SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 0-3797
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(Exact name of registrant as specified in its charter)
Delaware 59-1259279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3155 N.W. 77th Avenue, Miami, FL 33122-1205
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 599-1800
Former name, former address and former fiscal year, if changed since last report
Not Applicable
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class of Common Stock November 13 , 1997
$ 0.10 par value 27,509,048
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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MasTec, Inc.
Index
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 - Unaudited Condensed Consolidated Statements of Income
for the Three and Nine Month Periods Ended September 30, 1997 and 1996.....................3
Condensed Consolidated Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996 (Audited)................................................4
Unaudited Consolidated Statement of Stockholders' Equity for
the Nine Month Period ended September 30, 1997.............................................5
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30, 1997 and 1996...............................6
Notes to Condensed Consolidated
Financial Statements (Unaudited)...........................................................8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition.............................................14
PART II OTHER INFORMATION.........................................................................20
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<TABLE>
MasTec, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited) (Unaudited)
<CAPTION>
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenue $ 201,117 $ 162,208 $ 500,133 $ 355,842
Costs of revenue 150,992 118,796 364,153 264,699
Depreciation and amortization 5,729 4,197 15,038 10,261
General and administrative expenses 22,077 22,084 63,101 47,603
------- ------- ------- -------
Operating income 22,319 17,131 57,841 33,279
Interest expense 2,665 3,289 8,413 8,577
Interest and dividend income 393 1,059 1,350 3,192
Other income, net 754 1,076 1,685 1,640
------- ------- ------- -------
Income from continuing operations before
equity in earnings of unconsolidated companies,
provision for income taxes and minority interest 20,801 15,977 52,463 29,534
Equity in earnings of unconsolidated companies 961 586 2,277 1,789
Provision for income taxes 6,178 4,789 16,708 9,945
Minority interest 1,752 188 1,813 412
------- ------- ------- -------
Income from continuing operations 13,832 11,586 36,219 20,966
Discontinued operations:
Income from discontinued operations
(net of applicable income taxes) 46 163 118 110
Gain on disposal of discontinued
operations (net of applicable income taxes) 0 0 0 66
------- ------- ------- -------
Net income $ 13,878 $ 11,749 $ 36,337 $ 21,142
======= ======= ======= =======
Pro forma data (2):
Income from continuing operations before
equity in earnings of unconsolidated companies,
provision for income taxes and minority interest 20,801 15,977 52,463 29,534
Equity in earnings of unconsolidated companies 961 586 2,277 1,789
Pro forma provision for income taxes (2) 7,865 5,623 19,303 11,143
Minority interest 1,752 188 1,813 412
Discontinued operations 46 163 118 176
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Pro forma net income $ 12,191 $ 10,915 $ 33,742 $ 19,944
======= ======= ======= =======
Weighted average shares outstanding (1) 28,148 27,011 27,793 26,229
======= ======= ======= =======
Pro forma earnings per share (2):
Continuing operations $ .43 $ .40 $ 1.21 $ .75
Discontinued operations .00 .00 0.00 .01
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$ .43 $ .40 $ 1.21 $ .76
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
<FN>
(1) Amounts have been adjusted to reflect the three-for-two stock split
declared in February 1997 and shares issued in connection with two
acquisitions accounted for under the pooling of interest method.
(2) Provision for income taxes and net income have been adjusted to reflect
a tax provision for two acquisitions accounted for under the pooling of
interest method which were previously S corporations.
</FN>
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MasTec, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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<S> <C> <C>
September 30, December 31,
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,588 $ 10,989
Accounts receivable-net and unbilled revenue 294,446 318,967
Notes receivable 682 29,549
Inventories 9,685 5,737
Other current assets 29,265 35,529
------- -------
Total current assets 336,666 400,771
------- -------
Property and equipment-at cost 119,208 95,467
Accumulated depreciation (39,242) (28,290)
------- -------
Property and equipment-net 79,966 67,177
Investments in unconsolidated companies 63,125 30,209
Other assets 59,544 12,997
------- -------
TOTAL ASSETS $ 539,301 $ 511,154
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 33,662 $ 39,916
Accounts payable 128,070 166,993
Other current liabilities 41,745 28,651
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Total current liabilities 203,477 235,560
------- -------
Other liabilities 40,691 33,593
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Long-term debt 120,956 125,018
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock 2,806 2,780
Capital surplus 97,160 149,083
Retained earnings 80,595 49,070
Accumulated translation adjustment (1,553) (802)
Treasury stock (4,831) (83,148)
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Total stockholders' equity 174,177 116,983
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 539,301 $ 511,154
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MasTec, Inc.
