
|
|
|
|
333
|
|
Purchases of securities available for sale
|
|
|
(16,437
|
)
|
|
|
(565,854
|
)
|
|
|
(473,747
|
)
|
Proceeds from sale of securities available for sale
|
|
|
31,938
|
|
|
|
570,050
|
|
|
|
419,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(141,987
|
)
|
|
|
(62,457
|
)
|
|
|
(94,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from credit facility
|
|
|
186,345
|
|
|
|
|
|
|
|
2,855
|
|
Repayments of credit facility
|
|
|
(143,877
|
)
|
|
|
|
|
|
|
(7,009
|
)
|
Proceeds from the issuance of senior notes
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
Repayments of senior subordinated notes
|
|
|
|
|
|
|
(121,000
|
)
|
|
|
(75,000
|
)
|
Proceeds from other borrowings
|
|
|
31,491
|
|
|
|
45
|
|
|
|
1,189
|
|
Repayments of other borrowings, net
|
|
|
(20,967
|
)
|
|
|
(3,954
|
)
|
|
|
(864
|
)
|
Payments of capital lease obligations
|
|
|
(2,041
|
)
|
|
|
(2,113
|
)
|
|
|
(385
|
)
|
Proceeds from issuance of common stock, net
|
|
|
|
|
|
|
|
|
|
|
156,465
|
|
Proceeds from stock option exercises
|
|
|
8,101
|
|
|
|
13,895
|
|
|
|
4,648
|
|
Payments of financing costs
|
|
|
(2,064
|
)
|
|
|
(4,117
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
56,988
|
|
|
|
32,756
|
|
|
|
81,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(26,817
|
)
|
|
|
38,997
|
|
|
|
33,445
|
|
Net effect of exchange rate changes on cash and cash equivalents
|
|
|
(208
|
)
|
|
|
9
|
|
|
|
(187
|
)
|
Cash and cash equivalents beginning of period
|
|
|
74,288
|
|
|
|
35,282
|
|
|
|
2,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
47,263
|
|
|
$
|
74,288
|
|
|
$
|
35,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
13,898
|
|
|
$
|
13,557
|
|
|
$
|
13,876
|
|
Income taxes
|
|
$
|
665
|
|
|
$
|
275
|
|
|
$
|
284
|
|
Supplemental non-cash disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Note to sellers of Wanzek
|
|
$
|
55,000
|
|
|
|
|
|
|
|
|
|
Shares issued to sellers of Wanzek (7.5 million)
|
|
$
|
59,250
|
|
|
|
|
|
|
|
|
|
Equipment acquired under capital lease
|
|
$
|
880
|
|
|
$
|
6,246
|
|
|
$
|
8,635
|
|
Investment in unconsolidated companies
|
|
|
|
|
|
|
|
|
|
$
|
925
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
MASTEC,
INC.
|
|
Note 1
|
Nature of
the Business
|
MasTec, Inc. (collectively, with its subsidiaries,
MasTec or the Company) is a leading
specialty contractor operating mainly throughout the United
States and across a range of industries. The Companys core
activities are the building, installation, maintenance and
upgrade of utility and communications infrastructure, including
but not limited to, electrical utility transmission and
distribution, wind farm, other renewable energy and natural gas
infrastructure, wireless, wireline, and satellite communication
and water and sewer systems. MasTecs primary customers are
in the following industries: utilities (including wind farms and
other renewable energy, natural gas gathering systems and
pipeline infrastructure), communications (including telephony,
satellite television and cable television) and government (water
and sewer, utilities and communications work on military bases).
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
The following is a summary of the significant accounting
policies followed in the preparation of the accompanying
consolidated financial statements:
Management estimates. The preparation
of financial statements in conformity with United States
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. Key estimates
include the recognition of revenue, allowance for doubtful
accounts, accrued self-insured claims, the fair value of
goodwill, intangible assets and securities available for sale,
asset lives used in computing depreciation and amortization,
including amortization of intangibles, and accounting for income
taxes, contingencies and litigation. Estimates are based on
historical experience and on various other assumptions that
MasTec believes to be reasonable under the circumstances, the
results of which form the basis for judgments about results and
the carrying values of assets and liabilities. Actual results
and values may differ from these estimates.
Principles of consolidation. The
accompanying financial statements include MasTec, Inc. and its
subsidiaries. GlobeTec Construction, LLC (GlobeTec)
was consolidated in all periods presented as the Company had at
least a 51% controlling interest in this entity. Other
parties interest in GlobeTec was reported as minority
interest in the consolidated financial statements for the years
ended December 31, 2006 and 2007. During 2007, the Company
acquired an additional 45% ownership interest in GlobeTec, and
during the first quarter of 2008, the remaining 4% interest in
GlobeTec was acquired bringing MasTecs ownership interest
in this entity to 100%. All intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications. Certain
reclassifications were made to the prior year financial
statements in order to conform to the current period
presentation.
Comprehensive income
(loss). Comprehensive income (loss) is a
measure of net gain (loss) and all other changes in equity that
result from transactions other than with shareholders.
Comprehensive income (loss) consists of net income (loss),
foreign currency translation adjustments and unrealized gains
and losses on securities available for sale in the years ended
December 31, 2008, 2007 and 2006.
Revenue recognition. Revenue and
related costs for master and other service agreements billed on
a time and materials basis are recognized as the services are
rendered. Services are also performed under master and other
service agreements billed on a fixed fee basis. Under fixed fee
master service and similar type service agreements, MasTec
furnishes various specified units of service for a separate
fixed price per unit of service. For service agreements on a
fixed fee basis, profitability will be reduced if the actual
costs to complete each unit exceed original estimates.
In addition to master and other service agreements, the Company
enters into contracts that require the installation or
construction of specified units within an infrastructure system.
Under these contracts, revenue is recognized at the
contractually agreed price per unit as the units are completed
and delivered. Profitability will
51
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
be reduced if the actual costs to complete each unit exceed
original estimates. The full amount of any estimated loss on
these projects is immediately recognized if estimated costs to
complete the remaining units for the project exceed the revenue
to be earned on such units.
The Company also enters into fixed price, long-term
installation/construction contracts that primarily require the
construction and installation of an entire infrastructure
system. Revenue and related costs are recognized as work
progresses under these contracts using the
percentage-of-completion method, as prescribed in AICPA
Statement of Position
No. 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts which requires the
Company to estimate total project costs and profit to be earned
on each long-term, fixed-price contract. MasTecs process
for estimating total costs is based upon the professional
knowledge and experience of its project managers and financial
professionals. Under the percentage-of-completion method, the
Company records revenue and recognizes profit or loss as work on
the contract progresses. The cumulative amount of revenue
recorded on a contract at a specified point in time is that
percentage of total estimated revenue that contract costs
incurred to date bear to estimated total contract costs. The
full amount of any estimated loss on a contract is recognized at
the time the estimates indicate such a loss.
In certain circumstances MasTecs customers determine the
specification and supply materials such as cable, conduit and
telephone equipment. Customer-furnished materials for which the
customer retains the financial and performance risk associated
with these materials are not included in revenue and cost of
sales.
Billings in excess of costs and estimated earnings on
uncompleted contracts are classified as current liabilities. Any
costs and estimated earnings in excess of billings are
classified as current assets. Work in process on contracts is
based on work performed but not billed to customers as per
individual contract terms.
Allowance for doubtful accounts. The
Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers
to make required payments. Management analyzes the
collectability of accounts receivable and the adequacy of the
allowance for doubtful accounts on a regular basis based on the
aging of account balances, historical bad debt experience,
customer concentrations, credit-worthiness, financial condition
and credit reports, the availability of mechanics and
other liens, the existence of payment bonds and other sources of
payment, and current economic trends. An increase in the
allowance for doubtful accounts is recorded when it is probable
a receivable is not collectible and the loss can be reasonably
estimated. Amounts are written off against the allowance when
deemed uncollectible.
Cash and cash equivalents. All
short-term highly liquid investments with original maturities of
three months or less are considered to be cash equivalents
stated at cost which approximates market value. Restricted cash
related to collateral for letters of credit is also included in
cash and cash equivalents.
Fair value of financial
instruments. Effective January 1, 2008,
the Company adopted SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines
fair value, establishes a framework for measuring fair value in
accordance with accounting principles generally accepted in the
United States, and expands disclosure requirements about fair
value measurements. In accordance with Financial Accounting
Standards Board (FASB) Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2),
the Company will defer the adoption of SFAS 157 for our
nonfinancial assets and nonfinancial liabilities, except those
items recognized or disclosed at fair value on an annual or more
frequent recurring basis, until January 1, 2009 and does
not expect this adoption to have a material impact on the
consolidated financial statements. The adoption of SFAS 157
for our financial assets and liabilities did not have a material
impact on our fair value measurements.
In October 2008, the FASB issued FASB Staff Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When
the Market for that Asset is not Active (FSP
FAS 157-3).
FSP
FAS 157-3
clarifies the application of SFAS 157 in inactive markets
and provides guidance for evaluating and using observable and
52
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unobservable inputs in these circumstances. FSP
FAS 157-3
is effective immediately and has been adopted by the Company in
the preparation of the consolidated financial statements as of
December 31, 2008.
The fair market value of financial instruments is generally
estimated through the use of public market prices, quotes from
financial institutions and other available information. Judgment
is required in interpreting data to develop estimates of market
value and, accordingly, amounts are not necessarily indicative
of the amounts that could be realized in a current market
exchange. Short-term financial instruments, including cash and
cash equivalents, accounts and notes receivable, accounts
payable and other liabilities, consist primarily of instruments
without extended maturities, for which the fair value, based on
managements estimates, approximates their carrying values.
At December 31, 2008, there was insufficient observable
market data to determine the fair value of the Companys
auction rate securities due to the lack of activity in this
market. Therefore, the fair value of these investments was
estimated by an independent valuation firm, Houlihan
Smith & Company, Inc., using a probability weighted
discounted cash flow model. At December 31, 2008 and 2007,
the estimated fair value of the Companys outstanding
senior notes was approximately $112 million and
$142 million, respectively.
Securities available for
sale. Securities available-for-sale are
accounted for in accordance with the provisions of
SFAS No. 115, Accounting For Certain Debt and
Equity Securities. Securities available-for-sale are
recorded at fair value in accordance with SFAS 157, and
temporary unrealized holding gains and losses are recorded as a
separate component of accumulated other comprehensive income
(loss). Unrealized losses are charged against net earnings when
a decline in fair value is determined to be
other-than-temporary. In accordance with FASB Statement of
Position
FAS 115-1
and 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, several factors
are reviewed to determine whether a loss is
other-than-temporary. These factors include but are not limited
to: i) the length of time a security is in an unrealized
loss position, ii) the extent to which fair value is less
than cost, iii) the financial condition and near term
prospects of the issuer and, iv) the Companys intent
and ability to hold the security for a period of time sufficient
to allow for any anticipated recovery in fair value.
The Companys 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 structured finance
securities. These structured finance securities are
collateralized by credit-linked notes made up of floating rate
international bank notes or credit card receivable notes with
investment grade credit ratings by one or more of the major
credit rating agencies, and credit default swap agreements on
corporate debt obligations. These auction-rate securities are
accounted for as securities available for sale at fair value,
and unrealized gains and losses are included in accumulated
other comprehensive income (loss) as a separate component of
shareholders equity. The Companys estimate of fair
value is sensitive to market conditions and management judgment
and can change significantly based on the assumptions used.
Factors that may impact the Companys valuation include
changes to credit ratings of the securities as well as to the
underlying assets supporting those securities, rates of default
of the underlying assets, underlying collateral value, discount
rates, counterparty risk and ongoing strength and quality of
market credit and liquidity. See Note 6
Securities Available for Sale.
Inventories. Inventories consist of
materials and supplies for construction and install to the home
projects, and are typically purchased on a
project-by-project
basis. Inventories are valued at the lower of cost (using the
specific identification method) or market. Construction projects
are completed pursuant to customer specifications. The loss of
the customer or the cancellation of the project could result in
an impairment of the value of materials purchased for that
customer or project. Technological or market changes can also
render certain materials obsolete. Allowances for inventory
obsolescence are determined based upon the specific facts and
circumstances for each project and market conditions. There was
no material obsolescence provision required in 2008 and 2007.
During 2006, the Company recorded a provision for inventory
obsolescence of approximately $0.6 million, included in
loss from discontinued operations.
53
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and equipment. Property and
equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are depreciated over
the shorter of the term of the lease or the estimated useful
lives of the improvements. Expenditures for repairs and
maintenance are charged to expense as incurred. Expenditures for
betterments and major improvements are capitalized and
depreciated over the remaining useful life of the asset. The
carrying amounts of assets sold or retired and related
accumulated depreciation are eliminated in the year of disposal
and the resulting gains and losses are included in other income
or expense.
Deferred costs. Deferred financing
costs related to the credit facility and the senior notes whose
short and long-term portions are included in other current and
non-current assets in the Consolidated Balance Sheets are
amortized over the related terms of the debt using the effective
interest method. Net deferred financing costs were
$4.2 million and $6.4 million at December 31,
2008 and 2007, respectively.
Software capitalization. The Company
capitalizes certain costs incurred in connection with developing
or obtaining internal use software in accordance with American
Institute of Certified Public Accountants Statement of Position
98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. These capitalized
software costs are included in Property and equipment,
net in the Consolidated Balance Sheets and are being
amortized over a period not to exceed seven years.
Valuation of Long-Lived
Assets. Management reviews long-lived assets,
consisting primarily of property and equipment and intangible
assets with finite lives, for impairment in accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). In
analyzing potential impairment, management uses projections of
future discounted cash flows from the assets. These projections
are based on managements view of growth rates for the
related business, anticipated future economic conditions and the
appropriate discount rates relative to risk and estimates of
residual values. Management believes that these estimates are
consistent with assumptions that marketplace participants would
use in their estimates of fair value.
Valuation of Goodwill and Intangible
Assets. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142), management
conducts, on at least an annual basis, a review of the
Companys reporting entities to determine whether the
carrying values of goodwill exceed the fair value using a
discounted cash flow methodology for each entity. Should this be
the case, the value of goodwill may be impaired and written
down. Goodwill acquired in a purchase business combination and
determined to have an infinite useful life is not amortized, but
instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. Under
SFAS No. 142, goodwill impairment is deemed to exist
if the net book value of a reporting unit exceeds its estimated
fair value as determined using a discounted cash flow
methodology applied to the particular reporting unit. In
addition, acquired intangible assets are required to be
recognized and amortized over their useful lives if the benefit
of the asset is based on contractual or legal rights.
Accrued insurance. MasTec maintains
insurance policies subject to per claim deductibles of
$1 million for its workers compensation policy,
$2 million for its general liability policy and
$2 million for its automobile liability policy. The Company
has excess umbrella coverage up to $100 million per claim
and in the aggregate. MasTec actuarially determines liabilities
for unpaid claims and associated expenses, including incurred
but not reported losses, and reflects the present value of those
liabilities in the balance sheet as other current and
non-current liabilities. The determination of such claims and
expenses and appropriateness of the related liability is
reviewed and updated quarterly. Accruals are based upon known
facts, historical trends and a reasonable estimate of future
expenses. However, a change in experience or actuarial
assumptions could nonetheless materially affect results of
operations in a particular period. Known amounts for claims that
are in the process of being settled, but have been paid in
periods subsequent to those being reported, are also recorded in
such reporting period. As of December 31, 2008 and
December 31, 2007, MasTecs liability for unpaid
claims and associated expenses, including incurred but not
reported losses, was $39.9 million and $43.1 million,
54
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively, of which $24.2 million and $27.6 million
was reflected within non-current other liabilities, respectively.
The Company also maintains an insurance policy with respect to
employee group health claims subject to per employee deductibles
of $350,000.
The Company is periodically required to post letters of credit
and provide cash collateral to its insurance carriers. As of
December 31, 2008 and December 31, 2007, such letters
of credit amounted to $66.2 million and $64.8 million,
including $18 million of restricted cash at
December 31, 2008 and 2007 collateralizing certain of these
letters of credit. In addition, cash collateral posted amounted
to $3.3 million as of the end of both periods, which is
included in other assets.
Income taxes. The Company records
income taxes using the asset and liability method of accounting
for deferred income taxes. Under this method, deferred tax
assets and liabilities are recognized for the expected future
tax consequence of temporary differences between the financial
statement and income tax bases of our assets and liabilities.
Income taxes are estimated in each of the jurisdictions in which
the Company operates. This process involves estimating the tax
exposure together with assessing temporary differences resulting
from differing treatment of items, such as deferred revenue, for
tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within
the consolidated balance sheet. The recording of a net deferred
tax asset assumes the realization of such asset in the future.
Otherwise a valuation allowance must be recorded to reduce this
asset to its net realizable value. Management considers future
pretax income and ongoing prudent and feasible tax planning
strategies in assessing the net realizable value of tax assets
and the need for such a valuation allowance. In the event that
management determines that the Company may not be able to
realize all or part of the net deferred tax asset in the future,
a valuation allowance for the deferred tax asset is charged
against income in the period such determination is made.
Stock-based compensation. Effective
January 1, 2006, in accordance with SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), the Company expenses the
estimated fair value of stock-based compensation issued to
employees over the vesting period within general and
administrative expense in the Statement of Operations.
MasTec also grants restricted stock, which is valued based on
the market price of the common stock on the date of grant.
Compensation expense arising from restricted stock grants is
recognized using the ratable method over the vesting period,
generally 3 years. Unearned compensation for
performance-based options and restricted stock is shown as a
reduction of shareholders equity in the consolidated
balance sheets.
See Note 13 Stock-Based Compensation Plans for
further discussion.
New accounting pronouncements. On
February 15, 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB
Statement No. 115 (SFAS 159).
This standard permits an entity to measure financial instruments
and certain other items at estimated fair value. Most of the
provisions of SFAS 159 are elective; however, the amendment
to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to
all entities that own trading and available-for-sale securities.
The fair value option created by SFAS 159 permits an entity
to measure eligible items at fair value as of specified election
dates. The fair value option (a) may generally be applied
instrument by instrument, (b) is irrevocable unless a new
election date occurs, and (c) must be applied to the entire
instrument and not to only a portion of the instrument. The
adoption of SFAS 159 as of January 1, 2008 did not
have a material impact on the Companys consolidated
financial statements.
In December 2007, the FASB issued No. 141(R),
Business Combinations (SFAS 141(R)) and
SFAS No. 160 Accounting and Reporting of
Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51 (SFAS 160).
SFAS 141(R) and SFAS 160 significantly change the
accounting for and reporting of business combination
transactions and noncontrolling (minority) interests.
SFAS 141(R)
55
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and SFAS 160 are effective for the fiscal years beginning
after December 15, 2008. SFAS 141(R) and SFAS 160
are effective prospectively; however, the reporting provisions
of SFAS 160 are effective retroactively. SFAS 141(R)
is required to be adopted concurrently with SFAS 160 and is
effective for business combination transactions for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. The Company has adopted SFAS 141(R) effective
January 1, 2009 and will apply SFAS 141(R)
prospectively to business combinations with an acquisition date
on or after January 1, 2009. The adoption of SFAS 160
effective January 1, 2009 did not have a material impact on
the consolidated financial statements, as the Company currently
does not have any noncontrolling interests.
On January 1, 2008, MasTec adopted EITF Issue
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards.
(EITF 06-11).
EITF 06-11
requires that a realized income tax benefit from dividends or
dividend equivalent units paid on unvested restricted shares,
restricted share units and stock options be reflected as an
increase in capital surplus and reflected as an addition to the
companys excess tax benefit pool, as defined under
SFAS No. 123(R). Because MasTec did not declare any
dividends during 2008 and does not currently anticipate
declaring dividends in the near future,
EITF 06-11
did not have any impact during 2008, and is not expected to have
a material impact in the near term, on MasTecs
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative Instruments and Hedging
Activities (SFAS 161). SFAS 161 requires
enhanced disclosures to enable investors to better understand
the effects of derivative instruments and hedging activities on
an entitys financial position, financial performance, and
cash flows. Statement 161 also improves transparency about the
location and amounts of derivative instruments in an
entitys financial statements; how derivative instruments
and related hedged items are accounted for under FASB Statement
133; and how they affect its financial position, financial
performance, and cash flows. This statement is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. The adoption of SFAS on January 1, 2009 is not
expected to have a material impact on the consolidated financial
statements.
In April 2008, the FASB issued FASB Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142) to improve the consistency
between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under
SFAS No. 141, Business Combinations, and other
U.S. GAAP.
FSP 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of FSP
FAS 142-3
on January 1, 2009 is not expected to have a material
impact on the consolidated financial statements.
On May 9, 2008, the FASB issued FASB Staff Position,
Accounting Principles Board
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1).
FSP APB 14-1
clarifies the accounting for convertible debt instruments that
may be settled in cash (including partial cash settlement) upon
conversion. FSP APB
14-1
requires issuers of convertible debt to account separately for
the liability and equity components in a manner that will
reflect the entitys nonconvertible debt borrowing rate.
The resulting debt discount is amortized over the period the
debt is expected to be outstanding as additional non-cash
interest expense. The equity component is not revalued as long
as it continues to qualify for equity treatment. FSP APB
14-1 is
effective for fiscal years beginning after December 15,
2008 on a retrospective basis for all periods presented. FSP APB
14-1 is not
applicable to the Companys convertible debt and had no
material impact to the Company upon adoption as of
January 1, 2009.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This statement identifies
the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that
56
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are presented in conformity with generally accepted accounting
principles (GAAP) in the United States. This Statement became
effective on November 15, 2008. The adoption of
SFAS 162 did not have a material impact on the consolidated
financial statements.
In June 2008, the EITF reached a consensus on Issue
No. 08-3,
Accounting by Lessees for Maintenance
Deposits
(EITF 08-3)
This issue addresses the accounting for certain lease
arrangements that require the lessee to pay maintenance deposits
to ensure that it properly maintains the leased asset. If an
amount on deposit is less than probable of being returned, it
shall be recognized as an additional expense.
EITF 08-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of
EITF 08-3
on January 1, 2009 is not expected to result in a material
impact on the consolidated financial statements.
In September 2008, the FASB issued FASB Staff Position FSP
FAS 133-1
and
FIN 45-4,
Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective
Date of FASB Statement No. 161. This FSP requires
additional disclosures by sellers of credit derivatives,
including credit derivatives embedded in hybrid instruments, and
also requires additional disclosure regarding the current status
of the payment or performance risk of guarantees. These
provisions are effective for any annual or quarterly reporting
period beginning after November 15, 2008. Lastly, the FSP
clarifies that the disclosures required by FASB Statement
No. 161, Disclosures about Derivative Instruments
and Hedging Activities should be provided for any
annual or quarterly reporting period beginning after
November 15, 2008. The Company does not believe the
adoption of FSP
FAS 133-1
and
FIN 45-4
will have a material impact on the consolidated financial
statements.
In January 2009, the FASB issued FASB Staff Position
EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue
No. 99-20,
(FSP
EITF 99-20-1).
This FASB Staff Position (FSP) amends the impairment guidance in
EITF Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial
Assets, to achieve more consistent determination of
whether an other-than-temporary impairment has occurred. The FSP
also retains and emphasizes the objective of an other
than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
and other related guidance. FSP
EITF 99-20-1
is effective for interim and annual reporting periods ending
after December 15, 2008. The adoption of FSP
EITF 99-20-1
for the year ended December 31, 2008 did not have a
material impact on the consolidated financial statements.
|
|
Note 3
|
Earnings
Per Share
|
MasTec presents earnings per share in accordance with
SFAS No. 128, Earnings Per Share.
Basic earnings per share is computed by dividing earnings
available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if
stock options and unvested restricted stock (common stock
equivalents), securities, or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of MasTec.