UNAUDITED CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
(In thousands)
for the nine months ended September 30, 1997
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Accumulated
Issued Capital Retained Translation Treasury
Shares Amount Surplus Earnings Adjustment Stock Total
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Balance as previously
reported, December 31, 1996 26,435 $ 2,643 $ 149,083 $ 35,728 $ (802) $ (83,148) $ 103,504
Acquisitions accounted for
as poolings of interest 1,371 137 13,342 13,479
------ ----- ------- -------
Balance at December 31, 1996 27,806 2,780 149,083 49,070 (802) (83,148) 116,983
Distributions by Pooled
Companies (4,812) (4,812)
Net income 36,337 36,337
Cumulative effect of
translation (751) (751)
Stock issued to employees
from treasury stock 92 912 1,004
Stock issued for acquisitions 250 26 6,600 6,626
Stock issued for acquisitions
from treasury stock 4,479 1,603 6,082
Stock issued from
treasury stock 3,007 3,007
Stock issued for stock dividend
from treasury stock (75,802) 75,802 0
Tax benefit for poolings treated
as asset sales for income
tax 9,701 9,701
purposes
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Balance, September 30, 1997 28,056 $ 2,806 $ 97,160 $ 80,595 $ (1,553) $ (4,831) $ 174,177
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MasTec, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
<S> <C> <C>
1997 1996
---- ----
(Unaudited)
Cash flows from operating activities:
Net income $ 36,337 $ 21,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 1,813 412
Depreciation and amortization 15,038 10,261
Equity in earnings of unconsolidated companies (2,277) (1,789)
Gain on sale of assets (632) (205)
Changes in assets and liabilities net of effect of acquisitions and
divestitures:
Accounts receivable-net and unbilled revenue 8,782 20,486
Inventories and other current assets (924) (5,742)
Other assets (922) (2,754)
Accounts payable and other expenses (25,976) 3,683
Income and deferred taxes 2,422 (1,111)
Other current liabilities (884) 1,438
Net assets of discontinued operations (389) (195)
Other liabilities (1,783) 1,405
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Net cash provided by operating activities 30,605 47,031
------ ------
Cash flows from investing activities:
Cash acquired in acquisitions 1,702 999
Cash paid for acquisitions (24,423) (6,164)
Repayment of notes receivable 1,345 440
Capital expenditures (17,171) (7,359)
Investments in unconsolidated companies (4,165) (1,651)
Proceeds from sale of assets 9,788 9,000
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Net cash used in investing activities (32,924) (4,735)
------- ------
Cash flows from financing activities:
Proceeds from revolving credit facilities 36,704 5,853
Other borrowings 1,728 3,200
Debt repayments (42,765) (47,425)
Distributions by pooled companies (4,812) (1,821)
Net proceeds from common stock issued from treasury 4,011 178
Financing costs (587) 0
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Net cash used in financing activities (5,721) (40,015)
------- ------
Net (decrease) increase in cash and cash equivalents (8,040) 2,281
Effect of translation on cash (361) (20)
Cash and cash equivalents - beginning of period 10,989 3,084
------- ------
Cash and cash equivalents - end of period $ 2,588 $ 5,345
======= ======
Supplemental disclosures of cash flow information: Cash paid during the period:
Interest $ 7,266 $ 8,013
Income taxes $ 10,437 $ 8,310
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MasTec, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Supplemental disclosure of non-cash investing and financing activities:
NINE MONTHS ENDED
SEPTEMBER 30,
<S> <C> <C>
1997 1996
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(Unaudited)
Acquisitions accounted for under purchase method of accounting:
Fair value of assets acquired:
Accounts receivable $ 12,932 $ 245,940
Inventories 193 2,980
Other current assets 853 10,114
Property 11,999 8,750
Investments in unconsolidated companies 0 9,373
Other assets 1,700 2,105
------ -------
Total non-cash assets 27,677 279,262
------ -------
Liabilities 10,873 160,990
Debt 4,364 78,600
------ -------
Total liabilities assumed 15,237 239,590
------ -------
Net non-cash assets acquired 12,440 39,672
Cash acquired 1,702 999
------ -------
Fair value of net assets acquired 14,142 40,671
Excess over fair value of assets acquired 17,624 4,956
------ -------
Purchase price $ 31,766 $ 45,627
====== =======
Note payable issued in acquisitions $ 130 $ 36,965
Cash paid and common stock issued for acquisitions 21,562 6,169
Contingent consideration 9,895 2,250
Acquisition costs 179 243
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Purchase price $ 31,766 $ 45,627
====== =======
Property acquired through financing arrangements $ 413 $ 7,596
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</TABLE>
In 1997, the Company issued approximately 173,000 shares of Common Stock for
domestic acquisitions. Common Stock was issued from treasury stock at a cost of
approximately $1.4 million. (See Note 2 for non cash transactions related to
MasTec Inepar.)
In July 1997, the Company converted a note receivable and accrued interest
thereon totaling $29.0 million into stock of a company. (See Note 3.)
In 1996, the Company's purchase of an additional 3% interest in a cable
television operator was financed in part by the sellers for $2.0 million.
In 1996, the Company converted $11.6 million of its 12% Convertible Subordinated
Debentures into Common Stock. Common Stock was issued from treasury stock at a
cost of $6.1 million.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. CONSOLIDATION AND PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
MasTec, Inc. ("MasTec" or the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. In July
and August 1997, Wilde Construction, Inc. and two related companies ("Wilde")
and AIDCO, Inc. ("Aidco") and one related company were merged with and into the
Company through an exchange of common stock. The mergers were accounted for as
poolings of interest. Accordingly, the Company's consolidated financial
statements include the results of Wilde and Aidco for all periods presented (see
Note 2). The consolidated financial statements do not include all information
and notes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the audited
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1996. The year end condensed
balance sheet data was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles.
The financial information furnished reflects all adjustments, consisting only of
normal recurring accruals which are, in the opinion of management, necessary for
a fair presentation of the financial position and results of operations and
financial position for the periods presented. The results of operations are not
necessarily indicative of future results of operations or financial position of
MasTec.
The financial position and results of operations of the Company's
foreign subsidiaries are measured using local currency as the functional
currency. The Company translates foreign currency financial statements by
translating balance sheet accounts at the exchange rate on the balance sheet
date and income statement accounts at the average exchange rate for the period.
Translation gains and losses are recorded in stockholders' equity, and realized
gains and losses are reflected in income.