As described in Note 4 Acquisitions, on
December 16, 2008, in connection with MasTecs
acquisition of Wanzek, MasTec issued 8% convertible notes in the
aggregate principal amount of $55 million. The 8%
convertible notes are convertible into shares of common stock,
at the holders election and MasTecs election under
certain circumstances, at a conversion price of $12 per share,
and are reflected in the calculation of diluted earnings per
share by application of the if-converted method, as
specified in SFAS No. 128 and detailed below. Under
the if-converted method, in computing the dilutive
effect of the 8% convertible notes, the numerator is adjusted to
add back the after-tax amount of interest recognized in the
period associated with the 8% convertible notes. In addition,
the 8% convertible notes are assumed to have been converted and
the resulting common shares are added to the denominator.
57
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table represents a reconciliation of the income
from continuing operations, net income and weighted average
shares outstanding for the calculation of basic and diluted
earnings per share for the years ended December 31 (in
thousands), except per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share income from continuing
operations
|
|
$
|
66,602
|
|
|
$
|
6,283
|
|
|
$
|
40,050
|
|
Interest expense on 8% convertible notes, net of tax
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share income from continuing
operations
|
|
$
|
66,785
|
|
|
$
|
6,283
|
|
|
$
|
40,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share net income (loss)
|
|
$
|
65,788
|
|
|
$
|
(7,328
|
)
|
|
$
|
(50,348
|
)
|
Interest expense on 8% convertible notes, net of tax
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share net income (loss)
|
|
$
|
65,971
|
|
|
$
|
(7,328
|
)
|
|
$
|
(50,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
67,983
|
|
|
|
66,147
|
|
|
|
63,574
|
|
Effect of dilutive common stock equivalents
|
|
|
744
|
|
|
|
1,479
|
|
|
|
1,545
|
|
Effect of dilutive 8% convertible notes
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
68,916
|
|
|
|
67,626
|
|
|
|
65,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.98
|
|
|
$
|
0.10
|
|
|
$
|
0.63
|
|
Net income (loss)
|
|
$
|
0.97
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.79
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.97
|
|
|
$
|
0.09
|
|
|
$
|
0.62
|
|
Net income (loss)
|
|
$
|
0.96
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.77
|
)
|
Wanzek
In December 2008, MasTec purchased all of the issued and
outstanding shares of Wanzek Construction, Inc.,
(Wanzek) for: (i) $50 million in cash,
(ii) 7.5 million shares of MasTec common stock,
(iii) an 8% convertible note in the principal amount of
$55 million due December 2013 with interest payments
payable in April, August, and December of each year, commencing
in April 2009, (iv) the assumption of up to
$15 million of Wanzeks debt and (v) a two-year
earn-out equal to 50% of Wanzeks EBITDA over
$40 million per year. See Note 10 Debt for
further details regarding the terms of the 8% convertible notes.
The acquisition is effective as of December 1, 2008, and
accordingly, Wanzeks earnings have been consolidated as of
that date.
Wanzek, headquartered in Fargo, North Dakota, has been in
business more than 37 years and manages a team of
highly-skilled workers and tradesmen which it deploys throughout
the country and which is capable of working under extreme
weather conditions. Wanzek currently derives a significant
portion of its revenue from wind farm construction and maintains
a fleet of heavy equipment, including a number of specialized
heavy cranes, a critical component for the successful erection
of wind turbine towers. With the acquisition of Wanzek, MasTec
is now capable of providing end-to-end construction services to
wind farm owners and developers. The Wanzek acquisition
58
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
complements MasTecs existing expertise and contracts in
the construction of the electrical collection systems,
substations and transmission lines necessary to connect energy
from wind farms to the power grid. Wanzek will also bring
additional experience and capabilities to MasTec in the
construction of natural gas processing plants and compression
stations, and other heavy/civil and industrial process
construction.
The allocation of purchase price to the fair value of the
tangible and intangible assets and the useful lives of these
assets remains preliminary as management continues to assess the
valuation of the acquired assets and liabilities and any
ultimate purchase price adjustments based on the final net
working capital as prescribed in the purchase agreement. The
purchase price to acquire Wanzek including transaction costs has
been allocated on a preliminary basis to the assets acquired and
liabilities assumed at the effective date of the acquisition
based on estimated fair values, as summarized below.
|
|
|
|
|
Current assets
|
|
$
|
69,195
|
|
Property and equipment
|
|
|
31,355
|
|
Other assets
|
|
|
794
|
|
Customer contracts and relationships
|
|
|
24,200
|
|
Trade name
|
|
|
34,500
|
|
Non-compete agreement
|
|
|
1,350
|
|
Goodwill
|
|
|
88,620
|
|
|
|
|
|
|
Total assets acquired
|
|
|
250,014
|
|
|
|
|
|
|
Current liabilities
|
|
|
(57,390
|
)
|
Other liabilities
|
|
|
(16,228
|
)
|
Debt
|
|
|
(12,831
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(86,449
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
163,565
|
|
|
|
|
|
|
The portion of intangible assets related to existing customer
contracts is amortized over the remaining term of these
contracts. The remaining portion of the intangible assets
related to customer relationships is amortized on an accelerated
basis in relation to the benefits received over its weighted
average ten-year useful life. The intangible assets related to
the non-compete agreement with the seller is being amortized
over its useful life of three years, and the Wanzek trade name
has an indefinite life.
Funraisers
On October 1, 2008, MasTec acquired from Red Ventures LLC,
(the Seller), the same seller that sold the
remaining 51% interest in DirectStar TV LLC
(DirectStar) to MasTec, 100% of the membership
interests of Funraisers PR, LLC (Funraisers), a
company engaged in a
start-up
business that provides marketing, advertising, promotion, sales
and activities for internet data delivery service by satellite
and certain other broadband companies. DirectStar, together with
it subsidiaries, including Funraisers, is referred to as the
DirectStar business. Funraisers earnings have been
consolidated since the date of acquisition.
Although MasTec did not pay any upfront cash consideration for
Funraisers at the closing, in connection with the transaction,
MasTec has agreed to increase the earn-out payable with respect
to the DirectStar business until December 31, 2018.
Additionally, the Seller has an option to purchase DirectStar
business back from MasTec. This option is exercisable from
January 1, 2011 to December 31, 2013 for an amount
determined, in part, on the earnings of DirectStar for the
trailing twelve months preceding the exercise date multiplied by
a multiple to be determined in part on MasTecs earnings
multiple minus the remaining earn-out payments under the
purchase agreements subject to a floor and cap as set forth in
the agreement. Management is in the process of determining the
value of this option with the assistance of independent third
parties and preliminarily estimates the value to be between
approximately
59
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2 and $12 million, resulting in a preliminary allocation
of $1.4 million to customer contract and relationship
intangible asset and $0.7 million to goodwill.
Inclusion of pro forma results of operations as if the
acquisition of Funraisers had been completed at the beginning of
the current period would not have a material impact on the
results of operations as presented.
Nsoro
On July 31, 2008, MasTec purchased certain assets of Nsoro,
LLC (Nsoro) for a purchase price of
$17.5 million, paid in cash at closing, plus the assumption
of approximately $12 million in indebtedness and earn-out
payments payable over an eight-year period equal to 50% of
Nsoros earnings before taxes above certain minimum
thresholds. The earn-out is payable in cash and, at the
Companys option, MasTec common stock or a combination
thereof. Nsoro is headquartered in Atlanta, Georgia and
specializes in wireless infrastructure management and
construction. The ultimate purchase price is subject to
adjustment based on minimum and maximum tangible net worth,
total assets and net working capital thresholds to be determined
within 270 days of closing.
As part of this strategic acquisition, MasTec has acquired
Nsoros project management services for wireless network
operators in the United States to support the build-out and
expansion of their wireless network infrastructure which is
comprised of cell sites and central office switching facilities.
At the time of the acquisition, substantially all of
Nsoros revenue came from AT&T. However, growth in
wireless voice, video and data traffic has driven demand for
expanded bandwidth as consumers push for more integration of
content into their wireless devices. As a result, management
believes this acquisition will allow MasTec to take advantage of
the major wireless spending plans announced by its large
communications customers to leverage this growing market
opportunity.
The allocation of purchase price to the fair value of the
tangible and intangible assets and the useful lives of these
assets remain preliminary as management continues to assess the
valuation of the acquired assets and liabilities including the
value of work in process, costs and estimated earnings in excess
of billings and billings in excess of cost accounts.
Additionally, continuing analysis of these accounts has resulted
in reclassifying entries to
gross-up
amounts previously netted. Revised estimates in the valuation of
acquired assets and liabilities since the initial purchase price
allocation have resulted in additional goodwill. The ultimate
purchase price remains subject to adjustment based on the
metrics described above based on the final valuation of the net
assets acquired and may result in further revisions to the
goodwill balance. The purchase price to acquire Nsoro including
transaction costs has been allocated on a preliminary basis to
the assets acquired and liabilities assumed at the effective
date of the acquisition based on estimated fair values, as
summarized below.
|
|
|
|
|
Current assets
|
|
$
|
85,942
|
|
Property and equipment
|
|
|
762
|
|
Customer relationships
|
|
|
11,900
|
|
Trade name
|
|
|
990
|
|
Goodwill
|
|
|
6,264
|
|
Other long-term assets
|
|
|
94
|
|
|
|
|
|
|
Total assets acquired
|
|
|
105,952
|
|
|
|
|
|
|
Current liabilities
|
|
|
(75,792
|
)
|
Debt
|
|
|
(12,164
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(87,956
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
17,996
|
|
|
|
|
|
|
60
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The customer relationship and tradename intangible assets are
amortized on a straight-line basis, consistent with the benefits
expected to be received.
In connection with the acquisition of Nsoro, management has
approved a plan to exit the activities of four Nsoro locations
including the termination
and/or
relocation of the employees at these locations. These exit
activities resulted in liabilities assumed of approximately
$0.2 million included in the allocation of purchase price
above. These locations were substantially closed at the end of
2008.
Nsoros earnings have been consolidated since the date of
acquisition. Inclusion of pro forma results of operations as if
the acquisition had been completed at the beginning of the
current period would not have a material impact on the results
of operations as presented.
Pumpco
In May 2008, MasTec acquired all of the issued and outstanding
capital stock of Pumpco, Inc. (Pumpco) for a
purchase price of $44 million, paid in cash, plus the
retirement and assumption of certain indebtedness and earn-out
payments payable over a five-year period equal to 50% of
Pumpcos earnings before taxes above significant specified
thresholds. The earn-out is payable in cash and, at the
Companys option, MasTec common stock or a combination
thereof. In connection with the acquisition, the Company entered
into a $22.5 million equipment term loan and used the
proceeds to pay off $8.7 million of Pumpco indebtedness
with the balance used to pay a portion of the acquisition
purchase price. The equipment term loan is secured by most of
Pumpcos existing equipment and guaranteed by MasTec. The
acquisition is effective as of May 1, 2008, and,
accordingly, Pumpcos earnings have been consolidated as of
that date.
Pumpco, headquartered in Giddings, Texas, has been in business
for over 25 years and specializes in midstream natural gas
pipeline construction. The acquisition of Pumpco continues
MasTecs diversification and growth strategy and expands
its presence and capabilities in servicing gas pipeline
customers.
The allocation of purchase price to the fair value of the
tangible and intangible assets and the useful lives of these
assets remains preliminary as management continues to assess the
valuation of the acquired assets and liabilities. The initial
purchase price allocation has been adjusted to reflect
additional deferred tax liabilities and goodwill. The purchase
price to acquire Pumpco including transaction costs has been
allocated on a preliminary basis to the assets acquired and
liabilities assumed at the effective date of the acquisition
based on estimated fair values, as summarized below.
|
|
|
|
|
Current Assets
|
|
$
|
11,349
|
|
Property and equipment
|
|
|
34,655
|
|
Customer contracts and relationships
|
|
|
5,200
|
|
Non-compete agreement
|
|
|
1,740
|
|
Trade name
|
|
|
2,400
|
|
Goodwill
|
|
|
18,286
|
|
|
|
|
|
|
Total assets acquired
|
|
|
73,630
|
|
|
|
|
|
|
Current liabilities
|
|
|
(3,655
|
)
|
Other liabilities
|
|
|
(8,807
|
)
|
Debt
|
|
|
(9,539
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(22,001
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
51,629
|
|
|
|
|
|
|
The portion of intangible assets related to existing customer
contracts is amortized over the remaining term of these
contracts. The remaining portion of the intangible assets
related to customer relationships is amortized on an
61
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accelerated basis in relation to the benefits received over its
ten-year useful life. Intangible assets related to customer
contracts and relationships, the non-compete agreement with the
seller, and the Pumpco trade name has a weighted average useful
life of 13 years.