2. ACQUISITIONS
Domestic
In July 1997, the Company completed the acquisition of Wilde which
provides telecommunications and cable television infrastructure services in
Minnesota, North and South Dakota, Iowa, Nebraska and other bordering states. In
August 1997, the Company completed the acquisition of Aidco, a company engaged
in the installation and maintenance of voice, data and video local-area networks
in the Western and Midwestern states. These acquisitions were consummated
through stock-for-stock exchanges in which the Company issued approximately
1,371,000 shares of common stock. The Company has accounted for these mergers
under the pooling of interest method. Accordingly, historical financial
information has been restated to reflect the mergers as though they occurred as
of the earliest period presented. These acquisitions are collectively referred
to as the "Pooled Companies".
During the nine months ended September 30, 1997, the Company completed
other acquisitions which have been accounted for under the purchase method of
accounting and the results of operations of which have been included in the
Company's condensed consolidated financial statements from the respective
acquisition dates. If the acquisitions had been made at the beginning of 1997 or
1996, pro forma results of operations would not have differed materially from
actual results. Acquisitions made in 1997 were Kennedy Cable Construction, Inc.,
GJS Construction Co. d/b/a Somerville Construction and Shanco Corporation, three
contractors servicing multiple systems operators such as Time Warner, Marcus
Cable Co. and Cox Communications in a number of states including Alabama,
Arizona, Florida, Georgia, New Jersey, New York, North Carolina, South Carolina
and Texas; and R.D. Moody and Associates, Inc., B&D Contractors of Shelby, Inc.,
Tele-Communications Corporation of Virginia, E.L. Dalton & Company, Inc., and
R.D. Moody and Associates of Virginia, Inc., five telecommunications and utility
contractors with operations primarily in the southeastern and southwestern
United States.
Intangible assets of approximately $20 million resulting from domestic
business acquisitions are included in other long-term assets and principally
consist of the excess acquisition cost over the fair value of the net assets
acquired (goodwill). Goodwill associated with domestic acquisitions is being
amortized on a straight-line basis over a range of
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
15-20 years. The Company periodically reviews goodwill to assess recoverability.
See Note 3 for goodwill related to the Company's investment in unconsolidated
companies.
Separate results of the Pooled Companies for the periods prior to the
consummation of the combinations, including a pro forma adjustment for income
taxes related to the Subchapter S status of certain Pooled Companies are as
follows:
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<CAPTION>
<S> <C> <C> <C>
Pooled
MasTec Companies Combined
Nine months ended September 30, 1996
Total revenue......................... $ 313,575 $ 42,267 $ 355,842
Net income............................ $ 19,606 $ 338 $ 19,944
Nine months ended September 30, 1997
Total revenue......................... $ 456,203 $ 43,930 $ 500,133
Net income............................ $ 29,071 $ 4,671 $ 33,742
</TABLE>
The direct transaction costs resulting from the mergers were $0.2
million. These costs, which include filing fees with regulatory agencies, legal,
accounting and other professional costs, were charged to the combined operations
for the quarter ended September 30, 1997.
International
On July 31, 1997, the Company completed its acquisition of 51% of
MasTec Inepar S/A-Sistemas de Telecomunicacoes, a newly formed Brazilian
telecommunications infrastructure contractor, for $29.4 million in cash payable
over eleven months and 250,000 shares of common stock. Goodwill related to this
acquisition amounted to $12.1 million is included in other long-term assets and
is being amortized over 15 years.
On April 30, 1996, the Company purchased from Telefonica de Espana,
S.A. ("Telefonica") 100% of the capital stock of Sistemas e Instalaciones de
Telecomunicacion, S.A. ("Sintel"), a company engaged in telecommunications
infrastructure construction services in Spain, Argentina, Chile, and Peru. The
Sintel acquisition gave the Company a significant international presence. See
Note 5 regarding geographic information.
The following information presents the unaudited pro forma condensed
results of operations for the nine months ended September 30, 1996 as if the
Company's acquisition of Sintel and certain related transactions had occurred on
January 1, 1996. The Sintel acquisition has been accounted for as a purchase
under generally accepted accounting principles. Management's estimate of fair
value approximated that of the carrying value of the net assets acquired after
reflecting a reserve for employee terminations net of deferred taxes. The pro
forma results, which include adjustments to increase interest expense resulting
from the debt incurred pursuant to the Sintel acquisition ($700,000), offset by
the reduction in interest and depreciation expenses resulting from the related
transactions ($1.0 million) and a tax expense of 35% is presented for
informational purposes only and is not necessarily indicative of the future
results of operations or financial position of the Company or the results of
operations or financial position of the Company had the Sintel acquisition and
the related transactions occurred January 1, 1996.
Pro forma results of operations
for the nine months ended September 30, 1996
Revenue $ 439,537
Income from continuing operations $ 22,964
Net income $ 23,140
Earnings per share:
Continuing operations $ .88
Discontinued operations .00
--------
Net income $ .88
========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
The pro forma results for the nine months ended September 30, 1996
include special charges incurred by Sintel related to a restructuring plan of
$1.4 million, net of tax.
3. INVESTMENTS IN UNCONSOLIDATED COMPANIES
In July 1995, the Company made a $25 million non-recourse term loan to
Devono Company Limited, a British Virgin Islands corporation ("Devono"). The
loan was collateralized by 40% of the capital stock of a holding company that
owns 52.6% of the capital stock of Consorcio Ecuatoriano de Telecomunicaciones,
S.A. ("Conecel"), one of two cellular phone operators in the Republic of
Ecuador. In June 1997, the Company converted its loan and accrued interest into
the stock of the holding company. In September 1997, the Company entered into an
agreement to sell its investments for $20.0 million in cash and Conecel stock
valued at $45.0 million. The transaction is expected to close before year end.