Power
Partners, LLC
In December 2007, MasTec acquired certain assets, of Power
Partners, LLC for $5.5 million in cash, and assumed certain
liabilities of $2.8 million and agreed to pay the seller an
earn-out based on future performance through the fifth
anniversary of the closing date. The Company may, at its option,
issue shares of its common stock to the sellers of Power
Partners, LLC in connection with the earn-out for this
acquisition. Power Partners, LLC, is an electrical utility
contractor specializing in wind farm construction. The purchase
price of approximately $8.3 million has been allocated to
the estimated fair value of acquired tangible assets of
$0.2 million, and identifiable intangible assets of
$0.5 million resulting in goodwill totaling
$7.6 million. Power Partners earnings have been
consolidated since the date of acquisition.
Three
Phase Line Construction, Inc.
In October 2007, MasTec acquired all the outstanding shares of
capital stock of Three Phase Line Construction, Inc.
(Three Phase) for a purchase price of
$8.0 million in cash, subject to adjustments, and an
earn-out based on future performance of the acquired entity
through the fifth anniversary of the closing date. The Company
may, at its option, issue shares of its common stock to the
sellers of Three Phase in connection with the earn-out for this
acquisition. Three Phase is involved in the construction and
maintenance of transmission and distribution utility systems,
substation and storm restoration in several northern states. The
purchase price, including acquisition costs of approximately
$0.1 million, has been allocated to the estimated fair
value of acquired tangible assets of $3.3 million, assumed
liabilities of $1.9 million, and identifiable intangible
assets of $0.7 million, resulting in goodwill totaling
$6.0 million. Three Phases earnings have been
consolidated since the date of acquisition.
Acquisition
of Additional Ownership Interest in GlobeTec
During 2007, MasTec acquired an additional 45% ownership
interest in GlobeTec Construction, LLC (GlobeTec)
for $6.5 million in cash. In addition to the cash payments,
MasTec has agreed to pay certain sellers an earn-out based on
future performance through the fourth anniversary of the closing
date based on fiscal year. As a result of these investments,
MasTecs ownership interest in GlobeTec increased from 51%
to 96% during the year ended December 31, 2007. The
aggregate purchase price of $6.5 million has been allocated
to the estimated fair value of acquired tangible assets of
$2.9 million and identifiable intangible assets of
$0.7 million, resulting in goodwill totaling
$2.9 million. In March 2008, the Company acquired the
remaining 4% interest in GlobeTec, bringing MasTecs
ownership interest in this entity to 100%. The acquisition of
the remaining 4% interest in GlobeTec was not material to the
Companys consolidated financial statements.
Acquisition
of Remaining Interest in DirectStar
Effective February 1, 2007, the Company acquired the
remaining 51% equity interest in DirectStar, its equity-method
investee. As a result of the acquisition of the remaining 51%
equity interest, the Company consolidated the operations of the
acquired entity with its results commencing in February 2007. In
February 2007, the Company paid the seller $8.65 million in
cash, in addition to approximately $6.35 million which the
Company also paid at that time to discharge our remaining
obligations to the seller under the purchase agreement for the
original 49% equity interest, and issued to the seller
300,000 shares of MasTec common stock. The Company has also
agreed to pay the seller an earn-out through December 31,
2018 based on the future performance of the acquired business.
In connection with the purchase, the Company entered into a
service agreement with the sellers for them to manage the
business. Under certain circumstances, MasTec may be required to
invest up to an additional $3.0 million in the acquired
entity.
62
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price allocation for the 51% acquisition of this
entity is based on the fair-value of each of the components as
of February 1, 2007 (in thousands):
|
|
|
|
|
Net assets
|
|
$
|
3,281
|
|
Tradename
|
|
|
476
|
|
Non-compete agreement
|
|
|
311
|
|
Contract Intangible
|
|
|
5,941
|
|
Customer related intangibles
|
|
|
774
|
|
Goodwill
|
|
|
928
|
|
|
|
|
|
|
Purchase price
|
|
$
|
11,711
|
|
|
|
|
|
|
The purchase price for the original 49% equity interest exceeded
the carrying value of the net assets as of the original
acquisition date and accordingly the excess was considered
goodwill.
The non-compete agreements are in force with the former
shareholders of the acquired entity and are being amortized over
their contractual life. Customer related intangibles are being
amortized using an accelerated method over five years.
Prior to the acquisition of the remaining 51% equity interest,
the Company accounted for this investment using the equity
method as the Company had the ability to exercise significant
influence over the financial and operational policies of this
limited liability company. MasTec recognized approximately
$0.1 million and $5.8 million in equity income related
to this investment during the years ended December 31, 2007
and 2006, respectively.
Acquisition
of Digital Satellite Services, Inc.
Effective January 31, 2006, MasTec acquired substantially
all of the assets and assumed certain operating liabilities and
contracts of Digital Satellite Services, Inc. (DSSI). DSSI was
involved in the installation of residential and commercial
satellite and security services in several markets including
Atlanta, Georgia, the Greenville-Spartanburg area of South
Carolina and Asheville, North Carolina, and portions of
Tennessee, Kentucky and Virginia. The purchase price was
composed of $18.5 million in cash, $6.9 million of
MasTec common stock (637,214 shares based on the closing
price of MasTecs common stock of $11.77 per share on
January 27, 2006 discounted by 8.75% due to the shares
being restricted for 120 days), $0.9 million of
estimated transaction costs and an earn-out based on future
performance. The resale of these shares was registered on
April 28, 2006. The purchase price, including acquisition
costs has been allocated to the estimated acquired net assets of
$2.0 million and identifiable intangible assets of
$0.7 million, resulting in goodwill of $23.6 million.
Earnings from DSSI have been consolidated since the date of
acquisition.
Unaudited
Pro Forma Information
The following unaudited pro forma data has been previously
disclosed in
Form 8K-A
filed February 27, 2009 and presents pro forma results of
operations as if the acquisitions of Wanzek and Pumpco had
occurred as of the beginning of each period.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
1,767,358
|
|
|
$
|
1,299,815
|
|
Income from continuing operations
|
|
$
|
92,756
|
|
|
$
|
21,380
|
|
Earnings per share from continuing operations, diluted
|
|
$
|
1.20
|
|
|
$
|
0.28
|
|
63
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5
|
Goodwill
and Other Intangible Assets
|
The following table sets forth information for MasTecs
goodwill and intangible assets as of December 31(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Amortization
|
|
|
|
2008
|
|
|
Period
|
|
|
2007
|
|
|
Period
|
|
|
Amortized intangible assets:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
57,629
|
|
|
|
14 years
|
|
|
$
|
8,659
|
|
|
|
18 years
|
|
Less: accumulated amortization
|
|
|
8,978
|
|
|
|
|
|
|
|
5,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets, net
|
|
$
|
48,651
|
|
|
|
|
|
|
$
|
3,338
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
331,037
|
|
|
|
|
|
|
$
|
193,075
|
|
|
|
|
|
Trade name
|
|
|
34,976
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
Other
|
|
|
5,940
|
|
|
|
|
|
|
|
5,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets
|
|
$
|
371,953
|
|
|
|
|
|
|
$
|
199,491
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
$
|
420,604
|
|
|
|
|
|
|
$
|
202,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consist principally of customer relationships, tradenames, and
non-compete agreements with finite lives. |
During the years ended December 31, 2008 and 2007, MasTec
recorded approximately $138.0 million and
$42.8 million, respectively, of goodwill and
$83.5 million and $9.4 million, respectively, of other
identifiable intangible assets in connection with acquisitions
and payment of earn-outs made in these years.
MasTec continues to amortize identifiable intangible assets that
have a definite useful life. Total amortization expense related
to these identifiable intangible assets was $3.7 million,
$1.0 million and $0.3 million in 2008, 2007 and 2006,
respectively.
Information about estimated amortization expense for
identifiable intangible assets that have a finite life for the
periods subsequent to December 31, 2008 is summarized in
the following table (in thousands):
|
|
|
|
|
|
|
Amortization
|
|
|
|
Expense
|
|
|
2009
|
|
$
|
9,033
|
|
2010
|
|
|
7,639
|
|
2011
|
|
|
6,143
|
|
2012
|
|
|
4,411
|
|
2013
|
|
|
3,281
|
|
Thereafter
|
|
|
18,144
|
|
|
|
|
|
|
Total
|
|
$
|
48,651
|
|
|
|
|
|
|
During the fourth quarters of 2008, 2007 and 2006, management
performed its annual review of goodwill and certain identifiable
intangible assets with an infinite useful life for impairment.
No impairment charges for 2008, 2007 and 2006 were required as a
result of this review. During the year ended December 31,
2007, MasTec wrote-off $0.4 million in goodwill in
connection with the decision to sell substantially all of
MasTecs Canadian net assets.
64
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6
|
Securities
Available for Sale
|
The Companys securities available for sale consist of
investment grade auction rate securities that represent
interests in pools of student loans guaranteed by the
U.S. government under the Federal Family Education Loan
Program and structured finance securities. These structured
finance securities are collateralized by investment grade
credit-linked notes made up of floating rate international bank
notes or credit card receivable notes and credit default swap
agreements on corporate debt obligations with remaining terms of
8 to 9 years. Under the terms of the credit default swaps,
the principal value of these auction rate securities would be
impaired at net default rates on the underlying corporate debt
obligations ranging from 8% to 11%. All of these auction rate
securities carry investment grade ratings from one or more of
the major credit rating agencies, and the Company continues to
earn and collect interest on these securities.
Liquidity for these auction-rate securities is typically
provided by an auction process that resets the applicable
interest rate at pre-determined intervals, usually every 7, 28
or 35 days. Due to disruptions in the credit markets, these
auctions have not had sufficient bidders to allow investors to
complete a sale, indicating that immediate liquidity at par is
unavailable. Management has the intent and believes the Company
has the ability to hold these securities until they can be sold
at par value. Management is uncertain at this time as to when
the liquidity issues associated with these investments will
improve, and as a result of this uncertainty, has classified the
book value of these securities as long-term assets since
June 30, 2008. Management is uncertain at this time as to
when the Company will be able to exit these investments at their
par value or whether additional temporary or
other-than-temporary impairment related to these investments
will be incurred in the future.
As of December 31, 2008, there was insufficient observable
market data to determine the fair value of the Companys
auction rate securities due to the lack of activity in this
market. Therefore, the fair value of these investments was
estimated by an independent valuation firm, Houlihan
Smith & Company, Inc., using a probability weighted
discounted cash flow model. This model incorporates assumptions
market participants would use in their estimates of fair value
such as reset interest rates, final stated maturities,
collateral values, credit quality and insurance, and applies the
probabilities of either (a) a successful auction,
(b) a failed auction, or (c) a default, at each
auction (Level 3 inputs under SFAS 157). This
valuation is sensitive to market conditions and
managements judgment and can change significantly based on
the assumptions used. Factors that may impact the valuation
include changes to credit ratings of the securities as well as
to the underlying assets supporting the securities, rates of
default of the underlying assets, underlying collateral values,
discount rates, counterparty risk and ongoing strength and
quality of market credit and liquidity.
As of December 31, 2008, the estimated fair value of the
securities available for sale totaled $20.6 million. During
the years ended December 31, 2008 and 2007, the Company
recorded unrealized losses of $8.3 million and
$4.8 million, respectively, in Other Comprehensive Income.
These amounts are reflected in Other Comprehensive Income net of
the tax impact which is a fully reserved deferred tax asset.
Management believes this temporary unrealized decline in
estimated fair value is primarily attributable to the limited
liquidity of these investments and the overall market volatility
in the current period.
SFAS 157 defines three categories for the classification
and measurement of assets and liabilities carried at fair value:
Level 1: Quoted market prices in active markets for
identical assets or liabilities.
Level 2: Observable market based inputs or observable
inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting
entitys own assumptions.