In September 1997, the Company agreed to sell 5.5% of its
investment in Supercanal Holding S.A.("Supercanal") to Multicanal, S.A. for
$20.0 million in cash. The transaction is expected to close before year end.
Goodwill related to the Company's investments in unconsolidated
companies amounted to $38.3 million at September 30, 1997 and is being amortized
over a period of 17-20 years.
4. DEBT
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Debt is comprised of the following (in thousands):
<S> <C> <C>
September 30, December 31,
1997 1996
---- ----
Revolving Credit Facility at LIBOR plus 1.25%
(6.93 at September 30, 1997) $ 82,425 0
Fleet Credit Facility at LIBOR plus 2.00% - 2.25%
(7.75% - 7.94% at December 31, 1996) 0 $ 46,865
Revolving credit facility, at MIBOR plus 0.30% (6.01%
and 7.00% at September 30, 1997 and December 31, 1996,
respectively, due November 1, 1998) 14,717 43,613
Other debt denominated in Spanish Pesetas, at interest
rates from 6.5% to 8.15% 16,887 11,048
Notes payable for equipment, at interest rates from
7.5% to 8.5% due in installments through the year 2000 14,694 28,607
Notes payable for acquisitions, at interest rates from
7% to 8% due in installments through February 2000 25,895 32,253
Real estate mortgage notes, at interest
rates from 8.5% to 8.53% 0 2,548
------- -------
Total debt 154,618 164,934
Less current maturities (33,662) (39,916)
------- -------
Long-term debt $ 120,956 $ 125,018
======= =======
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
In June 1997, the Company obtained from a group of financial
institutions led by BankBoston, N.A. a $125 million revolving credit facility
("Revolving Credit Facility"), maturing on June 9, 2000 to replace the Fleet
Credit Facility and certain other domestic debt. As a result of the prepayment
of the Fleet Credit Facility, deferred financing costs and a termination fee
totaling $690,000 were expensed in the second quarter of 1997.
The Company also has several credit facilities denominated in Spanish
Pesetas, one of which is a revolving credit facility with a wholly-owned finance
subsidiary of Telefonica. Interest on this facility accrues at MIBOR (Madrid
interbank offered rate) plus .30%. At September 30, 1997, the Company had $55.8
million (8.3 billion Pesetas) of debt denominated in Pesetas, including $24.2
million remaining of the acquisition debt incurred as a result of the Sintel
acquisition (see Note 2).
Debt agreements contain, among other things, restrictions on the
payment of dividends and require the observance of certain financial covenants.
5. OPERATIONS BY GEOGRAPHIC AREAS
The Company's principal source of revenue is the provision of
telecommunications infrastructure construction services in the United States,
Spain and Brazil. Significant international operations commenced on May 1, 1996
with the acquisition of Sintel and continue to increase with the July 31, 1997
acquisition of MasTec Inepar (see Note 2).
1997 1996
---- ----
Revenue
Domestic $ 309,787 $ 248,553
International 190,346 107,289
------- -------
Total $ 500,133 $ 355,842
======= =======
Operating income
Domestic $ 42,760 $ 22,757
International 15,081 10,522
------- -------
Total $ 57,841 $ 33,279
======= =======
As of September 30, As of December 31,
1997 1996
Identifiable assets
Domestic $ 209,186 $ 147,065
International 173,290 258,071
Corporate 156,825 106,018
------- -------
Total $ 539,301 $ 511,154
======= =======
There are no transfers between geographic areas. Operating income
consists of revenue less operating expenses, and does not include interest
expense, interest and other income, equity in earnings of unconsolidated
companies, minority interest and income taxes. Domestic operating income is net
of corporate general and administrative expenses. Identifiable assets of
geographic areas are those assets used in the Company's operations in each area.
Corporate assets include cash and cash equivalents, investments in
unconsolidated companies, net assets of discontinued operations, real estate
held for sale and notes receivable.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
6. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company derives a substantial portion of its revenue from the
provision of telecommunications infrastructure services to Telefonica and to
BellSouth Telecommunications, Inc. ("BellSouth"). For the nine months ended
September 30, 1997, approximately 27% and 13% of the Company's revenue was
derived from services performed for Telefonica and BellSouth, respectively. For
the nine months ended September 30, 1996, the Company derived approximately 28%
and 15% of its revenue from services performed for Telefonica and BellSouth,
respectively. Although the Company's strategic plan envisions diversification of
its customer base, the Company anticipates that it will continue to be dependent
on Telefonica and its affiliates and BellSouth for a significant portion of its
revenue in the future.
7. COMMITMENTS AND CONTINGENCIES
In December 1990, Albert H. Kahn, a stockholder of the Company, filed a
purported class action and derivative suit in Delaware state court against the
Company, the then-members of its Board of Directors, and National Beverage
Corporation ("NBC"), the Company's then-largest stockholder. The complaint
alleges, among other things, that the Company's Board of Directors and NBC
breached their respective fiduciary duties in approving certain transactions,
including the distribution in 1989 to the Company's stockholders of all of the
common stock of NBC owned by the Company and the exchange by NBC of shares of
common stock of the Company for certain indebtedness of NBC to the Company. The
lawsuit seeks to rescind these transactions and to recover damages in an
unspecified amount.
In November 1993, Mr. Kahn filed a class action and derivative
complaint against the Company, the then-members of its Board of Directors,
Church & Tower, Inc. and Jorge L. Mas, Jorge Mas and Juan Carlos Mas, the
principal shareholders of Church & Tower, Inc. The 1993 lawsuit alleges, among
other things, that the Company's Board of Directors and NBC breached their
respective fiduciary duties by approving the terms of the acquisition of the
Company by the Mas family, and that Church & Tower, Inc. and its principal
shareholders had knowledge of the fiduciary duties owed by NBC and the Company's
Board of Directors and knowingly and substantially participated in the breach of
these duties. The lawsuit also claims derivatively that each member of the
Company's Board of Directors engaged in mismanagement, waste and breach of
fiduciary duties in managing the Company's affairs prior to the acquisition by
the Mas family.
Each of the foregoing lawsuits is pending and no trial date has been
set. The Company believes that the allegations in each of the lawsuits are
without merit and intends to defend these lawsuits vigorously.
In August 1997, the Company settled its lawsuit with BellSouth arising
from certain work performed by a subcontractor of the Company from 1991 to 1993
for nominal consideration.
The Company is a party to other pending legal proceedings arising in
the normal course of business, none of which the Company believes is material to
the Company's financial position or results of operations.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas, and major customers. This statement
requires a public business enterprise report financial and descriptive
information about its reportable operating segments. The financial information
is required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for financial statements for
periods beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130
and No. 131 and their applicability to the Company.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Overview
MasTec is one of the world's leading contractors specializing in the
build-out of telecommunications and related infrastructure. The Company's
principal business consists of the design, installation and maintenance of the
outside physical plant for telephone and cable television communications systems
and of integrated voice, data and video local and wide area networks inside
buildings, and the installation of central office switching equipment. The
Company also provides infrastructure services to electric power companies and
other public utilities.
In April 1996, the Company purchased Sintel, a company engaged in
telecommunications infrastructure construction services in Spain, Argentina,
Chile and Peru, from Telefonica. The Sintel acquisition gave the Company a
significant international presence and more than doubled the size of the Company
in terms of revenue and number of employees. In Argentina, Chile and Peru, the
Company operates through unconsolidated 50% joint ventures. See Notes 2 and 5 to
the Condensed Consolidated Financial Statements for pro forma financial
information and geographic information, respectively. The period ended September
30, 1996 includes the results of operation of Sintel from May 1, 1996.
In July 1997, the Company acquired a 51% interest in MasTec Inepar, a
Brazilian telecommunications infrastructure construction company. At the time of
the acquisition, MasTec Inepar had a backlog of construction contracts of
approximately $280.0 million. The period ended September 30, 1997 includes the
results of operation of MasTec Inepar from August 1, 1997.
On September 3, 1997, Sintel filed a petition with the Spanish labor
authorities to approve a restructuring of its workforce whereby its total
workforce would be reduced by 200 employees and another 1,200 employees would be
terminated and rehired under a lower cost structure. Management believes that a
restructuring of Sintel's labor costs is necessary to permit Sintel to provide
services at competitive prices in the future.
In response to the Company's petition, the unionized employees declared
work stoppages during the latter part of September 1997 and continued with half
day strikes through the first week in October 1997. Although only two half days
of work stoppages occurred in the quarter ended September 30, 1997, overall
production for the month of September was further impacted by labor slow downs
following the filing of the petition at the beginning of the month. The Company
expects revenue and income from Sintel to continue to be impacted by Sintel's
labor situation until the matter is resolved.
At the time of this filing, management is involved in extensive
negotiations with labor representatives, government mediators and
representatives from Telefonica. Although the ultimate resolution of this matter
is uncertain, management believes that the negotiations will result in an
agreement that will allow Sintel to reduce its workforce by an as yet
undetermined number. Any agreement is likely to stipulate the number, timing and
termination pay requirements for the workforce reduction. While management
anticipates a significant reduction in ongoing operating costs to result from
these negotiations, the Company recognizes that it services an increasingly
competitive telephony industry in the Spanish market and a substantial portion
of any savings may be reflected in future bidding activities to Telefonica and
other communication service customers.
Results of Operations
Revenue is generated primarily from telecommunications and related
infrastructure services. Infrastructure services are provided to telephone
companies, public utilities, cable television operators, other
telecommunications providers, governmental agencies and private businesses.
Costs of revenue includes subcontractor costs and expenses, materials not
supplied by the customer, fuel, equipment rental, insurance, operations payroll
and employee benefits. General and administrative expenses include management
salaries and benefits, rent, travel, telephone and utilities, professional fees
and clerical and administrative overhead.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997 vs. Three Months Ended September 30, 1996.
The following table sets forth certain historical consolidated
financial data as a percentage of revenue for the three months ended September
30, 1997 and 1996.
<S> <C> <C>
1997 1996
---- ----
Revenue 100.0% 100.0%
Costs of revenue 75.1% 73.2%
Depreciation and amortization 2.8% 2.6%
General and administrative expenses 11.0% 13.6%
Operating margin 11.1% 10.6%
Interest expense 1.3% 2.0%
Interest and dividend income and other income, net,
equity in unconsolidated companies and minority
interest 0.0% 1.6%
Income from continuing operations before provision for income taxes (1) 9.9% 10.1%
Provision for income taxes (1) 3.9% 3.5%
Net income (1) 6.1% 6.7%
<FN>
(1) Certain pooled companies were S corporations prior to their merger.
Provision for income taxes and net income as a percentage of revenue
have been adjusted to reflect a tax provision as though the pooled
companies had been subject to taxation during the entire period.