65
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cost basis, gross unrealized losses and estimated fair
value, determined using level 3 inputs, for these
securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Basis
|
|
|
Losses
|
|
|
Value
|
|
|
Basis
|
|
|
Losses
|
|
|
Value
|
|
|
Auction rate securities student loans
|
|
$
|
17,450
|
|
|
$
|
(1,596
|
)
|
|
$
|
15,854
|
|
|
$
|
32,950
|
|
|
$
|
|
|
|
$
|
32,950
|
|
Auction rate securities structured finance
securities(a)
|
|
|
16,200
|
|
|
|
(11,474
|
)
|
|
|
4,726
|
|
|
|
16,200
|
|
|
|
(4,790
|
)
|
|
|
11,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total auction rate securities
|
|
$
|
33,650
|
|
|
$
|
(13,070
|
)
|
|
$
|
20,580
|
|
|
$
|
49,150
|
|
|
$
|
(4,790
|
)
|
|
$
|
44,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The fair value of the auction rate securities related to
structured finance securities had been determined using
level 2 inputs for periods prior to the third quarter of
2008. |
The contractual maturity of the auction rate securities
available for sale at December 31, 2008 ranges from 20 to
39 years for student loan auction rate securities and from
8 to 9 years for structured finance auction rate securities.
|
|
Note 7
|
Accounts
Receivable, Cost and Earnings in Excess of Billings and
Retainage, Net of Allowance
|
Accounts receivable, classified as current, consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Contract billings
|
|
$
|
210,215
|
|
|
$
|
130,158
|
|
Retainage
|
|
|
29,408
|
|
|
|
8,865
|
|
Costs and earnings in excess of billings
|
|
|
99,405
|
|
|
|
36,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,028
|
|
|
|
175,365
|
|
Less allowance for doubtful accounts
|
|
|
(11,646
|
)
|
|
|
(15,276
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
327,382
|
|
|
$
|
160,089
|
|
|
|
|
|
|
|
|
|
|
Retainage, which has been billed but is not due until completion
of performance and acceptance by customers, is expected to be
collected within one year. Any receivables, including retainage,
expected to be collected beyond a year are recorded in long-term
other assets.
Activity for the allowance for doubtful accounts from continuing
operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Allowance for doubtful accounts at beginning of year
|
|
$
|
15,276
|
|
|
$
|
11,537
|
|
Provision for doubtful accounts from continuing operations,
includes $14,034 related to anticipated legal settlements for
2007
|
|
|
3,482
|
|
|
|
17,473
|
|
Amounts charged against the allowance
|
|
|
(7,112
|
)
|
|
|
(13,734
|
)
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts at end of year
|
|
$
|
11,646
|
|
|
$
|
15,276
|
|
|
|
|
|
|
|
|
|
|
Amounts charged against the allowance primarily represent the
write-off of accounts which had been fully reserved previously.
66
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8
|
Other
Current Assets and Liabilities
|
Prepaid expenses and other current assets as of
December 31, 2008 and 2007 consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Non-trade receivables
|
|
$
|
6,797
|
|
|
$
|
17,081
|
|
Other receivables
|
|
|
4,986
|
|
|
|
4,346
|
|
Prepaid expenses and deposits
|
|
|
10,781
|
|
|
|
5,708
|
|
Deferred project cost
|
|
|
2,109
|
|
|
|
907
|
|
Other
|
|
|
1,333
|
|
|
|
1,759
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
26,006
|
|
|
$
|
29,801
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities consist of the following as of
December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Obligations related to acquisitions
|
|
|
14,701
|
|
|
|
5,919
|
|
Accrued amounts related to discontinued operations
|
|
|
2,018
|
|
|
|
9,882
|
|
Accrued losses on contracts
|
|
|
3,860
|
|
|
|
195
|
|
Other
|
|
|
15,949
|
|
|
|
6,988
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
36,528
|
|
|
$
|
22,984
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9
|
Property
and Equipment, Net
|
Property and equipment, net, including property and equipment
under capital leases, is comprised of the following as of
December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
|
2008
|
|
|
2007
|
|
|
(In Years)
|
|
|
Land
|
|
$
|
3,866
|
|
|
$
|
3,654
|
|
|
|
|
|
Buildings and leasehold improvements
|
|
|
9,246
|
|
|
|
8,944
|
|
|
|
5 - 40
|
|
Machinery and equipment
|
|
|
214,480
|
|
|
|
139,735
|
|
|
|
2 - 15
|
|
Office furniture and equipment
|
|
|
49,285
|
|
|
|
41,578
|
|
|
|
3 - 5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276,876
|
|
|
|
193,911
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(118,864
|
)
|
|
|
(111,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
158,013
|
|
|
$
|
81,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment under capital leases are depreciated over
their estimated useful lives.
Depreciation expense for the years ended December 31, 2008,
2007 and 2006 is $24.8 million, $17.0 million and
$14.5 million, respectively.
Management reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be realizable. If an evaluation is required, the
estimated future undiscounted cash flows associated with the
asset are compared to the assets carrying amount to
determine if an impairment of such asset is necessary. The
effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value.
67
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt is comprised of the following at December 31, 2008 and
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revolving credit facility
|
|
$
|
42,468
|
|
|
$
|
|
|
7.625% senior notes due February 2017
|
|
|
150,000
|
|
|
|
150,000
|
|
8% convertible notes due December 2013
|
|
|
55,000
|
|
|
|
|
|
7.05% Equipment term loan due in installments through 2013
|
|
|
20,243
|
|
|
|
|
|
Capital lease obligations
|
|
|
11,013
|
|
|
|
12,289
|
|
Notes payable for equipment, at interest rates up to 9%, due in
installments through the year 2013
|
|
|
25,614
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
304,338
|
|
|
|
162,973
|
|
Less current maturities
|
|
|
(16,884
|
)
|
|
|
(2,694
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
287,454
|
|
|
$
|
160,279
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
MasTec entered into an amended and restated Senior Secured
Credit Facility effective July 29, 2008, which expires
May 10, 2013 (the Credit Facility). The Credit
Facility has a maximum amount of available borrowing of
$210.0 million, subject to certain restrictions. The
maximum available borrowing may be increased to
$260.0 million if certain conditions are met.
As in the past, the amount MasTec can borrow at any given time
is based upon a formula that takes into account, among other
things, eligible billed and unbilled accounts receivable,
equipment, real estate and eligible cash collateral, which can
result in borrowing availability of less than the full amount of
the Credit Facility. MasTec had $82.2 million of
availability under the Credit Facility at December 31,
2008, net of outstanding letters of credit on that date of
$82.4 million. The Credit Facility is collateralized by a
first priority security interest in substantially all of
MasTecs assets and the assets of its wholly-owned
subsidiaries and a pledge of the stock of certain of its
operating subsidiaries. Interest under the Credit Facility
accrues at variable rates based, at MasTecs option, on the
agent banks base rate (as defined in the Credit Facility)
plus a margin of between 1.25% and 1.75%, or at the LIBOR rate
plus a margin of between 2.00% and 3.00%, depending on certain
financial thresholds. At December 31, 2008, the margin over
LIBOR was 2.50% and the margin over the base rate was 1.25%. The
Credit Facility includes an unused facility fee ranging from
0.375% to 0.5% based on usage. The weighted average interest
rate on the Credit Facility at December 31, 2008 is 3.96%.
The Credit Facility contains customary events of default
(including cross-default) provisions and covenants related to
our operations that prohibit, among other things, making
investments and acquisitions in excess of specified amounts,
incurring additional indebtedness in excess of specified
amounts, creating liens against MasTec assets, prepaying other
indebtedness excluding its 7.625% senior notes, making
acquisitions in excess of specified amounts, and engaging in
certain mergers or combinations without the prior written
consent of the lenders. The Credit Facility also limits
MasTecs ability to make certain distributions or pay
dividends. In addition, MasTec is required to maintain a minimum
fixed charge coverage ratio of 1.20 to 1.00, as defined in the
Credit Facility. Any deterioration in the quality of billed and
unbilled receivables, reduction in the value of equipment or an
increase in lease expense related to real estate, could reduce
availability under the Credit Facility. At December 31,
2008, MasTec is in compliance with all provisions and covenants
of the Credit Facility.
68
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Senior
Notes
As of December 31, 2008, $150.0 million of
MasTecs 7.625% senior notes due in February 2017,
with interest due semi-annually were outstanding. The notes
contain default (including cross-default) provisions and
covenants restricting many of the same transactions as under
MasTecs Credit Facility. The indenture which governs
MasTecs senior notes allows MasTec to incur the following
additional indebtedness among others: credit facilities under a
defined threshold, renewals to existing debt permitted under the
indenture plus an additional $50 million of indebtedness,
and further indebtedness if MasTecs fixed charge coverage
ratio, as defined, is at least 2:1. In addition, the indenture
prohibits incurring additional capital lease obligations in
excess of 5% of MasTecs consolidated net assets at any
time the senior notes remain outstanding. The senior notes are
guaranteed by all of MasTecs operating subsidiaries.
Convertible
Notes
As described in Note 4 Acquisitions, in
connection with MasTecs acquisition of Wanzek, MasTec
issued an 8% convertible note in the principal amount of
$55 million due December 2013 with interest payments
payable in April, August, and December of each year, commencing
in April 2009. The 8% convertible note is convertible, at the
holders election, at a conversion price of $12 per share.
Additionally, MasTec can redeem the note by payment of the
principal balance, plus accrued but unpaid interest, subject to
the holders conversion right, after one year if the
average of the closing prices of MasTecs common stock
during any thirty day period is at or above $16, and if consent
is granted under the Credit Facility.
Equipment
Term Loan
In connection with the acquisition of Pumpco (see
Note 4 Acquisitions), MasTec entered into an
equipment term loan in the aggregate principal amount of
$22.5 million with an interest rate of 7.05%, payable in
sixty monthly installments, and maturing in 2013. This loan is
secured by most of Pumpcos existing equipment and
guaranteed by MasTec. Proceeds from this loan were used to pay
off $8.7 million of Pumpcos indebtedness with the
remaining balance used to pay a portion of the acquisition
purchase price.
In connection with the acquisition of Nsoro (see
Note 4-
Acquisitions), MasTec assumed approximately $12 million in
indebtedness which was subsequently paid off during the third
quarter.
The following table summarizes MasTecs contractual
maturities of long-term debt obligations as of December 31,
2008 (in thousands).
|
|
|
|
|
2009
|
|
$
|
16,884
|
|
2010
|
|
|
14,595
|
|
2011
|
|
|
11,369
|
|
2012
|
|
|
9,691
|
|
2013
|
|
|
59,019
|
|
Thereafter
|
|
|
192,780
|
|
|
|
|
|
|
Total
|
|
$
|
304,338
|
|
|
|
|
|
|
Capital
Leases
MasTec enters into agreements which provided financing for
various machinery and equipment. In accordance with Statement of
Financial Accounting Standard No. 13, Accounting
for Leases (SFAS 13), as amended,
these leases were capitalized. SFAS 13 requires the
capitalization of leases meeting certain criteria, with the
related asset being recorded in property and equipment and an
offsetting amount recorded as a liability. These capital leases
are non-cash transactions and, accordingly, have been excluded
from the consolidated statements of cash flows. As of
69
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2008, MasTec had $11.0 million in total
indebtedness relating to the capital leases entered into during
2008, of which $8.4 million was considered long-term.
|
|
Note 11
|
Lease
Commitments
|
MasTec has operating lease agreements for premises and equipment
that expire on various dates. The operating lease agreements are
subject to escalation. Rent expense from continuing operations
for the years ended December 31, 2008, 2007 and 2006 was
approximately $57.6 million, $48.1 million and
$50.2 million, respectively.
MasTec also has capital lease agreements for equipment that
expire on various dates.
Minimum future lease commitments under non-cancelable operating
leases and future minimum capital lease payments, including
effect of escalation clauses in effect at December 31, 2008
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Capital Leases
|
|
|
2009
|
|
$
|
24,746
|
|
|
$
|
3,278
|
|
2010
|
|
|
16,982
|
|
|
|
3,278
|
|
2011
|
|
|
11,864
|
|
|
|
3,230
|
|
2012
|
|
|
8,802
|
|
|
|
2,450
|
|
2013
|
|
|
6,262
|
|
|
|
709
|
|
Thereafter
|
|
|
5,791
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
74,447
|
|
|
|
13,098
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
(2,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,013
|
|
Less current portion
|
|
|
|
|
|
|
(2,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,411
|
|
|
|
|
|
|
|
|
|
|
For leases with purchase options, the option to purchase
equipment is at estimated fair market value. MasTec has
non-cancelable subleases for certain capital leases which are
recorded in other assets.
|
|
Note 12
|
Transactions
in the Companys Common Stock
|
In connection with MasTecs acquisition of Wanzek on
December 16, 2008 as described in Note 4
Acquisitions, MasTec issued 7,500,000 shares of its common
stock to the sellers of Wanzek valued at $59.3 million
based on the average market price five days before and after the
date the terms of the acquisition were agreed to and announced
in accordance with EITF Issue
99-12
Determination of the Measurement Date for the Market
Price of Acquirer Securities Issued in a Purchase Business
Combination.
On January 24, 2006, MasTec completed a public offering of
14,375,000 shares of its common stock at $11.50 per
share. The net proceeds from the sale were approximately
$156.4 million after deducting underwriting discounts and
offering expenses. MasTec used $18.5 million of the net
proceeds for the cash portion of the purchase price for the DSSI
acquisition, as described in Note 4 - Acquisitions. On
March 2, 2006, MasTec used $75.5 million of the net
proceeds of the public offering to redeem a portion of its
7.75% senior subordinated notes due February 2008.
|
|
Note 13
|
Stock-Based
Compensation Plans
|
The Company has five stock-based compensation plans with stock
options and restricted stock grants outstanding as of
December 31, 2008: the 1994 Stock Incentive Plan (the
1994 Plan), the 1994 Stock Option Plan for
Non-Employee Directors (the Directors Plan),
the 1999 Non-Qualified Employee Stock Option Plan
70
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(the Non-Qualified Plan), the 2003 Employee Stock
Incentive Plan as amended (the 2003 Plan) and the
Amended and Restated 2003 Stock Incentive Plan for Non-Employees
as amended (the 2003 Non-Employee Plan) and
individual option and restricted stock agreements. Typically,
options under these plans are granted at fair market value at
the date of grant, vest between one to five years after grant,
and terminate no later than 10 years from the date of
grant. The 2003 Non-Employee Plan was adopted in April 2003 and
authorized granting of restricted stock to non-employees. The
1994 Plan and the Directors Plan expired in 2004 and no future
stock options can be granted under these plans. In addition, the
1997 Non-Qualified Employee Stock Purchase Plan allows eligible
employees to purchase MasTecs common stock through payroll
deductions or in a lump sum at a 15% discount from fair market
value. The amount of compensation expense related to these
employee stock purchases is immaterial.
Under these plans there were a total of 5,076,454 options
and/or
restricted shares available for grant at December 31, 2008.
The total stock-based compensation expense recorded for the
years ended December 31, 2008, 2007 and 2006 was
$3.7 million, $5.5 million and $7.4 million,
respectively.
Stock
Options
The Company granted options to purchase its common stock to its
employees and members of the Board of Directors and affiliates
under various stock option plans at no less than the fair market
value of the underlying stock on the date of grant. These
options are granted for a term not exceeding ten years and are
generally forfeited in the event the employee or director
terminates his or her employment or relationship with the
Company or one of its affiliates. All option plans contain
anti-dilutive provisions that require the adjustment of the
number of shares of common stock represented by each option for
any stock splits or dividends.
The following is a summary of stock option transactions during
the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
of Unexercised
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
in-the-Money
|
|
|
|
Stock
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Options
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
(In millions)
|
|
|
Option outstanding January 1, 2008
|
|
|
5,862,455
|
|
|
$
|
12.47
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(702,028
|
)
|
|
|
10.73
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(523,000
|
)
|
|
|
12.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2008
|
|
|
4,637,427
|
|
|
$
|
12.68
|
|
|
|
4.5
|
|
|
$
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable December 31, 2008
|
|
|
4,331,611
|
|
|
$
|
12.62
|
|
|
|
4.3
|
|
|
$
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes-Merton (Black-Scholes) option
pricing model to determine the fair value of stock option awards
under SFAS 123R. The Company did not grant any stock
options in the years ended December 31, 2008 and 2007. The
weighted-average grant date fair value of options granted during
2006 was $8.45, determined using the following assumptions.
|
|
|
|
|
2006
|
|
Expected term-employees
|
|
4.2 - 7 years
|
Expected term-executives
|
|
5.7 - 7.7 years
|
Volatility
|
|
40% - 65%
|
Risk-free interest rate
|
|
4.6% - 4.9%
|
Dividends
|
|
None
|
Forfeiture rate
|
|
7.5%
|
71
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, there was $0.4 million of
unrecognized compensation expense related to unvested
outstanding stock options which is expected to be recognized
over a weighted-average period of one year. The total intrinsic
value of options exercised during the years ended
December 31, 2008, 2007 and 2006 was $2.7 million,
$6.1 million and $6.1 million, respectively.
Restricted
Stock
MasTec grants restricted stock which is valued based on the
market price of the common stock on the date of grant.
Compensation expense arising from restricted stock grants is
recognized using the ratable method over the period of the
restrictions. Total unearned compensation related to restricted
stock grants as of December 31, 2008 is $6.4 million
which is expected to be recognized over a weighted-average
period of 3 years. The total fair value of restricted
shares vested during the years ended December 31, 2008,
2007 and 2006 was $0.8 million, $1.6 million and
$1.7 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Restricted
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested restricted stock, January 1, 2008
|
|
|
254,308
|
|
|
$
|
11.80
|
|
Granted
|
|
|
790,333
|
|
|
$
|
7.62
|
|
Vested
|
|
|
78,972
|
|
|
$
|
11.19
|
|
Forfeited
|
|
|
11,000
|
|
|
$
|
6.93
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock, December 31, 2008
|
|
|
954,669
|
|
|
$
|
9.68
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14
|
Retirement
Plans
|
MasTec has a 401(k) plan covering all eligible employees.
Subject to certain dollar limits, eligible employees may
contribute up to 75% of their pre-tax annual compensation to the
401(k) plan. MasTec matches 100% of the employees
contribution up to 1% of the employees salary, payable
quarterly in common shares of MasTec. During 2008, MasTec made
matching contributions of $387,000.
In 2008, MasTec also began offering a deferred compensation plan
to its highly compensated employees. These employees are allowed
to contribute a percentage of their pre-tax annual compensation
to the deferred compensation plan. In addition, under the
deferred compensation plan, MasTec matches 100% of the
employees contribution up to 1% of the employees
salary. MasTecs matching contribution is payable quarterly
in common shares of MasTec stock. During 2008, MasTec made
matching contributions of $20,000.
72
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision (benefit) for income taxes from continuing
operations consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
128
|
|
|
$
|
(103
|
)
|
|
$
|
(415
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
7
|
|
State and local
|
|
|
870
|
|
|
|
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
998
|
|
|
|
(103
|
)
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(128
|
)
|
|
|
103
|
|
|
|
415
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
State and local, net of valuation provisions
|
|
|
|
|
|
|
|
|
|
|
(589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
103
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
870
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of significant items comprising our net deferred
tax asset as of December 31, 2008 and 2007 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debts
|
|
$
|
4,447
|
|
|
$
|
7,207
|
|
|
|
|
|
|
|
|
|
Accrued self insurance
|
|
|
4,711
|
|
|
|
3,349
|
|
|
|
|
|
|
|
|
|
Operating loss and tax credit carry forward
|
|
|
18,189
|
|
|
|
23,729
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
13,299
|
|
|
|
22,069
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(18,189
|
)
|
|
|
(23,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
22,457
|
|
|
|
32,625
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable retainage
|
|
|
11,229
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
5,283
|
|
|
|
3,624
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
16,512
|
|
|
|
6,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
$
|
5,945
|
|
|
$
|
26,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete
|
|
$
|
2,259
|
|
|
$
|
2,636
|
|
|
|
|
|
|
|
|
|
Accrued self insurance
|
|
|
10,994
|
|
|
|
13,460
|
|
|
|
|
|
|
|
|
|
Operating loss and tax credit carry forward
|
|
|
59,250
|
|
|
|
51,965
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
7,705
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(6,003
|
)
|
|
|
(24,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
74,205
|
|
|
|
45,333
|
|
|
|
|
|
|
|
|
|
73
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
18,428
|
|
|
|
2,330
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
14,985
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
15,627
|
|
|
|
12,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
49,040
|
|
|
|
14,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax asset
|
|
$
|
25,165
|
|
|
$
|
30,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
31,110
|
|
|
$
|
56,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, MasTec had approximately
$185.4 million of net operating loss carryforwards for
U.S. federal income tax purposes that expire beginning in
2022.
In assessing the ability to realize the deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which these temporary differences become
deductible. Management considers the projected future taxable
income and prudent and feasible tax planning strategies in
making this assessment. As of December 31, 2008 and 2007,
valuation allowances of $24.2 million and
$47.9 million have been recorded, respectively.
A reconciliation of U.S. statutory federal income tax rate
related to pretax income (loss) from continuing operations to
the effective tax rate for the years ended December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. statutory federal rate applied to pretax income (loss) from
continuing operations
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes
|
|
|
2.0
|
|
|
|
2.6
|
|
|
|
0.8
|
|
Non-deductible expenses
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
1.4
|
|
Other
|
|
|
(0.8
|
)
|
|
|
0.4
|
|
|
|
8.8
|
|
Valuation allowance for deferred tax assets
|
|
|
(36.9
|
)
|
|
|
(39.4
|
)
|
|
|
(46.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1.3
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MasTec adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement 109,
(FIN 48) in the first quarter of 2007.
FIN 48 is an interpretation of FASB Statement No. 109,
Accounting for Income Taxes, and seeks to
reduce the diversity in practice associated with certain aspects
of measurement and recognition in accounting for income taxes.
FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of
a tax position that an entity takes or expects to take in a tax
return. Under FIN 48, an entity may only recognize or
continue to recognize tax positions that meet a more
likely than not threshold. In the ordinary course of
business there is inherent uncertainty in quantifying our income
tax positions. The Company assesses its income tax positions and
records tax benefits for all years subject to examination based
on managements evaluation of the facts, circumstances and
information available at the reporting date. For those tax
positions where it is more likely than not that a tax benefit
will be sustained, the Company has recognized the largest amount
of tax benefit with a greater than 50% likelihood of being
realized upon ultimate settlement with a taxing authority that
has full knowledge of all relevant information. For those income
tax positions where it is not more likely than not that a tax
benefit will be sustained, no tax benefit has been recognized in
the Companys financial statements.
74
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 16
|
Operations
by Geographic Areas and Segments
|
MasTec manages its business on a project basis and the Company
operates in one reportable segment as a specialty trade
contractor. MasTec provides services to its customers in the
communications, utilities and government industries. These
services are provided by MasTecs various subsidiaries
throughout the United States and all of the Companys
subsidiaries have been aggregated into one reporting segment due
to their similar economic characteristics, processes and service
offerings. Revenue for customers in these industries is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Communications
|
|
$
|
865,499
|
|
|
$
|
766,184
|
|
|
$
|
684,217
|
|
Utilities
|
|
|
447,217
|
|
|
|
221,240
|
|
|
|
217,947
|
|
Government
|
|
|
65,947
|
|
|
|
50,355
|
|
|
|
38,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,378,663
|
|
|
$
|
1,037,779
|
|
|
$
|
940,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has recently made several acquisitions and
management continues to evaluate these acquisitions for
qualification as a reportable segment.
During the years ended December 31, 2007 and 2006, MasTec
operated in the United States and Canada. In March 2007, MasTec
declared its Canadian operations as discontinued. Accordingly,
results of operations for all periods presented reflect
MasTecs Canadian business as discontinued and its results
from continuing operations for all periods presented relate only
to MasTecs United States operations.
|
|
Note 17
|
Commitments
and Contingencies
|
Legacy Litigation. MasTec is subject to
litigation, primarily dating from the period 2001 through 2005.