</FN>
</TABLE>
Revenue increased $38.9 million, or 24.0%, to $201.1 million for the
three months ended September 30, 1997 as compared to $162.2 million in the same
period in 1996. Revenue from domestic operations increased $29.5 million, or
31.9%, to $122.0 million for the three months ended September 30, 1997 as
compared to $92.5 million in the same period in 1996. Domestic growth was
generated from acquisitions and internal expansion. Revenue generated by
international operations increased $9.4 million, or 13.5%, to $79.1 million in
the three months ended September 30, 1997 as compared to $69.7 million in the
comparable period of 1996 due primarily to revenue generated by the Company's
Brazilian operation ($35.0 million) for the two months ended September 30, 1997.
Offsetting the increase in international revenue was a decline in revenue from
the Company's Spanish operations of $25.6 million. This decline is primarily due
to a 19.6% devaluation in the Spanish peseta when compared to the average rate
for 1996 and a decline in production due to the labor situation described above.
Gross profit, excluding depreciation and amortization, increased $6.7
million, or 15.5%, to $ 50.1 million, or 24.9% of revenue, for the three months
ended September 30, 1997 from $43.4 million, or 26.8% of revenue, for the three
months ended September 30, 1996. Domestic gross margins (gross profit as a
percentage of revenue) increased to 29.3% for the three months ended September
30, 1997 from 24.1% in the 1996 period primarily due to certain short-term
projects providing more attractive pricing. International gross margins declined
to 18.2% for the three months ended September 30, 1997 from 30.2% in the 1996
period. This decline is primarily due to overall lower margins from the newly
formed Brazilian operations and lower productivity due to work stoppages and
slow downs as a reaction to the Company's petition to reduce its Spanish
workforce cost structure. (See Overview.)
Depreciation and amortization increased $1.5 million, or 36.5%, to $5.7
million for the three months ended September 30, 1997 from $4.2 million for the
three months ended September 30, 1996. The increase in depreciation and
amortization was a result of increased capital expenditures in the latter part
of 1996, as well as depreciation and amortization associated with acquisitions.
As a percentage of revenue, depreciation and amortization were 2.8% and 2.6% of
revenue for 1997 and 1996, respectively.
General and administrative expenses were $22.1 million, or 11.0% of revenue, for
the three months ended September 30, 1997 compared to $22.1 million, or 13.6% of
revenue, for the three months ended September 30, 1996. The decline in
percentage is due to the higher volume of revenue and nominal general and
administrative expenses related to the Company's Brazilian operations. Domestic
general and administrative expenses increased $3.2 million, or 35%, to $12.3
million, or 10.1% of domestic revenue, for the three months ended September 30,
1997 from $9.1 million, or 9.8% of domestic revenue, primarily due to
acquisitions. Included in the 1997 period are bonuses paid to employees of
<PAGE>
the Pooled Companies of approximately $0.6 million compared to $0.2 million for
the 1996 period. Absent the increase in the bonuses by Pooled Companies, general
and administrative expenses as a percentage of revenue would have remained
constant. International general and administrative expenses decreased $3.1
million, or 24.0%, to $9.8 million, or 12.3% of international revenue, for the
three months ended September 30, 1997 from $12.9 million, or 18.6% of
international revenue, for the three months ended September 30, 1996. The
decrease in international general and administrative expenses in dollar terms
was due primarily to the devaluation of the Spanish peseta. In Spanish peseta
terms, general and administrative expenses declined 10.0%; however, general and
administrative expense as a percent of revenue, increased to 21.4% due to the
lower sales volume. Offsetting the increase in peseta terms of the percentage of
Spanish general and administrative expenses was a nominal amount of general and
administrative expenses associated with the newly formed Brazilian operations.
Operating income increased $5.2 million, or 30.3%, to $22.3 million, or
11.1% of revenue, for the three months ended September 30, 1997 from $17.1
million, or 10.6% of revenue, for the three months ended September 30, 1996.
Interest expense decreased $0.6 million, or 18.2%, to $2.7 million for
the three months ended September 30, 1997 from $3.3 million for the three months
ended September 30, 1996 primarily due to lower interest costs and average
borrowings associated with Sintel's working capital needs and the devaluation of
the Spanish peseta.
Provision for income taxes on a pro forma basis (considering the Pooled
Companies as C corporations) was $7.9 million, or 37.8% of income from
continuing operations before earnings in earnings of unconsolidated companies,
income taxes and minority interests for the three months ended September 30,
1997, compared to $5.6 million, or 35.2% for the three months ended September
30, 1996. The increase in the effective tax rate was primarily due to the
decreased proportion of income from international operations during the 1997
period.
Net income on a pro forma basis increased $1.3 million, or 11.9%, from
$10.9 million in 1996 to $12.2 million in 1997. Net income as a percentage of
revenue decreased to 6.1% in 1997 from 6.7% in 1996.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 vs. Nine Months Ended September 30, 1996.
The following table sets forth certain historical consolidated
financial data as a percentage of revenue for the nine months ended September
30, 1997 and 1996.
<S> <C> <C>
1997 1996
---- ----
Revenue 100.0% 100.0%
Costs of revenue 72.8% 74.4%
Depreciation and amortization 3.0% 2.9%
General and administrative expenses 12.6% 13.4%
Operating income 11.6% 9.3%
Interest expense 1.7% 2.4%
Interest and dividend income and other
income, net, equity in earnings of unconsolidated
companies and minority interest 0.7% 1.8%
Income from continuing operations before provision for income taxes (1) 10.6% 8.7%
Provision for income taxes (1) 3.9% 3.1%
Net income (1) 6.7% 5.6%
<FN>
(1) Certain Pooled Companies were S corporations prior to their merger.