Resolved
Legacy Litigation
In 2005, former employees filed a Fair Labor Standards Act
(FLSA) collective action against the Company in the
Federal District Court in Tampa, Florida, alleging failure to
pay overtime wages as required under the FLSA. While MasTec
denied the allegations underlying the lawsuit, in October 2007
the Company agreed to a settlement to avoid significant legal
fees, the uncertainty of a jury trial, other expenses and
management time that would have to be devoted to protracted
litigation. The settlement covers MasTecs current and
former install-to-the home employees who were employed by the
Company from October 2001 through September 2007 in California,
Florida, Georgia, Maryland, New Jersey, New Mexico, North
Carolina, South Carolina, Texas and Virginia. In
April 2008, the settlement was approved by the court, and
MasTec paid $8.0 million in connection with this settlement
in July 2008.
During 2003 and 2004, MasTec provided services to MSE Power
Systems on two separate projects in Pennsylvania, New York and
Georgia. In 2004, the Company filed suit against MSE seeking
payment and arbitration was held in August 2007. In January
2008, MasTec was awarded a $2.7 million judgment in
connection therewith and collected approximately
$2.7 million in September 2008.
Hugh OKane Electric filed a claim against MasTec for
subcontract work done in 2001 on a telecommunication project for
Telergy in New York. Telergy went bankrupt and did not pay
MasTec for this work. The trial court ruled in favor of Hugh
OKane, MasTec appealed and won but the appellate court
remanded the case to the trial court to determine whether there
were factual issues that prevented the Company from using the
contractual provision as a defense. The trial court found that
factual issues prevented us from using the contractual provision
as a defense and MasTec appealed. The appellate court upheld the
trial courts ruling and we paid approximately $3.4 million
to Hugh OKane in June 2008 to resolve the dispute.
75
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 24, 2008, the Company entered into a settlement
agreement with the buyer of our state Department of
Transportation projects and assets to settle warranty,
indemnification and other claims primarily relating to work we
had performed on the state Department of Transportation projects
we sold. In connection with the settlement agreement, the
parties also agreed to further amend and restate the Amended
Asset Purchase Agreement between the parties effective as of
January 24, 2008, referred to as the revised sale agreement.
Under the terms of the settlement agreement, MasTec paid
$6 million in cash, which was previously accrued, and
obtained from the buyer a covenant not to sue and general
release from nearly all obligations owed by the Company to the
buyer under the purchase agreement, including warranty and other
indemnification obligations. The revised sale agreement, among
other things, deleted substantially all of MasTecs
representations and warranties and indemnification obligations
set forth in the Amended Asset Purchase Agreement, reduced the
term of MasTecs covenants against competition and
solicitation of customers, suppliers and other third parties
(other than the buyers employees) from the five year
period ending February 13, 2012 to the four year period
ending February 13, 2011 and released the Company from the
covenant not to compete in the following states: Arizona,
Nevada, Colorado, Oklahoma, New Mexico, Missouri and Minnesota.
During 2003, MasTec contracted to construct a natural gas
pipeline for Coos County, Oregon (Coos County). In
December 2003 construction work on the pipeline ceased after
Coos County refused payment due MasTec, and MasTec sued Coos
County in February 2004. Coos County subsequently counterclaimed
against MasTec for breach of contract for alleged failures to
properly construct the pipeline and for alleged environmental
and labor law violations, and other causes. In April 2008,
MasTec entered into a definitive settlement agreement to settle
its dispute with Coos County, which provides for a
$4.35 million payment to Coos County on the later of
June 1, 2008 or ten days after the entry of a judgment in
the Corps of Engineers matter described below, and a
$4.35 million payment to Coos County on June 1, 2009
with 3% interest accruing beginning June 1, 2008. The
settlement agreement is subject to MasTec not being penalized
greater than $1.5 million in the Corps of Engineers case.
In February 2009, the Federal District Court entered a judgment
in favor of the Corps of Engineers in the amount of
$1.5 million thus making the settlement effective.
In connection with the Coos County pipeline project, the United
States Army Corps of Engineers (Corps of Engineers)
and the Oregon Department of Environmental Quality issued cease
and desist orders and notices of non-compliance to Coos County
and to MasTec with respect to the project. On March 30,
2007, the Corps of Engineers brought a complaint in a federal
district court against MasTec and Coos County and are seeking
damages in excess of $16 million. The matter went to trial
in February 2008 and in February 2009, the Federal District
Court entered a judgment in favor of the Corps of Engineers in
the amount of $1.5 million.
In June 2005, MasTec posted a $2.3 million bond in order to
pursue the appeal of a $2.0 million final judgment entered
against MasTec for damages plus attorneys fees resulting
from a break in a Citgo Products Pipeline Company
(Citgo) pipeline that occurred in 1999. In October
2008, the appellate court reduced the total award to
$1.9 million, and MasTec requested a rehearing, which was
denied by the appellate court. In February 2009, the parties
settled the dispute for $1.6 million. A portion of the
total award will be reimbursed by insurance.
Outstanding
Legacy Litigation
MasTec filed a lawsuit against Consolidated Edison, Inc.,
Consolidated Edison Company of New York, Inc. and Con Edison
Communications, Inc. (collectively, Con Edison) in
May 2002 in connection with a telecommunication project MasTec
worked on for Telergy, Inc. (Telergy). The lawsuit
alleges that Con Edison directly interfered with MasTecs
work for Telergy and that this interference resulted in
Telergys bankruptcy and resulted in Con Edison obtaining
MasTecs work on the Telergy project without paying for it.
MasTec seeks in excess of $40 million from Con Edison.
In April 2006, MasTec settled, without payment to the plaintiffs
by MasTec, several complaints for purported securities class
actions filed against MasTec and certain officers in the second
quarter of 2004. As part of the
76
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settlement, MasTecs excess insurance carrier retained
rights to seek reimbursement of up to $2.0 million from
MasTec based on its claim that notice was not properly given
under the policy. Upon exhausting MasTecs legal recourse,
MasTec paid the insurance carrier $2.0 million to resolve
the dispute. MasTec is now vigorously pursuing claims against
Aon Risk Services, Inc. of Florida, the insurance broker, for
breach of contract and breach of fiduciary duty for the losses
arising from a denial of insurance coverage.
MasTec provided telecommunication infrastructure services to
Adesta Communications, Inc. (Adesta) in 2000 and
2001. Adesta filed for bankruptcy in 2001. Adestas
bankruptcy trustee sold Adestas assets in the trust, and
MasTec is waiting for a distribution from that trust. Based on
MasTecs current understanding of the expected
distribution, MasTec has reduced its receivable to
$1.3 million, which is recorded in other current assets on
its consolidated balance sheet at December 31, 2008.
Outstanding
Litigation
In July 2008, MasTec filed a claim in arbitration against Credit
Suisse Securities (USA) LLC (Credit Suisse) with the
Financial Industry Regulatory Authority, Inc.
(FINRA) for negligence, unsuitability, negligent
supervision, negligent misrepresentations and omissions of
material fact, breach of fiduciary duty, breach of contract and
violations of state securities laws in connection with the sale
by Credit Suisse to MasTec of certain auction rate securities in
the aggregate principal amount of $33.7 million. MasTec is
seeking, among other relief, rescission of the purchase of the
auction rate securities. Credit Suisse responded denying
MasTecs claims. MasTec is currently in the discovery stage
of this matter.
In addition to the matters discussed above, MasTec is also
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.
Accrued aggregate liabilities related to the matters described
above and other litigation matters amounted to
$13.2 million at December 31, 2008. A charge of
$3.5 million was recorded for the year ended
December 31, 2008 with respect to these matters.
Other
Commitments and Contingencies.
MasTec is required to provide payment and performance bonds for
some of our contractual commitments related to projects in
process. At December 31, 2008, the cost to complete
projects for which the $485.6 million in performance and
payment bonds are outstanding was $68.3 million
|
|
Note 18
|
Concentrations
of Risk
|
The Company is subject to certain risk factors, including, but
not limited to risks related to economic downturns in the
telecommunications and broadband industries, collectability of
receivables, competition within our industry, the nature of our
contracts (which do not obligate our customers to undertake any
infrastructure projects and may be canceled on short notice),
acquisition integration and financing, seasonality, availability
of qualified employees, recoverability of goodwill, and
potential exposures to environmental liabilities.
The Company has more than 320 customers which include some of
the largest and most prominent companies in the communications,
utilities and government industries. Our customers include
incumbent local exchange carriers, broadband and satellite
operators, public and private energy providers, long distance
carriers, financial institutions and wireless service providers.
The Company grants credit, generally without collateral, to our
customers. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors.
However, MasTec generally has certain lien rights on that work
and concentrations of credit risk are limited due to the
diversity of the customer base. The Company believes our billing
and collection policies are adequate to minimize potential
credit risk. During the year ended December 31, 2008,
DIRECTV®
and AT&T customers each accounted for 34% and 12% of total
revenue, respectively.
77
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2007, one customer
accounted for 44% of total revenue. During the year ended
December 31, 2006,
DIRECTV®
and AT&T customers accounted for 38% and 10% of total
revenue. No other customers accounted for more than 10% of
revenues during the years ended December 31, 2008, 2007 and
2006.
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of customers to
make required payments. Management analyzes historical bad debt
experience, customer concentrations, customer credit-worthiness,
the availability of mechanics and other liens, the existence of
payment bonds and other sources of payment, and current economic
trends when evaluating the adequacy of the allowance for
doubtful accounts. If judgments regarding the collectability of
accounts receivables were incorrect, adjustments to the
allowance may be required, which would reduce profitability. As
of December 31, 2008, the Company had remaining receivables
from customers undergoing bankruptcy reorganization totaling
$1.6 million net of $0.3 million in specific reserves.
As of December 31, 2007, the Company had remaining
receivables from customers undergoing bankruptcy reorganization
totaling $1.6 million net of $0.3 million in specific
reserves. Based on the analytical process described above,
management believes that it will recover the net amounts
recorded. The Company maintains an allowance for doubtful
accounts of $11.6 million and $15.3 million as of
December 31, 2008 and December 31, 2007, respectively,
for both specific customers and as a reserve against other past
due balances. Should additional customers file for bankruptcy or
experience difficulties, or should anticipated recoveries in
existing bankruptcies and other workout situations fail to
materialize, we could experience reduced cash flows and losses
in excess of the current allowance.
|
|
Note 19
|
Related
Party Transactions
|
MasTec purchases, rents and leases equipment used in its
business from a number of different vendors, on a non-exclusive
basis, including Neff Corp. (Neff), in which Jorge
Mas, Chairman of our Board of Directors, and Jose Mas, our
President and Chief Executive Officer, were directors and owners
of a controlling interest through June 4, 2006. Juan Carlos
Mas, the brother of Jorge and Jose Mas, was the Chairman, Chief
Executive Officer, a director and a shareholder of Neff until
May 31, 2007 when he sold his Neff shares and resigned as
its chief executive officer. Juan Carlos Mas remains as chairman
of the Neff Board of Directors. During the years ended
December 31, 2008, 2007 and 2006, we paid Neff
approximately $0.8 million, $2.4 million and
$1.4 million, respectively, for equipment purchases,
rentals and leases. MasTec believes the amount paid to Neff is
equivalent to the payments that would have been made between
unrelated parties for similar transactions acting at arms
length.
During the years ended December 31, 2008, 2007 and 2006,
MasTec paid $48,000, $76,000 and $0 to Irma S. Mas,
the mother of Jorge Mas, the Chairman and Jose Mas, the
Companys President and Chief Executive Officer for the
lease of certain property located in Florida.
During the years ended December 31, 2008, 2007 and 2006,
MasTec had an arrangement with a customer whereby we leased
employees to that customer and charged approximately
$0.4 million, $0.4 million and $0.3 million,
respectively, to the customer in each year. As of
December 31, 2008 and 2007, a $0.7 million and
$0.4 million, respectively, receivable is included within
other current assets. Jorge Mas, Chairman of our Board of
Directors, and Jose Mas, our President and Chief Executive
Officer, are minority owners of this customer.
The Company charters aircraft from a third party who leases two
of its aircraft from entities in which Jorge Mas, Chairman
of our Board of Directors, and Jose Mas, our President and Chief
Executive Officer, have an ownership interest. We paid this
unrelated chartering company approximately $0.3 million,
$0.8 million and $0.7 million during the years ended
December 31, 2008, 2007 and 2006, respectively.
Effective as of August 27, 2002, MasTec and Jorge Mas
entered into a split dollar agreement, as subsequently amended,
wherein MasTec agreed to pay the premiums due on two life
insurance policies with an aggregate face amount of
$50.0 million. Mr. Mas and his spouse are the insured
under the policies. Under the terms of this agreement, MasTec is
the sole owner and beneficiary of the policies and is entitled
to recover the greater of (i) all premiums it pays on the
policies plus interest equal to four percent, compounded
annually, or (ii) the aggregate cash value of the life
insurance policy immediately before the death of the insureds.
The remainder of the policies
78
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
proceeds will be paid in accordance with Mr. Mas
designations. MasTec will make the premium payments until the
agreement is terminated, which occurs upon any of the following
events: (i) bankruptcy, or dissolution of MasTec, or
(ii) a change of control of MasTec.
Additionally, effective as of September 13, 2002, MasTec
and Jorge Mas entered into a second split dollar agreement, as
subsequently amended, wherein the Company agreed to pay the
premiums due on a life insurance policy with a face amount of
$80.0 million, $60.0 million of which is subject to
the agreement and the remaining $20.0 million is deemed to
be key-man insurance payable to MasTec and falls outside of the
agreement. Jorge Mas is the insured under this policy. Under the
terms of this agreement, MasTec is the sole owner and
beneficiary of the policy and is entitled to recover the greater
of (i) all premiums it pays on the portion of the policy
subject to the agreement, plus interest equal to four percent,
compounded annually, or (ii) the aggregate cash value of
the life insurance policy immediately before the death of the
insured. The Company will make the premium payments until the
agreement is terminated, which occurs upon any of the following
events: (i) bankruptcy, or dissolution of MasTec, or
(ii) a change of control of MasTec. An amount equal to
$60.0 million of the policys proceeds will be paid in
accordance with Jorge Mas designations. Any remainder of
the proceeds will be paid to the Company. In 2008, 2007 and
2006, we paid approximately $0.9 million, $0.4 million
and $1.1 million, respectively, in premiums in connection
with the split dollar agreements for Jorge Mas.
On November 1, 2002, MasTec and Jorge Mas entered into a
deferred bonus agreement in which the Company agreed to pay
Mr. Mas a bonus in the event that the split dollar
agreements Mr. Mas had entered into with MasTec were
terminated due to a change of control of MasTec. The amount of
the bonus is equal to the total premiums made by MasTec under
the terms of the split dollar agreements, plus interest of four
percent, compounded annually. The bonus is to be paid within
60 days after termination of the split dollar agreement.
The deferred bonus agreement was subsequently amended to comply
with Section 409A of the Internal Revenue Code.
On November 1, 2002, MasTec and Austin Shanfelter, who at
the time was a director and the Companys CEO, entered into
a split dollar agreement, as subsequently amended, wherein
MasTec agreed to pay the premiums due on a life insurance policy
with an aggregate face amount of $18.0 million.
Mr. Shanfelter and his spouse are the insureds under the
policy. Under the terms of this agreement, MasTec is the sole
owner and beneficiary of the policy and is entitled, upon the
death of the insureds, to recover the greater of
(i) all premiums it pays on the policy plus interest equal
to four percent, compounded annually or (ii) the aggregate
cash value of the life insurance policy immediately before the
death of the insureds. The remainder of the policys
proceeds will be paid in accordance with
Mr. Shanfelters designations. The Company has made
all of the premium payments required by the agreement. The
agreement terminates upon any of the following events:
(i) bankruptcy or dissolution of MasTec, or
(ii) change of control of MasTec.
On November 1, 2002, MasTec and Mr. Shanfelter entered
into a deferred bonus agreement in which the Company agreed to
pay Mr. Shanfelter a bonus in the event that the split
dollar agreement Mr. Shanfelter had entered into with
MasTec were terminated upon a change of control of MasTec. The
amount of the bonus is equal to the total premiums made by
MasTec under the terms of the split dollar agreements, plus
interest of four percent, compounded annually. The bonus is to
be paid within 60 days after termination of the split
dollar agreement. The deferred bonus agreement was subsequently
amended to comply with Section 409A of the Internal Revenue
Code.
On December 18, 2008, Mr. Shanfelter submitted his
written resignation effective immediately as a director of
MasTec, Inc. Following Mr. Shanfelters resignation,
on December 23, 2008, the Company and Mr. Shanfelter
entered into an agreement to modify certain matters pertaining
to Mr. Shanfelters employment agreement, deferred
bonus agreement and split dollar agreement, which he had
originally entered into with the Company at the time he served
as the Companys Chief Executive Officer. Under this
agreement MasTec paid to Mr. Shanfelter on January 2,
2009 approximately $2.4 million, which is equal to the
amount, as of December 23, 2008, that MasTec would have
been required to pay Mr. Shanfelter pursuant to the
deferred bonus agreement between MasTec and Mr. Shanfelter
in the event that a change of control of MasTec had occurred. As
a result of this payment, the deferred
79
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
bonus agreement, as amended, and the split dollar agreement
between MasTec and Mr. Shanfelter, as amended, have been
terminated.
Additionally, in accordance with the terms of his original
employment agreement, all of Mr. Shanfelters
restricted stock vested as of December 18, 2008 and
Mr. Shanfelters outstanding stock options shall
continue to be exercisable until their respective expiration
dates. Mr. Shanfelter will continue to be subject to
certain noncompetition provisions and certain nonsolicitation
provisions.
Effective as of August 3, 2004, MasTec and Jose Mas entered
into a split dollar agreement wherein we agreed to pay premiums
on a life insurance policy with an aggregate face amount of
$10.0 million. Under the terms of the agreement, we are the
sole owner and beneficiary of the policy and is entitled to
recover the greater of (i) all premiums it pays on the
policy plus interest equal to four percent, compounded annually,
or (ii) the aggregate cash value of the life insurance
policy immediately prior to the death of the survivor of the
insured. The remainder of the policys proceeds will be
paid in accordance with Mr. Mas designations. The
Company has agreed to make the premium payments until at least
July 15, 2009. In 2008, 2007 and 2006, the Company paid
approximately $0.0, $0.2 million and $0.2 million,
respectively, in premiums in connection with the split dollar
agreement for Mr. Jose Mas.
On April 3, 2007, MasTec and Jose Mas entered into a
deferred bonus agreement in which we agreed to pay Mr. Mas
a bonus in the event the split dollar agreement Mr. Mas had
entered into with us were terminated due to a change of control.
The amount of the bonus is equal to the total premium payments
made by us under the terms of the split dollar agreements, plus
interest of four percent, compounded annually. The bonus is to
be paid within 60 days after termination of the split
dollar agreement.
In December 2006, MasTec sold a property used in its operations
for $3.5 million to an entity whose principal is also a
principal of our then 51% owned subsidiary. MasTec received a
note in the amount of $2.8 million due December 2007, and
guaranteed by the principal noted above. Concurrent with the
sale of this property, MasTec entered into a month-to-month
lease agreement at $25,000 per month. In the second quarter of
2007, MasTec terminated this lease. In accordance with Statement
of Financial Accounting Standards No. 66,
Accounting for Sales of Real Estate and
Statement of Financial Accounting Standards No. 98,
Accounting for Leases; Sale-Leaseback Transactions
Involving Real Estate; Sales-Type Leases of Real Estate;
Definition of the Lease Term; Initial Direct Costs of Direct
Financing Lease-An Amendment of FASB Statements No. 13, 66
and 91 and a Rescission of FASB Statement No. 26 and
Technical
Bulletin No. 79-11,
MasTec recognized a gain on this sale of approximately
$2.5 million in the first quarter of 2007. In October of
2007, MasTec collected the amount due on the note receivable of
$2.8 million plus accrued interest.
|
|
Note 20
|
Discontinued
Operations
|
Canadian Operations. On March 30, 2007,
after evaluation of short and long term prospects, MasTecs
Board of Directors voted to sell substantially all of
MasTecs Canadian operations. MasTec reviewed the carrying
value of the net assets related to its Canadian operations and,
during the year ended December 31, 2007, wrote-off
$0.4 million in goodwill and recorded a non-cash impairment
charge of $0.6 million in connection with the decision to
sell substantially all of its Canadian operations. On
April 10, 2007, substantially all of the net assets of
MasTecs Canadian operations were sold for approximately
$1.0 million.
80
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the results of the Canadian
operations that are considered to be discontinued for the years
ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
675
|
|
|
$
|
5,385
|
|
Cost of revenue
|
|
|
|
|
|
|
(824
|
)
|
|
|
(5,263
|
)
|
Operating and other expenses
|
|
|
(814
|
)
|
|
|
(1,090
|
)
|
|
|
(1,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before benefit for income taxes
|
|
|
(814
|
)
|
|
|
(1,239
|
)
|
|
|
(1,135
|
)
|
Benefit for income taxes
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(814
|
)
|
|
$
|
(1,254
|
)
|
|
$
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Department of Transportation. On
December 31, 2005, after evaluation of short and long term
prospects, the executive committee of MasTecs Board of
Directors voted to sell substantially all of MasTecs state
Department of Transportation related projects and assets. MasTec
reviewed the carrying value of the net assets related to its
state Department of Transportation operations and also assumed
closing costs and other liabilities related to the sale. As a
result, MasTec recorded impairment charges totaling
$2.9 million and $44.5 million during the years ended
December 31, 2007 and 2006, respectively. Effective
February 2007, the state Department of Transportation related
projects and net assets were sold for $1.0 million in cash.
MasTec agreed to keep certain assets and liabilities related to
the state Department of Transportation related projects. In
addition, the buyer is required to pay MasTec an earn-out of up
to $12.0 million contingent on the future operations of the
projects sold. However, as the earn-out is contingent upon the
future performance of the state Department of Transportation
related projects, MasTec has not and may not receive any of
these earn-out payments.
On January 24, 2008, MasTec entered into a settlement with
the buyer of its state Department of Transportation projects and
assets to settle previously disclosed warranty, indemnification
and other claims primarily relating to work MasTec had performed
on the projects which were sold. Under the terms of the
Settlement Agreement, MasTec paid $6.0 million in cash and
obtained a covenant not to sue and general release from nearly
all obligations owed by MasTec to the buyer under the purchase
agreement including warranty and other indemnification
obligations. As a result of the settlement, MasTec has recorded
a charge of $6.0 million which is reflected in its loss
from discontinued operations for the year ended
December 31, 2007.
The following table summarizes the results of the discontinued
state Department of Transportation operations for the years
ended December 31, 2007 and 2006 (in thousands). No
activity was recorded in the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
5,663
|
|
|
$
|
81,967
|
|
Cost of revenue
|
|
|
(6,892
|
)
|
|
|
(112,337
|
)
|
Operating and other expenses
|
|
|
(11,070
|
)
|
|
|
(58,444
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,299
|
)
|
|
$
|
(88,814
|
)
|
|
|
|
|
|
|
|
|
|
Network Services. During the fourth quarter of
2004, MasTec ceased performing new services in the network
services operations and on May 24, 2005, the Company sold
certain assets of its network services operations for
$0.2 million. The Company recorded a loss from discontinued
operations of approximately $0, $20,000 and $317,000 in the
years ended December 31, 2008, 2007 and 2006, respectively,
related to network services.
|
|
Note 21
|
Quarterly
Information (Unaudited)
|
The following table presents unaudited quarterly operating
results for the years ended December 31, 2008 and 2007. The
Company believes that all necessary adjustments have been
included in the amounts stated below to
81
MASTEC,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
present fairly the quarterly results when read in conjunction
with the Consolidated Financial Statements and Notes for the
years ended December 31, 2008 and 2007. The quarterly
information has been adjusted for the reclassification of the
net loss related to our discontinued operations.