Provision for income taxes and net income as a percentage of revenue have
been adjusted to reflect a tax provision as though the Pooled Companies
had been subject to taxation during the entire year.
</FN>
</TABLE>
Revenue from domestic operations increased $61.2 million, or 24.6%, to
$309.8 million for the nine months ended September 30, 1997 as compared to
$248.6 million in the same period in 1996. Domestic growth was generated
primarily by acquisitions. Revenue generated by international operations
increased $83.0 million, or 77.4%, to $190.3 million in the nine months ended
September 30, 1997 as compared to $107.3 million in the comparable period of
1996 due primarily to the inclusion of Sintel's results for the entire period in
1997 compared to five months in the 1996 period and the results of MasTec Inepar
for two months ended September 30, 1997. See the quarterly discussion regarding
Sintel's revenue.
Gross profit, excluding depreciation and amortization, increased $44.9
million, or 49%, to $136.0 million, or 27.2% of revenue, for the nine months
ended September 30, 1997 from $91.1 million, or 25.6% of revenue, for the nine
months ended September 30, 1996. The increase in gross profit as a percentage of
revenue was due primarily to the performance of certain higher margin domestic
jobs during 1997 and domestic cost reductions. Domestic gross margins (gross
profit as a percentage of revenue) increased to 29.0% for the nine months ended
September 30, 1997 from 24.2% in the 1996 period. International gross margins
decreased to 24.2% for the nine months ended September 30, 1997 from 28.8% in
the 1996 period due to overall lower margins from the newly formed Brazilian
operations and lower productivity in the third quarter from the Spanish
operation.
Depreciation and amortization increased $4.8 million, or 47%, to $15.0
million for the nine months ended September 30, 1997 from $10.3 million for the
nine months ended September 30, 1996. The increase in depreciation and
amortization was a result of increased capital expenditures in the latter part
of 1996, as well as depreciation and amortization associated with acquisitions.
As a percentage of revenue, depreciation and amortization was 3.0% and 2.9% of
revenue for 1997 and 1996, respectively.
General and administrative expenses increased $15.5 million, or 32.6%,
to $63.1 million, or 12.6% of revenue, for the nine months ended September 30,
1997 from $47.6 million, or 13.4% of revenue , for the nine months ended
September 30, 1996. Domestic general and administrative expenses were $34.2
million, or 11.0% of domestic revenue, for the nine months ended September 30,
1997 compared to $29.0 million, or 11.7% of domestic revenue. The decline as a
percentage of domestic revenue is due primarily to the higher revenue volume.
The increase in dollar amount of domestic general and administrative expense is
due primarily to acquisitions. International general and administrative expenses
increased $10.3 million, or 55.4%, to $28.9 million, or 15.2% of international
revenue, for the nine months ended September 30, 1997 from $18.6 million, or
17.3% of international revenue, for the nine months ended September 30, 1996.
The increase in international general and administrative expenses was due to the
inclusion of Sintel's results for the entire 1997 period, compared to only five
months during the 1996 period. The decline in terms of international general and
administrative expenses as a percentage of international revenue is due to a
lower general and administrative expense for the Brazilian operations.
Operating income increased $24.6 million, or 73.8%, to $57.8 million,
or 11.6% of revenue, for the nine months ended September 30, 1997 from $33.3
million, or 9.3% of revenue, for the nine months ended September 30, 1996.
Interest expense decreased to $8.4 million for the nine months ended
September 30, 1997 from $8.6 million for the nine months ended September 30,
1996 primarily due to the lower interest rates on Spanish and domestic
borrowings and the conversion of the Company's 12% Subordinated Convertible
Debentures into Common Stock on June 30, 1996. Offsetting the decline was the
inclusion of interest cost associated with Sintel's working capital needs for
the entire 1997 period compared to five months for the 1996 period.
Provision for income taxes on a pro forma basis was $19.3 million, or
36.8% of income from continuing operations before equity in earnings of
unconsolidated companies, taxes and minority interests for the nine months ended
September 30, 1997, compared to $11.1 million, or 37.6% for the nine months
ended September 30, 1996. The reduction in the effective tax rate was primarily
due to the increased proportion of income from international operations during
the nine month period in 1997.
Pro forma net income increased $13.8 million, or 69.3%, from $19.9
million in 1996 to $33.7 million in 1997. Pro forma net income as a percentage
of revenue increased to 6.7% in 1997 from 5.6% in 1996.
Financial Condition, Liquidity and Capital Resources
The Company's primary liquidity needs are for working capital and to
finance acquisitions and capital expenditures. The Company's primary sources of
liquidity have been cash flow from operations, borrowings under revolving lines
of credit and the proceeds from the sale of investments and non-core assets.
Net cash provided by operating activities for the nine months ended
September 30, 1997 was $30.6 million, compared to $47.0 million for the nine
months ended September 30, 1996. This decrease was due to an increase in net
income to $36.3 million for the nine months ended September 30, 1997 as compared
to net income of $21.1 million in the comparative 1996 period which was offset
by fluctuations in working capital, particularly the reduction of accounts
payable balances and an increase in accounts receivable from Brazilian
operations.
Net cash provided by the sale of investments and non-core assets
amounted to $9.8 million in the nine months ended September 30, 1997. The
Company invested cash, net of cash acquired, in acquisitions and investments in
non-consolidated companies totaling $26.9 million during the nine months ended
September 30, 1997.
During the nine months ended September 30, 1997, the Company made
capital expenditures of $17.2 million, primarily for machinery and equipment
used in the production of revenue.
As of September 30, 1997, working capital totaled $133.2 million,
compared to working capital of $136.2 million at December 31, 1996 excluding a
note receivable that was converted into an equity investment in June 1997 (see
Note 3 to the Condensed Consolidated Financial Statements). Included in working
capital are net assets of discontinued operations and real estate held for sale
totaling $14.7.
In September 1997, the Company agreed to sell a portion of its equity
investment in Supercanal Holding, S.A. ("Supercanal"), an Argentine cable
television operator, for $20.0 million in cash, and to sell its indirect
investment in Consorcio Ecuatoriano de Telecomunicaciones, S.A. ("Conecel"), an
Ecuadorian cellular phone company, for $20.0 million in cash and $45.0 million
shares of Conecel non-voting common stock. In addition, the Company has agreed
to exchange a portion of its remaining 23.3% equity stake in Supercanal for
Supercanal preferred stock. The Company will have certain registration rights
with respect to the Supercanal preferred stock and the Conecel common stock that
it receives in these transactions. These transactions are expected to close
before year end.
In September 1997, the Company filed a petition with Spanish labor
authorities to approve a work force restructuring. (See Overview.) Sintel's
workers engaged in partial work stoppages in protest of this petition. The
Company believes that the cost of these partial work stoppages and potential
severance costs that could be incurred should all or a portion of the desired
workforce reduction be realized will be offset in the future by improvements in
operating margins.
The Company continues to pursue a strategy of growth through
acquisitions and internal expansion. During the quarter ended September 30,
1997, the Company closed its acquisition of 51% of MasTec Inepar for stock and
$29.4 million in cash payable over eleven months. In addition, in connection
with its acquisition of Sintel, the Company is required to make payments of 1.8
billion pesetas (approximately $12.1 million) on each of December 31, 1997 and
1998. See Note 2 to the Condensed Consolidated Financial Statements. The Company
believes that cash generated from operations, borrowings under its revolving
credit facility and proceeds from the sale of investments and non-core assets
will be sufficient to finance these payments, as well as the Company's working
capital needs and capital expenditures for the foreseeable future. Future
acquisitions are expected to be financed from these sources, as well as other
external financing sources to the extent necessary, including the issuance of
equity securities and additional borrowings.
In June 1997, the Company refinanced its domestic credit facility with
a $125 million revolving credit facility provided by a group of banks led by
BankBoston, N.A. Borrowings under this facility may be used for domestic
acquisitions, working capital, capital expenditures and general corporate
purposes. At September 30, 1997, borrowings under this facility totaled $82.4
million, and approximately $39.0 million remained unused and available. See Note
6 to the Condensed Consolidated Financial Statements.
The Company conducts business in several foreign currencies that are
subject to fluctuations in the exchange rate relative to the U.S. dollar. The
Company does not enter into foreign exchange contracts. It is the Company's
intent to utilize foreign earnings in the foreign operations for an indefinite
period of time and only repatriate those earnings when it is considered cost
effective. However, as a means of hedging its balance sheet currency risk, the
Company attempts to balance its foreign currency denominated assets and
liabilities. There can be no assurance that a balance can be maintained. In
addition, the Company's results of operations from foreign activities are
translated into U.S. dollars at the average prevailing rates of exchange during
the period reported, which average rates may differ from the actual rates of
exchange in effect at the time of the actual conversion into U.S. dollars. The
Company currently has no plans to repatriate significant earnings from its
international operations.
The Company's current and future operations and investments in certain
foreign countries are generally subject to the risks of political, economic or
social instability, including the possibility of expropriation, confiscatory
taxation, hyper-inflation or other adverse regulatory or legislative
developments, or limitations on the repatriation of investment income, capital
and other assets. The Company cannot predict whether any of such factors will
occur in the future or the extent to which such factors would have a material
adverse effect on the Company's international operations.
<PAGE>
PART II - OTHER INFORMATION
SEPTEMBER 30, 1997
Item 1. Legal Proceedings.
See Note 7 to the Condensed Consolidated Financial Statements.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27.1 Article 5 - Financial Data Schedules.
(a) Report on Form 8-K
On August 4, 1997, the Company filed
a Form 8-K current report for event of
August 1, 1997 with the Securities and
Exchange Commission reporting information
under Item 5 thereof regarding the Company's
acquisition of Wilde Construction, Inc.,
E.L. Dalton, Inc, Tele-Communications of
Virginia, Inc. and Somerville Construction.
On September 10, 1997, the Company
filed a Form 8-K current report for event of
August 27, 1997 with the Securities and
Exchange Commission reporting information
under Item 5 thereof regarding the Company's
partnership with Macri Group, its filing of
a labor petition in Spain, and its
acquisition of AIDCO, Inc.
On October 6, 1997, the Company
filed Form 8-K for event of the same day
regarding acquisition of 51% of MasTec
Inepar S/A-Sistemas de Telecomunicacoes, a
newly formed infrastructure contractor.
On October 3, 1997, the Company
filed a Form 8-K current report for event of
September 26, 1997 regarding work stoppages
at Sintel in response to Sintel's
application to the Spanish labor authorities
to restructure Sintel's work force.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MasTec, Inc.
Registrant
Date: November 14, 1997 /s/ Edwin D. Johnson
--------------------
Edwin D. Johnson
Senior Vice President-
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
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<LEGEND>
(Replace this text with the legend)
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<NAME> MasTec, Inc.
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